Do Client Gifts Qualify as Tax Deductible?

It’s common corporate courtesy to present your clients with gifts every now and then, such as on Christmas or New Years and so on. Buying gifts for your customers and business partners or associates comes with many benefits, such as maintaining goodwill and pleasant relationships, professional networking, or even just a plain thank you as human courtesy. After all, corporate life does not mean we’re all robots.

But to what extent are client gifts tax deductible? Can they even be claimed as tax deductions? Let’s take a deeper dive to understand the seemingly murky waters when it comes to investing in business relations via gifts.

Are There Any Rules of the Game?

Sure there are. Everything can be considered a game, and like every game, this one has certain rules you need to play by too. Here are three main ones that you must be aware of before jumping into showering affection on your clients:

1. First things first – the budget: Businesses are allowed to spend up to $25 per person per year. This means that if there are ten clients you want to present with a gift, the total cost of each should not exceed $25 – in effect, you can claim $25 x 10 clients = $250 in tax deductions.
2. However, keep in mind that any incidental costs, as a rule of thumb, can not be added to tax deductible items. Incidental costs can be anything that is included in the gift but does not add any substantial value to the gift itself, such as wrapping or brand name engraving. However, there are certain cases where businesses can get creative to add incidental costs within the $25 limit.
3. Detailed records must be ready and you should be able to present them as and when required. These details must include the amount spent, and the purpose of the gift that was necessitated in a business setting.
4. If the value of the gift is too little, it is exempt from taxation.
5. Gift cards, gift certificates, and the like, are considered equivalent to cash, and are therefore not allowed to be included in tax write-offs.

What’s a Safe Bet When Choosing a Gift for My Clients?

Since the gifts you want to present your clients and business associates with, cannot be too flashy or expensive, because then it might be considered a bribe by anyone who chooses to look at it that way, it is often a great idea to offer something that is sentimental and personalized, yet not too over the top.

Here are some examples of what are a safe bet when it comes to choosing what to gift your clients and business associates:

1. Customized anything (within reason, of course): these items could include cookies from a local small business, branded mugs, branded office stationery, or even desk plants.
2. Branded candles, spa vouchers, and the like.
3. Champagne, wine, or even customized/branded wine glasses.
4. Awards or tokens of appreciation.
5. Pocket watches or pocket knives, or anything that is useful and handy, such as keychains.

Are There Any Types of Gifts That Are Not Tax-Deductible?

1. Cash Gifts – recipients of cash gifts, such as Best Client or Top Performing Employee, must pay a tax on the cash gift. This is just like in the case of commissions and bonuses.
2. Gift Cards – this is because they’re considered practically cash, and cash is not tax deductible as it can be considered as income.
3. Large scale entertainment events – these used to be tax deductible for around 50% of the tab, before 2018, but they’re not tax deductible anymore.

What Are De Minimis Fringe Benefit Gifts?

Often, an employer would like to present their hard working employees with gifts that show their appreciation for the team’s hard work, but they also don’t want to have to pay additional tax for an expression of feelings of appreciation. This is where De Minimis Fringe Benefit gifts come in.

The De Minimis Fringe Benefit gifts are basically items that cost very little, almost negligible, and as such, are less of a gift than a token of appreciation. The loophole, so to speak, in giving business associates or clients a gift without really giving them a gift, is to make sure that its value is practically insignificant. Care must also be taken that such kinds of “gifts” are not a frequent occurrence.

A few examples include:

1. Donuts at the office.
2. Meal money or reimbursement for an extra shift.
3. Birthday celebrations with minimal items such as a cake.
4. Tickets for entertainment (that do not cost an arm and a leg, of course).

-Care must be taken that tickets for entertainment are very different from gift cards, which are not tax-deductible.

Are There Ways to Write Off Business Gifts?

Actually yes, there are. And the most common way is to present clients and business associates with items that have your company logo or branding on it. This way, it can be counted as advertising and promotional material, and thus can be fully deductible from taxable items.

The only things one needs to make sure of when writing off advertising and promotional items in the guise of business gifts, is that:

1. they should be common in the industry (ordinary items)
2. they should be helpful for your business (necessary expenses)

Want To Gift Your Business Associates? Start Here!

Want to check if the gifts you’re planning to present to your clients and business associates can be added to your list of tax deductibles? Better do that before you place an order!

Contact us today at info@monily.com or give us a quick call at + 1 (832) 391-3460. Alternatively, you can also book a free, no-obligations consultation slot with our small business accounting experts here.

Read more: Your Detailed Guide to K-2 and K-3 Tax Forms

Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.