The holidays may not be the most wonderful time of the year for a business that is unfamiliar with corporate gift laws. The IRS has tried to make the rules about business gifts straightforward, but there are other laws, like the foreign Corrupt Practices Act, that make it all more complicated. Some tax professionals suggest steering clear of corporate gifts, whether given or received, altogether. There are businesses, though, that believe the rewards outweigh other consideration.
The first thing to remember is that the tax code cares about the gift giver, not the recipient. When it comes to gifts, businesses receive the same treatment that individuals receive: The tax is levied on the donor, not the donee. Some exceptions apply, of course, depending on the relationship between the giver and the recipient, but, for the most part, the recipient can sit back and enjoy the fruit basket or the poinsettia without worrying about its fair market value.
It would make sense that a corporate gift would be deductible as a business expense, but the IRS imposes limits. You cannot, for example, give a pony to a client and deduct the entire cost. You can, however, deduct up to $25 per donee each year. So, if you give each of your clients a wallet worth $15 in June and a $10 box of peppermint bark at the end of the year, you should be able to deduct the total for all clients. If you replace the peppermint bark with a $15 fruitcake, though, $5 of the $30 you spent on each client would not be deductible.
There are exceptions. Under certain circumstances, your company can spend hundreds of dollars on gifts for your clients without worrying about the $25 limit. Many businesses would not place these items in the “gift” category, though; they would fall under “promotional items” instead.
To avoid the $25 limit here, each gift must cost your company no more than $4, must have your company name “clearly and permanently imprinted” on it and must be one of a supply of identical items that our company distributes widely. These are things like the pens, coffee mugs and other items your company orders by the dozen to hand out at trade shows or to include in marketing packets.
What about the Foreign Corrupt Practices Act? We’ll tackle that in a future post.