When can you deduct a business gift?

The IRS limits business gifts to $25 per recipient per year.

The limit treats married couples as a single giver.  Therefore, you and your spouse can’t each give $25 gifts to the same person and then deduct $50.  Similarly, partners in a partnership are considered a single giver.

A gift to a family member of a customer is considered as a gift to that customer.  If you give a customer a $25 baby gift, then any additional gifts that year to that customer will not be tax deductible.

Incidental costs, such as engraving, packaging or shipping are not included in the $25 limit, as long as the incidental costs don’t have their own inherent value.  If you are shipping fruit with a basket, a cheap basket would be incidental (and can also be deducted).  An expensive basket would be considered part of the gift (and subject to the $25 limit).

Cheap items that cost less than $4 each are not included in the $25 limit.  Don’t worry, you don’t have to count the number of free pens you give each customer to make sure their value doesn’t exceed $25.

Display or promotional materials used in a store are not included in the $25 limit.

Gifts can sometimes be taxed as entertainment.  For example, if you bring a customer to a Mets game for their birthday, that’s considered to be entertainment, rather than a gift.  On the other hand, if you give a customer Mets tickets and you stay home, you can account for the tickets either way – as a gift or as entertainment.  Choose whichever alternative will give you the bigger deduction.

Packaged food is a gift as long as it was meant for the customer to open later.

Read more about gifts on the IRS’ website.