If you give your customers gifts throughout the year, you may be able to deduct part of the associated cost.
How much can you deduct?
You can only deduct $25 per person per tax year. If your gift costs more than this amount, the excess is not deductible for tax purposes.
What’s included in the deduction limit?
Incidental costs – such as the cost of wrapping, packaging, and mailing the gift – are not included in the $25 limit for customer gift deductions. These incidental costs can be separately deducted.
A cost is incidental if it does not add substantial value to the gift.
When is it NOT a Gift?
It’s possible you give customers other small tokens throughout the year. The following are not considered gifts:
- An item, valued at $4 or less, that has your name clearly and permanently imprinted on it and is one of a number of identical items that you widely distribute.
- An example of this would be a pen with your company’s name and phone number on the barrel.
- Signs, display racks, or other promotional items to be used on the business premises of the recipient.
You send four customers each a $40 flower arrangement. Each arrangement costs $5 to ship. Here’s how your deduction would look:
Customer Gifts (4 x $25 Limit) $100
Shipping (4 x $5) $20
Total Deduction $120
If, however, you’d paid $3 extra per arrangement to upgrade to a fancier vase, this would not be an incidental cost as it would impact the value of the gift. While the shipping and delivery charge was necessary to get the flowers to their intended destination, the vase upgrade serves only to make your gift look nicer once it arrives.
You pay to have 500 refrigerator magnets printed with your company’s name, logo, and phone number. Each magnet cost you $1 and you hand them out at a local networking event. These magnets are not considered gifts as they were less than $4, identical to one another, and handed out indiscriminately. You would instead include the $500 cost (500 magnets at $1 each) in your marketing expenses for the year.
About the author: A licensed Certified Public Accountant (CPA) with her Masters in Taxation from the University of Illinois, Helena Swyter helps people turn their passions into careers. After seven years with Deloitte, Helena formed SweeterCPA – a company dedicated to providing tax, accounting, and business advisory services to creative entrepreneurs and independent small businesses. Helena handles the finances, allowing her clients to focus on their dreams. She lives in Chicago with her husband and two cats.
Editor’s note for Canadian business owners: We’ve had interest in the Canadian perspective for this post, so Josh from LiveCA was kind enough to chime in. Here’s what you need to know around claiming customer gifts as a Canadian business owner:
To give a Canadian perspective on this discussion, client gifts can certainly be claimed as advertising and promotions expense. It’s important to keep in mind that the gift is not an entertainment expense, such as a pair of hockey tickets (ie. one for the client and one for you) as entertainment expenses are only 50% deductible. However, a bottle of wine as a thank you for a client is a perfectly legitimate business expense which would fall under advertising and promotion.
There is no limit as to how much you can claim under this category. However, it is important that the amount is ‘reasonable.’ For example, if you are a marketing professional, it’s reasonable that you may give out gift baskets or bottles of wine to clients as a thank you. However, if you are a family doctor, it’s unlikely that you’re sending bottles of wine to all your patients (and if you are, I’m switching doctors). As Jason pointed out – the expense needs to be reasonably justifiable for your business size/activity. So feel free to be generous to your Canadian clients and rest assured that they’ll be deductible so long as you don’t go overboard!