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 when calculating the cost of the gift. A cost is incidental if it does not add substantial value to the gift.
When is it NOT a Gift?
Often time you give customers other items throughout the year that 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.
- Signs, display racks, or other promotional items to be used on the business premises of the recipient.
An example of this would be a pen with your company’s name and phone number on the barrel.
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
You send five customers each a $10 gift basket. Each arrangement costs $2 to ship. You also spend $5 to upgrade to a fancier basket. You would be able to claim the $10 gift cost plus the $5 upgrade cost (the upgrade adds value, so it isn’t an incidental cost). You couldn’t add the shipping to the cost of the gift though because it is an incidental cost. So you would be able to claim $15 for each gift. Here’s how your deduction would look:
Customer Gifts (5 x $15) = $75
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.
Want to learn more about customer gifts? Check out the IRS’ website for all the nitty-gritty details.
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.