What Business Gifts Can I Deduct on My Tax Return?

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

 

 

If you give a gift as a part of your business it’s a deductible business expense.     BUT! You can’t deduct more than $25 for gifts you give to a person during the tax year.    This $25 limit has been in place for ages and hasn’t been adjusted for inflation for as long as I’ve been doing taxes.  That makes keeping within the gift budget a little trickier every year.

 

I think some people do a lot of “fudging” on the gift expenses, but the IRS seems to be taking a closer look at everything these days so you need to know what you can and can’t deduct.  And make sure you document everything and keep those gift receipts.

 

Here’s some real questions that people have asked me about deducting gifts on their tax returns.

 

What if I give two different gifts, like a birthday and a Christmas gift?  Can I deduct $50 then?

No.  Sadly, the $25 limit is on gifts for the entire year, not $25 per gift.

 

What if I give a $100 gift to my client’s family of four?  Can I deduct the full expense?

No.  Any gift you give to the customer’s family is considered to be an indirect gift to the customer.   So unless you independently do business with each of the other family members, you may only deduct $25 for the gift.

 

My husband and I each own our own businesses and our businesses have some clients that overlap.  Can we each deduct $25 for gifts to our overlapping clients? (Okay, nobody asked me this one, I saw it online and thought it was a good question.)

Surprisingly, No.   Technically, a husband and wife are treated as one taxpayer and it doesn’t matter if you have separate businesses or separate employers.  Partnership partners are also treated as one taxpayer when it comes to gifts as well.

 

I sent one of those holiday gift tins that cost $24.95.  The extra Holiday message cost $1.95 and the shipping was $9.95 for a total of  $36.85.  Am I stuck only claiming the $25?

Actually, in your case, you can deduct the whole amount.  The gift itself was under $25.  You are allowed to deduct the incidental costs like shipping, wrapping or engraving on jewelry.

 

I gave my client two football tickets that cost $150 total.  Am I stuck only claiming $25?

Before the Taxpayer and Jobs Act, anything that could have been considered as entertainment could be deducted as an entertainment expense–even if you didn’t go with the client.  So prior to 2018, you could have deducted $75–half of the amount as an entertainment expense.  But now, after the Taxpayer and Jobs Act, you can’t deduct entertainment at all.  So no part of that gift would be considered to be deductible.

 

If bought my daughter an IPad for Christmas.  Since she sometimes does some work for me, can I write that off as a deductible business expense? (And yes, this was a real question.)

Since she does supposedly works for you,  you are issuing her a W2 for her wages right?  If you don’t issue a W2–then claiming she works for you probably isn’t going to pass muster with the IRS.

But let’s be realistic.  You’re either buying an IPad for the business, or you’re buying an IPad for your daughter.  If you’re wrapping it up and putting it under the tree as a present from Daddy – that’s a gift.  And it’s not a business gift.  If you really want to call it a business gift, fine, but you only get to deduct $25.

If she really works for you and she needs an IPad to do her job, you buy her an IPad for her job and it goes on your business asset list.  She might have some incidental personal use – that’s fine, but it’s a business asset not a gift.  

 

Remember, small incidental gifts valued at less than $4 with your logo on it don’t count as a “gift” towards that $25 total.  If you’ve been giving away mugs and pens for advertising, don’t worry–those are still  100% deductible.

 


Updated 7/20/2019

Why Am I Being Audited By the IRS?

file cabinets

Photo by redjar at Flickr.com

 

The first question I’m always asked when someone receives an audit notice is, “Why me?  What’s wrong with my tax return?”

 

If you received an audit notice, that’s a perfectly legitimate question, and you have the right to ask.  It’s a very important question too.  The answer you get from the IRS can help you to limit the scope of the audit—that‘s really important.  If you know what the audit is about, you know where to focus your energies.

 

Often times, an IRS agent may respond with, “Oh, I don’t know why your return was pulled, it’s just a random audit.”  However, sometimes they don’t seem so “random”.  Actual random audits (and yes, they do occur) involve reviewing every single line item on the tax return.  They’re used to help determine how future audits are handled.    Most audits, are not random, and if you’re being audited you have the right to know why.

 

So what does trigger an audit?  The most common type of audit is called a correspondence audit.  Usually what happens there is that the IRS received a notice saying you received income from a source and it doesn’t match anything on your tax return.  They call it “document matching.”  (Hey, it’s the IRS; creative names are not their forte.)

 

Document matching audits are usually pretty simple.  For example, the IRS gets a W2 from a job you had for 2 weeks in January but you completely forgot about it at tax time.  You never got the W2 so you didn’t include it on your return.  That’s a fairly typical correspondence audit.  In a case like that you just sign the form and pay the tax.  That’s a simple “oopsies.”   You’re not a criminal, you just made a mistake.

 

Sometimes, document matching is kind of screwed up.  For example:  I just handled one where the document matching showed three interest statements for “First National Bank”;  one for $21, one for $16, and the third for $54.  The tax return showed interest for “First National Bank” as $91 ($21 + $16 + $54 = $91).  We just handled that with a phone call.  Document matching is done by computer.  Normally, a human would have caught the numbers added together and the audit letter would never have gone out, but the computer isn’t that sophisticated.

 

One of the best ways to prevent document matching audits is to make sure that you report everything on the correct line.   If you have a 1099 with an amount in box 7 and you don’t have a Schedule C with your tax return—that will generate a correspondence audit.  Another common correspondence audit involves capital gains.  If you’ve bought or sold stocks or had stock options through your job—there should be a Schedule D with your tax return.

 

If you’re dealing with something new in your taxes, even if you’re very good at preparing your own, I recommend at least having a second look done before you file.

 

In-person audits are more often based on statistical data.  The IRS uses something called a “DIF” score.   To put it in simple terms, a DIF score basically highlights when things on your tax return are out of the “normal” range.  Basically, a computer algorithm kicks out something like:   “Joe Schmoe’s charitable contributions are out of line with his income.  So Joe will be audited for his charity donations.

 

So how do you know what’s normal?  That’s the magic question isn’t it?  The IRS does not release its DIF score formulas.  Even if they did—if you have a legitimate deduction, you shouldn’t let DIF scores (or the threat of DIF scores) keep you from claiming what’s legitimately yours.

 

I once worked on an audit for a fellow whose return was being looked at for the mileage he claimed.  In truth, his actual mileage was much higher than what he reported, but his co-workers had convinced him that he shouldn’t claim all his mileage because he’d get audited.   Claiming the lower mileage didn’t protect him from an audit—and—it cost him money for all those years that he didn’t claim what was rightfully his.

 

Your best defense against an audit is always going to be doing your taxes right in the first place and having the documentation to back up your claims.

 

If you’re a W2 wage earner, the most likely audit area will be your charitable contributions and employee business expenses, because most everything else can be determined through document matching.

 

Small business owners (Schedule C) are much more likely to be audited—mostly because there’s so much more to audit.   In every Schedule C audit I’ve ever worked on, the IRS has requested the mileage log.  Every audit—mileage log.  Every single one.

 

In addition to the mileage log, they’ll often want to examine the expenses or the revenues, sometimes both.  If you own your own business, I can’t stress enough the importance of keeping good records.

 

If you’re being audited, the IRS agent should be able to tell you why.  If you honestly don’t know why you’ve been selected, and you’re not getting clear answers from the IRS, hire someone to represent you.  A professional can usually find the audit trigger (or triggers) within a matter of minutes.