Filed under: Audits, Business Expense, Gifting, Small Business Deductions, Taxes
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?
Anything that can be considered as entertainment can be deducted as an entertainment expense–even if you don’t go with the client. In this case, you could deduct $75–half of the entertainment expense.
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.)
Ahem, really? Well, here’s the rules. An IPad counts as listed property. (Listed property is the cool stuff that might also make a good gift that the IRS looks at much more carefully than other business expenses.) Business use of listed property is not included in employee wages. Non-business use of the listed property is included in the employee’s wages and taxed accordingly. But you’ve got to substantiate it–and–if you don’t substantiate it, then the entire cost of the IPad is going to have to show up in your daughter’s wages. (By the way, since she does supposedly work 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.)
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.
At first blush, you might think that advertising and charity don’t go together at all. But when you own a small business, your advertising and charity might just go hand in hand. Let me explain.
When you own a small business, you’ll get lots of calls from organizations wanting your business to make donations to charities. When you’re a sole proprietor, partnership, or S Corporation, your charitable donations don’t reduce your business income, they only count as a charity donation on your Schedule A personal tax return.
So—let’s say you want to donate $100 to Cystic Fibrosis from your business. That’s all fine and good, but that donation doesn’t reduce your business income by $100. It doesn’t reduce your business income by anything at all. You still get to deduct it on your Schedule A—but if you don’t itemize your deductions, that $100 donation doesn’t help your tax return at all.
This is where advertising comes in. Instead of just donating $100 to a charity, you can buy an ad in a charity event program, that way you’re giving money to the charity, and getting a 100% business write-off for the advertising. The charity still gets your money, and you get a better write-off.
Why do you want to your business donation to be advertising? The taxes! If you have a sole proprietorship and you’re in the 25% tax bracket, your business income is actually taxed at 40.3%. (25% regular tax rate plus 15.3% self employment tax.) If you itemize your deductions, your $100 donation would really only cost you $75 (but only if you can itemize your donations.) But if you can count it as a business expense, then your $100 donation would really only cost you $59.70. ($100 minus $40.30) See why this is a good thing?
Of course, there are some things that are just going to be charitable donations no matter how you try to align them. Your tithe or temple dues simply won’t count as advertising. But when you’re looking at charities that you like to support, be sure to check out the advertising opportunities.
So what’s with the purple pig? A not for profit I support held an event for kids. Instead of just donating money, I got to set up a booth and hand out my fliers to the parents. The pig was part of a pig race game for the kids. The pig is a 100% deductible business expense—and he’s really cute. Cute and deductible—that works for me.
I was working on a client’s tax return and he had a whole lot receipts for business meals. A whole lot. I do a lot of tax returns and I’m pretty familiar with claiming meal expenses. This guy wasn’t in one of the jobs that I normally associate with lots of meal expenses – so I had to ask him about it.
He told me, “Well yeah, I own my own company and my wife helps me and so we go out to dinner together all the time and we talk about work so I write it off as a business expense.”
Here’s the problem – that’s not going to fly with the IRS. If you are just going out to dinner with your spouse, even if you do nothing but talk about business – well then, it’s not a deductible business expense.
I deal with this issue all the time. Heck, my own husband will say, “Hey we talked about business, you can deduct our dinner!” And yes, my husband often gives me excellent business advice during dinner (he’ll read this blog post so I have to say that) but I still can’t deduct having dinner with him for business purposes. (As smart as he is at business, he stinks at taxes.)
Here’s the IRS rule: “Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose for providing the entertainment.”
So, I can bring my husband, Mark, along if I’m entertaining a client who needed to bring her husband along as well. For example, someone is in from out of town and wouldn‘t want to leave her husband all alone in the hotel. But if I’m just having dinner with my husband alone – no deduction.
There are lots of other rules about claiming meals as well. You’re supposed to record the expense “contemporaneously”. That’s a fancy way of saying you should write down on the receipt who and why. For example, Helene is one of my advertising people. We both like the grand slam breakfast so I’ll meet her at Denny’s. On the receipt I would write, “Helene, advertising.” Quite frankly, Helene is the only person I meet at Denny’s so if I’ve got a Denny’s receipt, I know who I was meeting and what we were talking about. But a Bread Company receipt? Well I probably meet someone there once a week. If I don’t write that down that might not survive an audit. It’s just a good business practice to write who and what on the receipt every time.
Here’s a silly little tip that makes the IRS happy: when you’re paying for a business meal with your credit card, write the name and reason for the meeting on the slip that you sign and give to your waitress. That way, your “contemporaneous reporting requirement” is proved on your receipt carbon. Your waitress might think you’re a little weird but chances are she won’t even notice.
If you want more information about entertainment meal expenses, you can check out the IRS publication 463: http://www.irs.gov/pub/irs-pdf/p463.pdf
And now, I’m headed off to a non-deductible dinner with my husband!