Can I Deduct Gifts to Clients on my Taxes?

October, 31 2023 by Steve Banner, EA, MBA

This is a question that often comes up towards the end of the calendar year because of two main reasons:

1. The gift-giving season is approaching, and business owners may wish to cultivate goodwill with their clients and thank them for being their valued customer during the year; and
2. The tax filing season is just around the corner, and business owners may wish to reduce their taxable income by maximizing their deductions.

Fortunately for business owners, the tax law does indeed allow them to use the gifts they made to clients to increase their deductions from taxable income for the year. However, there is a dollar amount limit. You can spend as much as you may want to on gifts for your clients, but the tax law only lets you deduct the first $25 of the cost of the gifts you give to each person directly or indirectly during the year. Just to explain these last two terms, if you give a gift directly to a member of a client’s family, this is regarded as an indirect gift to that client (unless you have a direct business relationship with the family member).

For example, Gerald owns a winery, and he gave a $30 bottle of wine to Max, who is one of his best customers, as a gift. This is a direct gift to a client. Gerald also sent a sweatshirt valued at $20 to Max’s 12-year-old son, Paul, as a gift. This is an indirect gift because Gerald does not have a direct business relationship with Paul. Even though Gerald spent $45 on gifts, he can only deduct the first $25 because the gift to Paul is considered an indirect gift to Max. If he had sent the sweatshirt to Max’s daughter Emma, who is also one of his clients, he could deduct $25 for the gift to Max and $20 for the gift to Emma.

Although we have seen that your annual deduction for gifts made to each individual client during the year is limited to a maximum of $25, this amount does not include incidental costs such as gift wrapping, packaging, and engraving, so long as they don’t add substantial value to the gift. For example, our winemaker, Gerald, decided to send his client, Rupert, a silver goblet with his name engraved on it in honor of Rupert’s support of Gerald’s range of fortified wines during the year. The goblet itself cost $30, but the other incidental costs related to getting the gift customized and delivered to Rupert cost another $10. Max was able to deduct $25 of the cost of the goblet, plus $10 in incidental costs for a total of $35.

The tax law also states that for a gift to be deductible, it must be in the form of a tangible item. For example, gift baskets containing food and beverages are often sent to clients during the holiday period. This type of tangible gift would potentially qualify for deduction, but gift cards or cash do not meet the “tangible” test.

Another exception to the $25 annual limit for gifts is for promotional items that cost $4 or less. Examples of these items would include pens, key chains, plastic bags, and similar items with your business name permanently engraved or printed on them, and which you distribute on a regular basis.

Giving gifts to your clients is an accepted part of doing business, recognized by tax law. Like many business deductions, good record-keeping is essential for you to be able to take full advantage of this benefit. Thus, you are well-advised to retain documentation of the following related to each of your gifts to clients:

• A description of the gift,
• The gift’s cost,
• The date the gift was made,
• The business purpose of the gift, and
• The business relationship to the taxpayer of the person receiving the gift.

With detailed records such as these, you will be in a good position to argue your case for your client gift deductions in case the IRS ever questions them.