At this time of year, clients often ask bookkeepers how they can deduct client gifts from their taxes. Gifts are a great way to show clients they are valued and appreciated, whether during the holidays or throughout the year. Client gifts can also be a significant expense for some companies, and understandably, savvy entrepreneurs want to maximize all their annual deductions 

The answer to whether your client gifts are tax deductible is that it depends. You can deduct client gifts, but there are limitations to the type and value of gifts that you can deduct. 

Which type of client gifts are deductible?

Only physical items are deductible as gifts. If you can walk into a store and buy it, it will likely qualify as a deductible expense up to a certain amount. Examples include fruit and snack baskets, wine, coffee mugs, stationery, trinkets, and other tangible, non-cash equivalent items. Gift cards do not qualify because they are considered cash equivalents and, therefore, qualify as taxable income.

Entertainment items were partially tax-deductible before 2018, but those rules changed with the Tax Cuts and Jobs Act. If an item is eligible classified as entertainment, including concert or sporting event tickets, it is not deductible as a client gift. 

How much should you spend on client gifts? 

Well, how much you spend is up to you, but you can only deduct up to $25 per person annually for a client gift. The $25 limit does not include shipping and other incidentals such as wrapping paper, engraving, and sales tax. Remember that this amount applies to the entire year, not each occasion. You cannot purchase a tax-deductible $25 gift for a client for their birthday, then buy another $25 tax-deductible gift for them at year-end. 

Indirect client gifts also count toward the total that your business can deduct. This rule is true even if you send the gift to the business instead of the individual. The same rule applies to their spouse, friend, or relative. Also, married couples are single taxpayers regarding the $25 limit for tax-deductible gifts. They can give a gift to the same client, but once they reach the $25 limit, the remaining $25 is not deductible.

Exceptions to the $25 client gift rule

Thankfully, there are some exceptions to the $25 client gift rule set by the IRS. Gifts under $4 and items with your company logo available for gifting all year are exempt.

Examples of common deductible client gifts:

• Pens
• T-shirts
• Hats
• Notepads
• Flashlights
• USB drives
• Small tech devices

This exception doesn’t mean you can gift more expensive items simply because they have your company logo. They must comply with the rules.

Make sure you get the deduction

As with any business bookkeeping, maintaining accurate records of the gifts you purchase for clients is important. Document how much you spent, describe the item, when you purchased it, your relationship to the person receiving it, and the reason for the gift. If you are working with a bookkeeper or accountant, alert them about any gift purchases, so they know when to deduct client gifts.

If you have specific questions about which of your business gifts are deductible, please feel free to reach out to me and schedule a complimentary consultation. I’d love to help!