One really powerful way to provide excellent customer service and to say ‘tis the season, is to send your clients a gift this holiday season! It not only serves as a great way to check in with them, it also shows you are genuinely grateful for the opportunity to serve them this past year. (And I think this is especially true and meaningful given the crazy year of uncertainty we’ve all had! #thanks2020)
But before you start excitedly researching the best gift to give your clients, I want to give you a few accounting reminders. Because yes, there are rules about deducting gifts. Are you surprised?!
I know that might seem like the most Scrooge-like thing ever to be reminded of IRS guidelines as you’re happily shopping away, but I promise I’m just trying to help you not find yourself in a tight spot come tax season! I want to help you avoid the element of surprise when your tax accountant breaks that news that you cannot deduct the full cost of that beautiful but really over-the-top gift you purchased for your top performing clients. I believe it’s better to be aware of the rules and limitations regarding gift write-offs so you can make intentional and proactive decisions.
So, courtesy of the IRS, let’s take a closer look at what is/is not deductible…
The rules and limitations that the IRS has on client gifting can be broken down into 4 simple tips! (You can find the full information HERE starting on page 12 – link to 2019 Publication 463 (irs.gov), but I’ll save you time and give you a brief rundown of each section below).
FIRST: $25 Limit
This limit doesn’t mean that you can’t purchase a gift for a client that’s over $25, it just means that you won’t be able to deduct the full amount if the total of the gift is above $25.
So let’s say you’ve been eying a super nice, curated gift box for a client. It has hand-crafted artisan chocolates, gold wrapped gourmet pears and a luxury candle that you know they are absolutely going to love! But wait… it’s $85.That’s okay! It doesn’t mean you need to abandon your plans completely and start brainstorming gifts from scratch. What it comes down to is that $25 of the total can be deducted from your taxes and the other $40, from this example, can’t.
Knowing that, you’ll need to decide what the best decision is for you and your business. There isn’t a clear cut answer here for if it would be wiser for you to stick with gifts that are right at the $25 limit or if you can afford to splurge a bit more. All in all, it comes down to the cost of doing business and making smart money moves!
It might make more sense for you to go ahead and purchase this more elaborate gift because it would serve your business better in the long run to make sure you keep this specific client really happy! Or you might actually decide that for your business, it doesn’t make sense for you to purchase a gift above what you can deduct from your taxes.
(NOTE: Remember, the limit you can deduct is $25 per client. Important to keep in mind when shopping for multiple clients!)
SECOND: Incidental Costs
Incidental costs are the common expenses of daily life doing business. In regards to client gifting this would refer to things like packaging, bows, gift wrapping, engraving, shipping and insurance on the gift. These things are included expenses in gift giving, but as they are not actually part of the gift itself. As these expenses, or incidental costs, do not add additional value to the gift, they do not count towards your $25 limit of what is tax deductible. (Super helpful because shipping costs can add up fast!)
There are a few very specific exceptions that are not counted as gifts by the IRS, for purposes of the $25 limit. Generally these items are promotional materials, but here’s the exact breakdown. If an item costs less than $4 and clearly has your name printed on it or is one of multiple items you widely distribute. (Think pens with a company logo on them!)
It also includes promotional materials that you are giving to the client to display at their business. Any sort of display racks or signs that are given and that are intended to be used for promotional purposes are not classified as client gifts and therefore don’t count toward your $25/client limit.
If an item can be considered a gift or entertainment, the IRS defaults to viewing it as entertainment which is NOT deductible.
Ex: You gift a client tickets to a golf tournament. This is considered entertainment since it is an experience and is NOT deductible, not even up to the $25 limit.
So there you have it! 4 simple tips to keep in mind when shopping for gifts for your clients this Holiday season.
And a bonus 5th tip: remember to document these expenses! Keep a copy of your receipt and make sure you write down: the cost of the gift, a description of the gift, the date the gift was made, the business purpose of the gift, and the business relationship of the person receiving the gift.
If you have any questions, please reach out! And without further adieu, let the Holiday shopping… BEGIN!
P.S. I love supporting small businesses! Some of my favorite places to shop for holiday gifts are: Etsy, Farm Girl Flowers, Amy’s Gourmet Apples, and local boutiques. If you have others you love, leave a comment letting me know! I’m always happy to discover new small businesses to support!