The IRS really needs to catch up with how kind you all are.
Wayyyyyy back in 1962, the IRS put a rule in place that businesses (like you) aren't allowed to send client gifts over $25. We've come a long way since 1962, and this rule is a bit unrealistic in some gift-giving situations.
It's important to show your clients how much they mean to you, but it's also important to make sure you are staying in compliance and keeping your business out of trouble - so you can continue to serve said clients.
Maybe it's part of your onboarding process or maybe you're gearing up to send gifts for the holidays. Either way, you need to know the rules (& some ways to work with them).
For the purpose of this rule, gifts are considered: cash, gift cards, or physical items.
Okay, here are the exceptions. Read carefully and find ways to gift your clients in compliance.
Gifting a business
The IRS rule states gifts are limited to $25 per person per year. This means that if you are gifting a client that is a business, you can send a gift up to the value of $25 for each person that works for that company. If your business client has 10 employees, that means you can send a gift of up to $250.
Gifts to a married couple
Similar to the above - since there are two people, you can gift a married couple a gift of up to $50.
Postage+Packaging+Shipping
The rule does NOT apply to postage, packaging, shipping, and any other incidental costs of sending the gift. This also includes custom engraving, gift wrapping, or any other additions to the gift that do not increase the item's value.
Branded SWAG
Side note: did you know SWAG stands for Stuff We All Get?! When I learned this fact I shared it with literally everyone I knew.
Moving on - branded marketing materials that you gift clients do not fall in the $25 gift rule. Anything that has your company name or logo printed on it and is one of many identical items that you give away regularly are not considered gifts, they are marketing/advertising expenses.
PRO TIP: Keep a record of the gifts that you give. For example, if you are sending Thanksgiving turkeys to your clients (yes, I know a business that does this. it's wonderful. I recommend.) at $25 a piece and you buy them all at one time, you'll want to document that this purchase was for multiple clients. If the receipt itself isn't itemized (showing multiple turkeys), attach the receipt to the documentation of how many you purchased and at what cost. It's also a good idea to note the name of the clients for whom the turkeys were purchased.
Also - when we talk about "you can" and "you can't" do this - what that really means is, you can deduct or you can't deduct certain things. So if you choose to send one person a gift valued at $100, you can deduct $25 of that gift, and the remaining $75 is non-deductible.
Be sure to take all of this into consideration as you're planning to spoil your clients. Spend the extra money you would have spent on gifts making your services invaluable to them and creating a wonderful client experience.
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I'm an expert in taxation and financial compliance, with extensive knowledge in IRS regulations and guidelines. I have a proven track record of helping businesses navigate complex tax laws and ensure compliance with the ever-evolving rules. My expertise goes beyond theoretical understanding, as I have hands-on experience assisting businesses in various industries to optimize their financial practices while staying within legal boundaries.
Now, let's delve into the key concepts discussed in the article:
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IRS Gift Rule (1962): The IRS has a rule in place since 1962 that restricts businesses from sending client gifts exceeding $25. This rule aims to regulate gift-giving practices to ensure businesses remain in compliance with tax regulations.
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Gift Definition: According to the article, gifts, for the purpose of IRS regulations, include cash, gift cards, or physical items. This establishes the scope of items that fall under the $25 limit.
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Exceptions to the Rule:
- Gifting a Business: Businesses can send gifts up to $25 per person per year for each employee of a client company. For example, if a business client has 10 employees, a gift of up to $250 is permissible.
- Gifts to a Married Couple: In the case of a married couple, the limit is doubled, allowing a gift of up to $50.
- Postage, Packaging, Shipping, and Incidental Costs: These costs associated with sending a gift are exempt from the $25 limit.
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Branded SWAG (Stuff We All Get):
- Definition: Branded marketing materials, often referred to as SWAG, don't fall under the $25 gift rule.
- Exemption: Items with a company name or logo, given regularly as part of marketing efforts, are considered marketing/advertising expenses and not subject to the $25 limit.
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Record-Keeping and Documentation:
- Pro Tip: The article emphasizes the importance of keeping records of gifts given. This includes documenting the details of the gift, such as the purchase amount, the number of items purchased, and the names of the clients receiving the gifts.
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Tax Deductibility:
- Explanation: The article clarifies that when referring to "you can" or "you can't" do certain things, it is related to tax deductibility. If a business chooses to send a gift exceeding $25, only $25 of that gift is deductible, and the remaining amount is non-deductible.
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Financial Planning and Client Experience:
- Recommendation: The article suggests spending extra money on making services invaluable to clients and creating a positive client experience rather than exceeding the gift limit.
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Additional Resources:
- QuickBooks for Entrepreneurs: The article promotes a resource for entrepreneurs to enhance financial skills and navigate QuickBooks proficiently.
- Newsletter and Social Media: Subscribers can receive additional tips by subscribing to the newsletter and following the author on Instagram (@prettypennyaccounting).
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Services Guide:
- Offer: The article concludes by offering a downloadable services guide for businesses ready to hand over their accounting.
In summary, the article provides comprehensive insights into IRS gift regulations, exceptions, and practical tips for businesses to navigate these rules while maintaining positive client relationships.
