You may be able to deduct gifts given in the course of your trade or business from your taxable income. You are required to provide the details of the gift made and proof of the amount spent on the gift to the Internal Revenue Service. However, there are certain limitations placed on the kind of gifts as well as on the portion of their cost that is tax deductible.
What Are the Limits on Tax Deductible Gifts?
One limit on tax deductible gifts is that you cannot deduct more than $25 on each gift that you give in the course of your business to a person directly or indirectly. Giving a gift “indirectly” means giving a gift to a company, but with the knowledge that the gift will be used eventually by a certain person or persons. Another limitation is that items:
(1) costing less than $4;
(2) which have the name of the giver permanently imprinted on them; or
(3) are part of a number of identical and widely distributed items (e.g., pens plastic bags and cases),
are not considered gifts for tax purposes.
Additionally, if it is not clear whether an item would be considered entertainment or a gift, courts tend to consider it entertainment.
What Costs Can Be Included in the Gift Tax Deduction?
The costs of everything that “adds substantial value to the gift” can be included in the gift tax deduction. However, incidental costs (e.g. mailing, wrapping, engraving, etc.) are not considered to “add substantial value to the gift” and, therefore, are not tax deductible. Although, for example, if you purchase an ornamental basket to hold fruits (or other gifts), then the basket would not be an incidental cost to the extent that the value of the basket is substantial compared to the value of the fruit (or other gifts).