Getting around the $25 deduction limit for business gifts
November 20, 2017
At this time of year, it’s common for businesses to make thank-you gifts to customers, clients, employees and other business entities and associates. Unfortunately, the tax rules limit the deduction for business gifts to $25 per person per year, a limitation that has remained the same since it was added into law back in 1962. Fifty-five years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions.
The exceptions
Here’s a quick rundown of the major exceptions to the $25 limit:
Gifts to a business entity. The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.
Gifts to a married couple. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.
Incidental costs of making a gift. Such costs aren’t subject to the limit. For example, the costs of custom engraving on jewelry or of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.
Gifts to employees. Although employee gifts have their own limitations and may be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.
Gifts vs. entertainment expenses
In some situations related to gifts of tickets to sporting or other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. Under current law, entertainment expenses are normally 50% deductible, so the gift deduction is a better deal for lower-priced tickets. But once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.
Be aware, however, that the elimination of the entertainment expense deduction has been included in proposed tax reform legislation. If legislation with such a provision is signed into law, it likely won’t go into effect until 2018.
Track and document
To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.
In addition, you must retain documentation of the following:
- 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.
If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact us.
© 2017
Upcoming Events
Tax Executives Institute Annual Tax Symposium
December 12, 2019

Exempt Organizations Conference
December 17, 2019
Wilmington Trust Philanthropic Speaker Series
December 17, 2019
2019 Nonprofit Symposium
December 17, 2019
Responsible 100 Awards Luncheon
December 18, 2019
TCJA Updates and the Impact on Nonprofits, Donors and Beyond
December 19, 2019
Heckerling Institute on Estate Planning
January 13-17, 2020
NYSSCPA Annual Nonprofit Conference
January 16, 2020
IMN Winter Forum on Real Estate Opportunity & Private Fund Investing
January 22-24, 2019
Disaster Recovery Journal’s Spring 2020 Conference
March 15-18, 2020View All Events