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Nov 15, 2022

Gifts, Taxes, and Deductions: What You Need to Know Before Giving

Gift-giving is a generous way to show business associates how important they are in your life. In this post, we explain gift tax deductions.

Gift-giving is a generous and much-appreciated way to show friends, family, and business associates how important they are in your life. It feels good to give, doesn’t it? You might even be able to get a tax deduction from it.

The Season for Gift-Giving is upon us, but are there any tax liabilities or reporting requirements for giving gifts? Read on to learn more about what the IRS says about your thoughtful gifts.

What Exactly is a “Gift”?

The IRS has specific rules regarding the following types of gifts:

  • Business Gifts - Something (money, property, or another valuable asset) given “in the course of your trade or business” without an exchange of goods or services for this item
  • Personal Gifts - Something (money, property, or another valuable asset) given to another person without getting anything in return (or you get something of lesser market value)
  • Inherited Gift - Something (money, property, or another valuable asset) bequeathed to you upon someone’s death.
  • Charitable Gifts - donations of money or valuable property a Person or Business gives to recognized non-profit organizations.

In this article, we’ll take a closer look at the tax ramifications of Business and Personal gifts, so you can satisfy your inner gift-giver, bring joy to recipients, and make the most of tax opportunities.

Business Gifts

Gifts given to customers, suppliers, and other external partners:

Business gifts are tax-deductible for your business as long as they meet certain criteria:

  • Less than $25 in value (not including extras such as engraving, wrapping, shipping, or sales tax). This applies per person per year. If the value is higher, you can’t deduct more than $25. If $25 seems a bit paltry, that might be because the IRS hasn’t changed the allowable limit since 1962.
    On a positive note, if your client company has six employees, that $25 per person limit means giving a tax-deductible group gift of up to $150. It must be a single gift, such as a new Nespresso machine for the office. If you give a group gift, you cannot also give a separate gift to one of those individuals (or, at least, it won’t be tax-deductible).
  • Items that cost you $4 or less such as promotional swag, are not considered deductible business gifts by the IRS. However, items branded with the company name cost less than $4, and are distributed regularly (such as branded pens, water bottles, and writing pads) are fully deductible under office supplies or marketing expenses.
  • It must be a tangible item such as a gift basket, a bottle of wine, or a box of chocolates. So cash, gift certificates, and gift cards don’t count. Nor do entertainment expenses – for example, attendance at a ball game, whether you take the person as a guest or give them tickets.
  • If you and your spouse own separate businesses and have mutual clients, only one can give that client a tax-deductible gift during the year.

Pro Tip: There are separate tax categories for business entertainment expenses and meals. In fact, for 2022, business meals at restaurants are 100% tax-deductible. So consider taking your clients or suppliers out for dinner instead of giving them a traditional gift.

Gifts given to employees:

You can give gifts to employees; however, unless they are De Minimis Fringe Benefits, you will have to report the market value of the gift(s) as income to the employees through their wages. The IRS defines De Minimis Fringe Benefits as items for which the “value and the frequency with which it is provided is so small as to make accounting for it unreasonable or impractical."

If you do provide non-De Minimis Fringe Benefits to your employees, your company will have to include the value of the gifts to your payroll provider, so payroll taxes are correctly accounted for, and the year-end W2s are accurate.

ProTip: Stick to De Minimis Fringe Benefits such as a mug, t-shirt, birthday gift, or holiday ham.

You’ll need proof

Naturally, the IRS expects you to keep records of all your business deductions, including gifts. To support your deductible gifts, you will need to show the following:

  • What you purchased
  • What the item(s) cost
  • When you purchased it
  • The recipient’s full legal name
  • The recipient’s business relationship with you

Personal Gifts

You might give another person a money or property gift. One day, you might find yourself on the receiving end of a personal gift. Did Mom and Dad give you a down payment for a house? Did you give your newly graduated neighbor your old car parked in your garage?

The IRS considers a gift when you transfer money or property to another person without getting anything in return (or you get something of lesser value). Money or property bequeathed to you upon someone’s death is an inherited gift. This is also not the same as charitable contributions, which are donations of money or property a person or business makes to recognized non-profit organizations.

While businesses may give gifts and receive a tax deduction as outlined above, individuals may not receive a tax deduction for the gifts. Not only do they not get a tax deduction for personal gifts, but they might also have a tax payment or filing requirement if the gift exceeds the annual Gift Tax Exclusion limit ($16,000 per recipient for 2022, $17,000 for 2023 at the writing of this article). There is also a lifetime exclusion per recipient. That amount is $12.06 million for 2022 ($24.12M for married couples). This amount will drop significantly in 2026.

ProTip: Limit giving gifts to under the annual limit $16,000 per recipient for 2022, and $17,000 for 2023 at the writing of this article). If you are married, each spouse is entitled to the annual exclusion. So, theoretically, a husband and wife can each give up to $16,000 to the same recipient ($32,000 combined). For example, what if mom and dad want to give newlyweds daughter and son-in-law a down payment for a house? They can give up to $64,000 in a combined household benefit before reporting the gift.

Some types of personal gifts are not taxable, regardless of the amount. These include money you spend to pay someone’s medical or tuition expenses, spousal gifts, and gifts to a political organization.

The person who receives a personal gift from you does not need to report it or pay tax. However, if you exceed the annual or lifetime exclusion limits noted above, you may have to report the gift and pay tax on the value.

In our next post, we'll cover Gift, Inheritance, and Estate Taxes. Learn more here.

Have Questions? Let ProAdvisor CPA be your Gift Giving Guide

Gift-giving is noble and generous, but it’s best to give in a way that benefits everybody without causing unwanted tax implications. At ProAdvisor CPA, we understand that it’s complicated. We’re here to guide you so you can be confident you’re not only doing the right thing, you’re doing it the right way.

Talk to a ProAdvisor Today

 

 

Disclaimer:

This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.

This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.

This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

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