What You Should Know About IRS Business Gift Rules
Disclaimer: The content on this blog is for informational purposes only and does not constitute professional financial advice. While I am an accountant and tax professional, the information here should not be relied upon without seeking advice from a professional tailored to your individual circumstances. I disclaim any liability for actions taken based on the content of this blog.
As an e-commerce seller, especially in the Shopify space, gifting can be a strategic way to connect with clients, reward employees, and promote your brand. But did you know that different types of business gifts—whether promotional, for clients, or employees—are treated differently when it comes to taxes?
In this article, I’ll break down:
The three main types of business gifts: Promotional Gifts, Client Gifts, and Employee Gifts.
The IRS tax rules govern how these business expenses can be deducted.
Record-keeping requirements to substantiate your deductions.
By the end, you’ll be prepared to plan your holiday giving while staying tax-compliant.
Promotional Gifts: Boosting Your Brand
Promotional gifts are items specifically designed to increase brand awareness and visibility. These are usually inexpensive products like pens, tote bags, or mugs that prominently display your company’s logo or name. They should serve as subtle reminders of your business every time the recipient uses them.
My first promotional gift to prospects was a set of pens branded with our logo and contact number, which I handed out randomly to promote my tax and credit business.
As a Shopify seller, promotional gifts can take on a unique twist. Consider sending samples of your products as gifts—this showcases your offerings and gives potential clients a firsthand experience of your brand.
For instance, if you make candles, you could send mini candles branded with your logo to customers or collaborators as a thoughtful touch. Or, if you're aiming for something more classic, branded items like reusable water bottles, mouse pads, or phone chargers could be perfect for corporate clients to keep your business in mind.
Tax Treatment:
Promotional gifts are fully deductible as advertising or marketing expenses.
To qualify, the items must cost less than $4 each and feature your business name or logo prominently.
The expense must align with your business’s purpose, enhancing visibility and driving interest.
Documentation is Key for Promotional Gifts
When it comes to deducting promotional gifts, proper documentation is essential to ensure compliance with IRS rules and to secure your deduction. Here’s what you need to track:
Description of the Gift: Clearly outline what the promotional gift was (e.g., branded pens, tote bags, or water bottles).
Cost Per Item: Note the cost of each gift. Remember, promotional items are fully deductible if they cost $4 or less and prominently display your business name or logo.
Quantity Distributed: Keep a record of how many items you distributed and to whom (if possible).
Business Purpose: Specify the reason for distributing the promotional gifts, such as at a trade show, as part of a marketing campaign, or to attract new customers.
Receipts or Invoices: Maintain receipts or invoices from the vendor or supplier showing the purchase details.
Proper documentation not only helps you claim deductions but also ensures you’re prepared in case of an IRS audit. Being thorough with your records protects your business and gives you peace of mind during tax season.
Pro Tip:
When choosing promotional gifts, think about items your recipients will actually use. The more they interact with your gift, the more your brand sticks in their minds.
Client Gifts: Building Strong Relationships
Client gifts are a powerful way to show appreciation and nurture relationships, whether with loyal customers, referral sources, or colleagues. Especially during the holiday season, these thoughtful gestures remind recipients of the value you place on your connection with them. However, as generous as you may want to be, the IRS has strict rules about how much of this generosity you can deduct.
After-tax season, I like to show my appreciation to clients by sending thoughtful gifts to thank them for their business. I usually partner with other small businesses to create the items, so I’m supporting another small business all at the same time.
One year, a friend who sells soy candles crafted a beautiful batch of candles for me to send out. Another year, I found these adorable cups on Amazon that came with matching keychains and straws—functional and fun! My goal is always to send something clients can actually use, not just something that will sit around collecting dust. These small gestures show gratitude and build lasting connections, all while supporting other small businesses.
Tax Treatment:
The IRS allows a deduction of up to $25 per recipient annually for business gifts.
If a gift is intended for a group, like an office-wide snack basket, the $25 limit applies to each individual who uses the gift.
Shipping, wrapping, or engraving costs don’t count toward the $25 limit, so you can still go the extra mile with the presentation.
If you have an independent business relationship with multiple members of a family (e.g., a husband and wife), the $25 limit applies separately to each person.
Documentation is Key:
To ensure these deductions hold up, you must document:
The cost of the gift.
The date you gave the gift.
A description of the gift.
The business purpose of the gift.
Your relationship with the recipient.
And have a receipt
Why is the Deduction Limit So Low?
You’re probably wondering, Why is this limit stuck at $25? The short answer: the law hasn’t budged since 1962. Adjusted for inflation, that $25 would be closer to $180 today, highlighting just how outdated this rule is. Back then, a new car cost $2,275, gas was 31 cents a gallon, and stamps were 4 cents each! While the limit feels restrictive, creative gift-giving can still leave a lasting impression without breaking the rules.
Pro Tip:
Keep it personal and meaningful! A thoughtful, customized gift—like a product from your business or a curated item that aligns with your client’s interests—can leave a lasting impression. Pair it with a handwritten note to show genuine appreciation and strengthen the relationship. Remember, the IRS allows a $25 deduction per client per year, so plan your gifts accordingly!
Employee Gifts: Rewarding Dedication
Last but not least are gifts to employees. These gifts can be a thoughtful way to boost morale and show appreciation for their hard work. However, the IRS has specific rules about what’s deductible, what’s taxable, and how to stay compliant. Here’s what you need to know to reward your team without creating tax headaches.
Tax Rules for Employee Gifts
Cash or Cash-Equivalent Gifts:
Cash and gift cards of any amount are treated as taxable income. These gifts must be reported on the employee’s Form W-2 and are subject to income and payroll taxes.
Example: A $50 gift card given as a holiday gift is taxable as wages.
Non-Cash Gifts:
Non-cash gifts can be tax-free for employees if they qualify as a de minimis benefit—meaning their value is minimal, and they are given infrequently.
The IRS does not provide a strict dollar threshold, but gifts under $100 are generally considered safe. However, if the value exceeds the de minimis threshold, the gift is taxable.
Example: A holiday turkey or a box of chocolates given as a one-time gesture is likely tax-free.
Service Awards:
Non-cash awards for length of service or safety achievements can be tax-free up to $1,600 per employee per year if given as part of a qualified plan.
Non-qualified awards are limited to $400 per year. These awards must be tangible items like plaques or watches, not cash or gift cards.
Example: A $400 engraved watch for a 10-year milestone or a $1,200 safety achievement plaque under a qualified plan.
Holiday Parties and Celebrations:
Costs for employee holiday parties or picnics are deductible as a business expense and are tax-free for employees.
Documentation Requirements
Proper record-keeping is crucial to ensure compliance with IRS rules:
Receipts: Maintain receipts or invoices for all gifts.
Gift Details: Record the type of gift, its value, and the date it was given.
Purpose of the Gift: Specify the reason for the gift, such as “holiday appreciation” or “10-year service award.”
Recipient Information: Include the name and business relationship of the recipient.
For taxable gifts, report their value as part of the employee’s wages on their Form W-2.
Pro Tip:
To keep employee gifts tax-free, stick to non-cash items that meet the de minimis benefit criteria or qualified service awards. For cash or cash-equivalent gifts, be prepared to report them as taxable income and withhold the appropriate taxes.
Now that you know the rules for deducting business gifts, you’re ready to give like a pro—thoughtful, compliant, and totally tax-savvy! Whether it’s a $25 client gift, a branded promo item, or a holiday turkey for your star employee, you’ve got the knowledge to make every gift count.
Still feeling unsure about what’s deductible or need help organizing your expenses? Let’s take the stress off your plate! Click here to book your consultation.
