What expense category is Business Gifts?

Giving gifts to clients, customers, and employees is a common way to express appreciation and foster strong business relationships. While these are legitimate business expenses, the IRS has specific and strict rules that limit the amount you can deduct for them.

It is crucial for accountants and business owners to understand these limits to avoid overstating their deductions. This guide explains the IRS rules for business gifts, how to distinguish them from advertising or entertainment, and how to track them for complete tax compliance.

The Business Gifts Category

The cost of qualifying business gifts is a deductible business expense. These costs are not listed as a specific line item on the tax return; instead, they are reported under the category Other expenses.

On a company's books, these costs should be tracked in a specific account, such as Business Gifts, to ensure the annual per-person limit is not exceeded.

Important Considerations When Classifying Business Gifts

The IRS has several key rules you must follow to deduct the cost of business gifts.

The $25 Per Person Annual Limit

This is the most critical rule. As detailed in IRS Publication 463, you can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. If you give a client a gift worth $75, you can only deduct $25 of the value from your taxable income.

Indirect Gifts

The $25 limit applies to both direct and indirect gifts.

• An indirect gift is one made to a person's spouse, family member, or a company, with the intent that it benefits a specific individual. For example, a gift basket sent to a company but intended for a specific executive is an indirect gift to that executive.
• If you and your spouse both give gifts to the same person, you are treated as one taxpayer and are still limited to a total deduction of $25 for that person.

What Costs Are Not Included in the Limit?

Incidental costs are not included when figuring the $25 limit. Publication 463 lists these as costs that do not add substantial value to the gift, such as:

• Engraving
• Packaging
• Insuring
• Mailing

Gift vs. Advertising

Promotional items are only considered gifts if they do not meet the specific advertising rules. According to IRS Publication 535, an item is an advertising expense (and not subject to the $25 gift limit) only if it meets all three of these conditions:

1. It costs you $4 or less.
2. It has your business name clearly and permanently imprinted on it.
3. It is one of a number of identical items you widely distribute.

A pen or desk set that meets these criteria is fully deductible as an advertising expense. A more expensive item, such as a polo shirt, would be a suitable business gift.

Gift vs. Entertainment

Publication 463 states that any item that could be considered either a gift or entertainment will generally be treated as entertainment. Since entertainment expenses are no longer deductible, this is a critical distinction. The one exception is for packaged food or beverages that you give to a customer to use at a later date; these are treated as a gift.

Gifts to Employees (Achievement Awards)

Gifts to employees generally fall under the rules for awards. IRS Publication 535 explains that you can deduct the cost of tangible personal property given to an employee for length of service or safety achievement. 

The deduction for these awards is limited to $400 per employee (or up to $1,600 under a qualified, written plan). Cash, gift cards, vacations, or event tickets do not qualify as tangible personal property for this purpose.

Tax Implications and Recordkeeping

To deduct the cost of business gifts, you must report them correctly and maintain meticulous records.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), the deductible portion of business gifts is included in the total for Part II, Line 27a, Other expenses.

What Records to Keep

According to Publication 463, you must have records that prove:

• The cost of the gift.
• The date of the gift.
• A description of the gift.
• The business reason for the gift.
• The business relationship of the person receiving the gift.

How Fyle Can Automate Tracking for Business Gifts

Fyle helps you manage gift spending and stay compliant with the strict IRS limits, ensuring every gift is properly documented.

• Capture Gift Receipts Instantly: Employees can capture receipts for client gifts on the go using the Fyle mobile app.
• Enforce the $25 Limit: Fyle’s policy engine can automatically flag any gift expense that exceeds the $25 per-person limit for review.
• Track by Recipient: Code each gift to a specific client or employee to easily monitor the annual spending limit per person.
• Automate Your Accounting: Sync the deductible portion of gift expenses directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.