What expense category is Gifts?

In the course of business, you may give gifts to clients, customers, or employees. It's important to understand how to categorize and account for these expenses properly.

Gift Expense Category

Gift expenses are typically classified as general and administrative expenses or selling expenses. These are the ongoing costs a business incurs to run its daily operations and promote its products or services.

Important Considerations While Classifying Gift Expenses

• Direct vs. Indirect Gifts: Gifts can be given directly to an individual or indirectly, such as to a family member or a company, for the benefit of a particular person.
• $25 Limit: The IRS limits the deduction for business gifts to $25 per person per year.   
• Gift vs. Entertainment: Generally, items that could be considered either a gift or entertainment will be considered entertainment. However, packaged food or beverages intended for the customer to use later are treated as gifts.

Exceptions

• Items that cost $4 or less and have your business name clearly and permanently imprinted are not subject to the $25 limit if these are one of many identical items widely distributed.
• Signs, display racks, or other promotional materials for use on the recipient's business premises are also not subject to this limit.

Examples of Gift Expenses

• Gift baskets for clients
• Holiday gifts for employees
• Promotional items with company logo

Tax Implications of Gift Expenses

The tax treatment of gift expenses depends on whether they meet the requirements to be classified as a gift. If the expense is considered entertainment, then it’s not deductible. If the expense meets the requirements to be classified as a gift, then it’s deductible, but only up to $25 per person per year.

How Sage Expense Management (formerly Fyle) Automates Expense Categorization & More!

Our AI-powered expense management platform can help businesses accurately categorize and track their gift expenses. Our AI can automatically extract data from receipts and invoices, ensuring accurate record-keeping and compliance with IRS regulations, including the $25 limit per person. This saves businesses time and reduces the risk of errors, making tax preparation easier and more efficient.