Are Gifts Deductible Expenses?

Tax Deductions for Gift Giving

Giving gifts to clients can be a valuable method of building goodwill and loyalty. It’s one way to distinguish yourself from your competitors. Gifts are usually given during holiday seasons, for birthdays, significant transactions or simply as a thank you. When you buy a gift for use in business, you need to know if it qualifies as a tax deduction.

While gifts passed on to customers are deductible, there are certain conditions that you must be aware of:

• You must be able to demonstrate that the recipient is actually a business associate, such as a customer, supplier, or investor, and there must be a business purpose for the gift.
• The value of the gift should be realistic and relative to the nature of your relationship with the recipient. While sending a gift basket can make sense, a diamond bracelet for someone with minimal connection to your business will probably be disallowed.
• Only 50% of gifts that are specifically for meals or entertainment, i.e. gift cards for dining or tickets to a hockey game, are deductible.
• You should record the purpose on the gift’s sales receipt or record a note in your accounting software. This will help you provide relevant details during an audit.
• A mention of your sponsorship should follow gifts to a non-profit organization.
• Contributions to registered charities for which an official receipt is issued are allowable.

Gifts to clients are generally included in the advertising and promotion account unless meals or entertainment are involved. Like the latter, it is only 50% deductible. Such expenses should be recorded in the meals and entertainment account.

The bottom line is that businesses claiming gifts as a deductible expense should have substantiation for the contribution and record clear reasons for the purpose.

If you are unsure whether your generosity qualifies as a deduction, contact our office for help.