Tax deductions for Corporate Gifts vs Promotion: What Does the Law Say?
When it comes down to it, if there is no written evidence that the gift was intended as something other than just "entertainment," then many businesses' claims on those taxes will be denied by IRS auditors. The giving or receiving of things like tools, promotional items such as pens and t-shirts would not qualify under these circumstances since this falls into advertising expenses instead.
So, let’s take a look at what constitutes a gift for tax purposes. The IRS states that an item can be considered a gift if it is given "in the course of your trade or business.” However, if your intention is simply to give an employee or client something they need or use (e.g., pens), then it's not technically a gift; if you're trying to make them feel special because you appreciate their business relationship with your company or want them to know how much they mean to you personally, then yes, the gift is tax-deductible.
Direct & Indirect Gifting
The tax law states that you can deduct no more than $25 for business gifts given to each person during your tax year. A gift for a company intended for the eventual personal use or benefit of an individual will be considered an indirect gift as well. (An indirect gift will be considered an intentional and thoughtful present given as part of your relationship with that person/people which can include anything from dinner to concert tickets.) While there is no limit on how many people can receive an indirect gift, the $25 deductible limit per individual still applies. To break it down, if you give a gift that is $125 to each of your clients, you would be able to deduct $25 of each gift for each client.
If you and your spouse both give gifts, the two of you are treated as one taxpayer. This applies regardless if it is clear that each person has an independent connection with the recipient or they have a different employer. If a partnership gives gifts to someone who benefits from their company’s business, then all partners in this venture will be taxed jointly for these donations.
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Promotional and Advertising Expenses
Promotional and advertising expenses are a way for businesses to advertise their products. For example, the cost of creating brochures or promotional materials is considered an expense because they help form marketing efforts that can increase sales. This cost also includes the funding of prizes and awards, e.g. the cost of an automobile given as a prize for entering into a contest, etc.
With the rise of social media, promotional costs have increased exponentially. Promotional items are everywhere you look - from your Facebook feed to a company's Twitter account or blog posts on their website.
Promotional and advertising expenses can be lumped together for tax purposes even though they may differ in nature. One major difference between these two is that while business gifts given to specific individuals must be reported as expenditure if it exceeds $25 per gift recipient, this does not apply when giving away promotional materials such as brochures with multiple recipients listed. This means that these costs can be deducted without any limitations on how much is spent. This could potentially make it more advantageous than taking deductions under certain circumstances because there will never be an upper cap as opposed to gift purchases where limits exist. In other words, in order to maximize profit margins, one might choose promotional expenditures over gifting ones so long as the promotional expense is reported as such.
The question lies in if the gift is truly just a gift or if you can also classify it as promotional material and in that case, you would have far greater deduction potential. You can learn more about the differences between the two here. However, when it comes to business gifts and promotional expenses, talking with a qualified CPA can be extremely helpful as well!