Getting around the $25 deduction limit for business gifts

deduction limit for business gifts

At this time of year, it’s common for businesses to make thank-you gifts to customers, clients, employees and other business entities and associates. Unfortunately, the tax rules limit the deduction for business gifts to $25 per person per year, a limitation that has remained the same since it was added into law back in 1962. Fifty-five years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions.

The exceptions

Here’s a quick rundown of the major exceptions to the $25 limit:

Gifts to a business entity.

The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.

Gifts to a married couple.

If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.Incidental costs of making a gift. Such costs aren’t subject to the limit. For example, the costs of custom engraving on jewelry or of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.

Gifts to employees.

Although employee gifts have their own limitations and may be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.

Gifts vs. entertainment expenses

In some situations related to gifts of tickets to sporting or other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. Under current law, entertainment expenses are normally 50% deductible, so the gift deduction is a better deal for lower-priced tickets. But once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.

Be aware, however, that the elimination of the entertainment expense deduction has been included in proposed tax reform legislation. If legislation with such a provision is signed into law, it likely won’t go into effect until 2018.

Track and document

To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.

In addition, you must retain documentation of the following:

  • A description of the gift,
  • The gift’s cost,
  • The date the gift was made,
  • The business purpose of the gift, and
  • The business relationship to the taxpayer of the person receiving the gift.

If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact us.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Nonqualified stock options demand tax planning attention

stock-based compensationYour compensation may take several forms, including salary, fringe benefits and bonuses. If you work for a corporation, you might also receive stock-based compensation, such as stock options. These come in two varieties: nonqualified (NQSOs) and incentive (ISOs). With both NQSOs and ISOs, if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for.

The tax consequences of these types of compensation can be complex. So smart tax planning is critical. Let’s take a closer look at the tax treatment of NQSOs, and how it differs from that of the perhaps better known ISOs.

Compensation income

NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately.

ISOs, on the other hand, generally don’t create compensation income taxed at ordinary rates unless you sell the stock from the exercise without holding it for more than a year, in a “disqualified disposition.” If the stock from an ISO exercise is held more than one year, then generally your lower long-term capital gains tax rate applies when you sell the stock.

Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability. ISO exercises can trigger AMT unless the stock is sold in a disqualified disposition (though it’s possible the AMT could be repealed under tax reform legislation).

More tax consequences to consider

When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Otherwise you might face underpayment penalties.

Also keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax (NIIT). These two taxes might be repealed or reduced as part of Affordable Care Act repeal and replace legislation or tax reform legislation, possibly retroactive to January 1 of this year. But that’s still uncertain.

Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.