A common practice among certain types of business professionals is to provide a gift when a deal closes or a transaction is completed. For example, a real estate agent might give a client who buys a house a $100 gift card from a home improvement chain or a $100 bottle of wine. The agent attaches a note with the gift asking for future business and referrals accompanied by three business cards.
Are gifts like these tax deductible business expenses? Yes, but they are subject to draconian limits.
If you give someone a gift for business purposes, your business expense deduction is limited to $25 per person per year. Any amount over the $25 limit is not deductible. If this amount seems awfully low, that’s because it was established in 1954!
A gift to a member of a client's family is treated as a gift to the client, unless you have a legitimate nonbusiness connection to the family member. If you and your spouse both give gifts, you are treated as one taxpayer—it doesn’t matter if you work together or have separate businesses.
The $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift is intended for a particular person or group of people within the company. Such company-wide gifts are deductible in any amount, as long as they are reasonable.
Example: Bob, is a commercial real estate broker whose best client is Acme, Inc. Just before Christmas, he drops off a $100 cheese basket at the company’s reception area for all of Acme’s employees. He also delivers an identical basket to Acme’s president. The first basket left in the reception area is a company-wide gift, not subject to the $25 limit. The basket for Acme’s president is a personal gift and therefore is subject to the limit.
There is a special twist if you provide a client with entertainment tickets, such as tickets to a baseball game. If you don't attend the event with the client, you have the option of treating the tickets as a gift or as an entertainment expense. Gifts of up to $25 are 100% deductible, while entertainment expenses are only 50% deductible. So, with tickets that cost less than $50, you get a bigger deduction if you treat them as a gift. If they cost more, treat them as an entertainment expense.
Example: You pay $40 to a scalper for a college basketball game ticket that has a face value of only $30. You give the ticket to a client but don’t attend the game yourself. By treating the ticket as a gift, you may deduct $25 of the expense. If you treated it as an entertainment expense, your deduction would be limited to 50% of $30, or $15. However, if you paid $100 for a ticket with a $60 face value, you would be better off treating it as an entertainment expense. This way you would be able to deduct 50% of $60, or $30. If you treated the ticket as a gift, your deduction would be limited to $25.
For more information on this and other tax issues for real estate agents and brokers, refer to The Real Estate Agent's Tax Deduction Guide, by Stephen Fishman (Nolo).