It’s the holidays; the time that’s for being thankful; the time that’s for giving. It’s also the time for company Christmas parties, holiday bonuses, and giving gifts to our clients.
One of the myths of holiday meals and gifts is that they are all deductible. Most companies don’t know that they are limited in the dollar amount and the percentage of deductions you can take for your business. One particular limit that is often overlooked is gifting to clients.
Understanding How Giving is Viewed by the IRS
The IRS limits gifts to your clients and customers to $25.00. If you give a gift that is more expensive, you can only deduct the $25.00 from the total.
This means you will need two entries for gifts above $25.00 in your records. You will need an entry for the $25.00 deductible portion of the gift and a non-deductible entry for the remainder. This, of course, requires more record-keeping, but it is necessary to present the proper records to the IRS in case of an audit. Don’t just list everything as “charitable giving.” Different types of gifts require different rules.
Gourmet food baskets are one area where this becomes a problem. These baskets often cost $100 or more. If you are giving these to your clients at Thanksgiving or Christmas, the IRS will only allow $25 of that gift. It’s fine to give these or other expensive gifts, but not as a tax write-off. It is important that these items are placed in your accounting software correctly.
Keep Good Records
Make sure that you have photos of all your receipts and that your records are up to date. The IRS has been more focused on this area of gifts in the past few years, so if they suspect you have been recording these items incorrectly, the chances you’ll be audited increase.
Meals and entertainment expenses are only 50% deductible and that’s only if they are business-oriented. If you take all of your employees out to a restaurant, or if you invite your clients and vendors to a holiday party, it's considered meals and entertainment deduction and is only 50% deductible.
How often you entertain plays into it also. Is this a rare occurrence or a regular event? If you have a catered lunch for your employees every Friday, then a 100% deduction will probably be disallowed. It will fall into the meals and entertainment category and only be deductible at the 50% level.
The Consequences of Inappropriate Deductions
It’s best to check with an accountant or tax preparer if you have questions. If you take a 100% deduction for an event that should be only 50% deductible, the IRS may audit you and require that you pay the back taxes. If it seems that you are taking a lot of questionable deductions and that you're just trying to see what you can get away with rather than simply making an honest mistake, they may also impose penalties.
Since the whole area of holiday parties, and meals and entertainment can be a little ambiguous, the IRS will make a judgment based on their perception of the spirit in which you do your entertaining.
The Bottom Line
If you give gifts and do holiday entertaining at the end of the year for your business, don’t assume that everything is fully deductible. Evaluate each event to determine if you are taking the deductions allowable in the US Tax Code. Trying to take advantage of loopholes and grey areas may come back to haunt you. Don’t try to deduct the luncheon you have with your friend as a business expense unless it legitimately is one.
