Can I deduct business gifts, and what’s the limit?

by | Jun 6, 2025 | Business Taxes, Deductions & Write-Offs

Here’s what HIVE AI had to say about “Can I deduct business gifts, and what’s the limit?”:

Yes, you can deduct business gifts, but they are subject to strict limitations and substantiation requirements under Section 274(b) of the Internal Revenue Code. Understanding these rules is essential for properly claiming legitimate business gift deductions while maintaining compliance with federal tax law.

The $25 Per Recipient Annual Limitation

No deduction shall be allowed under section 162 or 212 for any expense for a gift made directly or indirectly by a taxpayer to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the taxpayer’s taxable year, exceeds $25. Tresuary Reg. 1.274-3 This is the fundamental limitation that applies to all business gifts, regardless of their actual cost or value.

The statutory limitation is reinforced by the regulations, which state that No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. IRC § 274(b) This means that even if you give a gift worth $100 to a business client, you can only deduct $25 of that expense.

Practical Application of the Limitation

The IRS provides a clear example of how this limitation works in practice. You sell products to a local company. You and your spouse gave the local company three gourmet gift baskets to thank them for their business. You and your spouse paid $80 for each gift basket, or $240 total. Three of the local company’s executives took the gift baskets home for their families’ use. You and your spouse have no independent business relationship with any of the executives’ other family members. You and your spouse can deduct a total of $75 ($25 limit × 3) for the gift baskets. IRS – Publication 463: Travel, Gift, and Car Expenses

This example demonstrates several important principles: the limitation applies per recipient, gifts to company executives are treated as gifts to those individuals rather than the company, and the deduction is limited regardless of the actual cost of the gifts.

Treatment of Spouses and Partnerships

Special aggregation rules apply to ensure that the $25 limitation cannot be circumvented through multiple related parties. For purposes of applying the $25 annual limitation contained in paragraph (a) of this section, a husband and wife shall be treated as one taxpayer. Thus, in the case of gifts to an individual by a husband and wife, the spouses will be treated as one donor; and they are limited to a deduction of $25 annually for each recipient. This rule applies regardless of whether the husband and wife file a joint return or whether the husband and wife make separate gifts to an individual with respect to separate businesses. Tresuary Reg. 1.274-3

Similarly, for partnerships, In the case of a gift by a partnership, the $25 annual limitation contained in paragraph (a) of this section shall apply to the partnership as well as to each member of the partnership. Thus, in the case of a gift made by a partner with respect to the business of the partnership, the $25 limitation will be applied at the partnership level as well as at the level of the individual partner. Consequently, deductions for gifts made with respect to partnership business will not exceed $25 annually for each recipient, regardless of the number of partners. Tresuary Reg. 1.274-3

Definition of Business Gifts

The regulations provide a specific definition of what constitutes a gift for purposes of these limitations. Except as provided in subparagraph (2) of this paragraph the term gift, for purposes of this section, means any item excludable from the gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of chapter 1 of the Code. Tresuary Reg. 1.274-3

Items Not Treated as Gifts

Importantly, certain items are specifically excluded from the definition of gifts and therefore not subject to the $25 limitation. The term gift, for purposes of this section, does not include the following: (i) An item having a cost to the taxpayer not in excess of $4.00 on which the name of the taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by such a taxpayer. Tresuary Reg. 1.274-3

Additionally, promotional materials are excluded: A sign, display rack, or other promotional material to be used on the business premises of the recipient Tresuary Reg. 1.274-3 is not considered a gift subject to the limitation.

Employee achievement awards also receive special treatment under certain circumstances, though these have their own specific requirements and limitations.

Incidental Costs

The regulations provide some relief for incidental costs associated with gifts. Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. A cost is incidental only if it doesn’t add substantial value to the gift. For example, the cost of gift wrapping is an incidental cost. However, the purchase of an ornamental basket for packaging fruit isn’t an incidental cost if the value of the basket is substantial compared to the value of the fruit. IRS – Publication 463: Travel, Gift, and Car Expenses

Substantiation Requirements

Business gift deductions are subject to strict substantiation requirements under Section 274(d). Taxpayers are entitled to deduct the cost of business gifts limited to $25 per recipient per year. They must substantiate the cost and description of the gift, the date that the gift was made, the business reason for the gift, and the business relationship between the taxpayer and the recipient. Dawson U.S. Tax Court Opinions: John E. Rogers & Frances L. Rogers Dawson U.S. Tax Court Opinions: John E. Rogers & Frances L. Rogers

The regulations specify exactly what must be substantiated: A taxpayer who claims a deduction for a business gift is required to substantiate it with adequate records or sufficient evidence corroborating his own testimony as to (1) the cost of the gift; (2) the date and description of the gift; (3) the business purpose of the gift; and (4) the business relationship of the person receiving the gift. Dawson U.S. Tax Court Opinions: Edmond Audrey Heinbockel & Lydia Rose Heinbockel

Consequences of Inadequate Substantiation

The courts have consistently enforced these substantiation requirements strictly. In one case, Mr. Henry’s sole evidence to support these deductions is receipts showing the purchases of the gift cards. Section 274(b)(1) limits the deduction of the cost of any business gift to $25 per recipient per year. A taxpayer claiming a business gift deduction must substantiate the cost and description of the gift, the date the gift was made, the business reason for the gift, and the business relationship to the taxpayer. While Mr. Henry provided receipts evidencing the purchase of the gift cards he later gave to clients, he does not meet his burden regarding the other substantiation requirements under the regulation. Dawson U.S. Tax Court Opinions: Lawrence Leroy Henry Dawson U.S. Tax Court Opinions: Lawrence Leroy Henry

Business Purpose Requirement

For a gift to be deductible as a business expense, it must serve a legitimate business purpose. The cost of a gift may be an ordinary and necessary business expense to the extent the gift is related to the taxpayer’s opportunity to generate business income. Dawson U.S. Tax Court Opinions: E. Bruce & Denise A. Agness DiDonato However, the amount of the deduction allowed for a gift is limited to $25 per donee per year. Moreover, section 274(d) requires that the taxpayer claiming the gift amount as a deduction substantiate with adequate records (1) the cost of the gift, (2) the date and description of the gift, (3) the business purpose of the gift, and (4) the business relationship of the person receiving the gift. Dawson U.S. Tax Court Opinions: E. Bruce & Denise A. Agness DiDonato Dawson U.S. Tax Court Opinions: E. Bruce & Denise A. Agness DiDonato

Indirect Gifts

The regulations address situations where gifts are made indirectly to individuals. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This rule doesn’t apply if you have a bona fide, independent business connection with that family member and the gift isn’t intended for the customer’s eventual use. IRS – Publication 463: Travel, Gift, and Car Expenses

Gifts to Superiors

There are specific restrictions on gifts made to superiors in the workplace. Gifts made to your superiors are not deductible. IRS IRM 4.10.10 Standard Paragraphs and Explanation of Adjustments This rule prevents employees from attempting to deduct gifts made to their bosses or supervisors.

Relationship to Charitable Contributions

It’s important to distinguish business gifts from charitable contributions. No deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section. IRC § 162(b) This means that if a payment qualifies as a charitable contribution under Section 170, it cannot be deducted as a business expense under Section 162.

Practical Examples from Tax Court Cases

The Tax Court has provided guidance on how these rules apply in practice. In one case, Petitioners deducted $800 in business gifts for 2006. We are satisfied that they adequately substantiated four business gifts of at least $25 and are entitled to deduct $100 in business gifts for 2006. We disallow the remaining business gift deduction for 2006. Dawson U.S. Tax Court Opinions: John E. Rogers & Frances L. Rogers Dawson U.S. Tax Court Opinions: John E. Rogers & Frances L. Rogers

In another case, petitioner made eight purchases, each limited to $25, and he is entitled to a business gift expense deduction of $200. Dawson U.S. Tax Court Opinions: Dean & Lori P. Cibotti This demonstrates that when proper substantiation is provided, taxpayers can claim the full $25 per recipient.

Record-Keeping Requirements

The IRS emphasizes the importance of maintaining proper records for business gift deductions. Business gifts allowed as deductions may not exceed $25 to any one individual per year. Since you did not establish with contemporaneous records, that the amount shown was (a) for business gifts, and (b) paid, it is not deductible. IRS IRM 4.10.10 Standard Paragraphs and Explanation of Adjustments

Employee Gift Deductions

For employees claiming unreimbursed business gift expenses, additional limitations apply. Unreimbursed business gifts are deductible only as miscellaneous itemized deductions. Miscellaneous deductions are deductible to the extent that they exceed 2 percent of your adjusted gross income. Since changes made elsewhere in this report effect your adjusted gross income, we have adjusted your miscellaneous deduction. IRS IRM 4.10.10 Standard Paragraphs and Explanation of Adjustments However, it’s important to note that miscellaneous itemized deductions subject to the 2% floor have been suspended for tax years 2018 through 2025 under the Tax Cuts and Jobs Act.

In summary, business gifts are deductible but subject to a strict $25 per recipient per year limitation, regardless of the actual cost of the gift. Proper substantiation is required, including documentation of the cost, date, description, business purpose, and business relationship with the recipient. Certain promotional items and incidental costs may be excluded from the limitation, but the rules must be carefully followed to ensure compliance and avoid disallowance of the deduction.

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