Are business gifts deductible?

Yes, business gifts are deductible, but there are specific limitations and rules that must be followed.

1. General Limitation: According to § 274(b) of the Internal Revenue Code, no deduction is allowed for business gifts to any individual to the extent that the total expense for gifts given during the taxable year exceeds $25. This means that you can deduct up to $25 per recipient per year for business gifts.
2. Definition of a Gift: For the purposes of this limitation, a "gift" is defined as any item excludable from the recipient's gross income under section 102, which is not excludable under any other provision of the chapter. However, certain items are not considered gifts:
   • Items costing $4 or less with the taxpayer's name clearly and permanently imprinted and distributed generally.
   • Signs, display racks, or other promotional material to be used on the business premises of the recipient.
3. Indirect Gifts: Gifts given to a company intended for the personal use or benefit of a particular person or a limited class of people are considered indirect gifts to those individuals. Similarly, gifts to family members of a customer are generally considered indirect gifts to the customer.
4. Exceptions: There are exceptions to the $25 limit:
   • Items costing $4 or less with the taxpayer's name clearly and permanently imprinted and distributed generally.
   • Signs, display racks, or other promotional material to be used on the business premises of the recipient.
5. Employee Achievement Awards: Separate rules apply to employee achievement awards, which are not considered business gifts under § 274(b) but have their own deduction limitations under § 274(j). These awards must be tangible personal property given for length of service or safety achievement and are subject to different dollar limits ($400 for non-qualified plan awards and $1,600 for qualified plan awards).
6. Record-Keeping: It is essential to maintain records that prove the business purpose of the gift and the details of the amount spent.

In summary, business gifts are deductible up to $25 per recipient per year, with specific exceptions and additional rules for certain types of items and employee achievement awards.

Sources:
Publication 463 (2023)
§ 162. Trade or business expenses
T.D. 8230
Rev. Rul. 67-49
Rev. Rul. 63-144
§ 274. Disallowance of certain entertainment, etc., expenses