Know the Tax Deduction Limit for Business Gifts

Entrepreneurs give gifts to business associates in a process suffused with the myth that no limit exists for claiming tax deduction of these expenditures. The U.S. tax code allows a deduction for gifts to non-employees of only $25 per recipient annually. A Canadian business isn’t confronted with a dollar limit but other conditions are imposed with similarity to U.S. rules.

In both the U.S. and Canada, tickets to events – such as concerts, theaters, or ball games – are treated as entertainment expenses. Gift certificates for restaurants are considered meal expenses. Only half of entertainment and meal expenses are tax-deductible. Moreover, fifty percent of a these costs commonly exceed the $25 per recipient U.S. ceiling.

Special tax rules apply to employee gifts. Giving employees cash or equivalents – like gift cards – of any amount is considered taxable compensation in the U.S. or Canada. Amounts are added to wages and subjected to payroll taxes. Businesses can give non-cash gifts to employees of nominal cost without adding the values to reported wages. Giving small holiday gifts is a typical example in both countries.

Employees don’t incur taxable wages if a gift is received tax-free under a documented achievement award program. The award program for a U.S. business cannot discriminate in favor of highly compensated workers. The U.S. tax deduction for each non-cash achievement award is capped at a $400 value and must be given in a meaningful presentation. Total awards per U.S. employee are limited to $1,600 annually. Canadian operations are merely limited to assuring that awards are not related to employee performance, which are taxable wages.

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