Business gifts can be tax-deductible, but there are strict IRS limits. For clients, you can deduct up to $25 per person annually. For employees, tangible gifts under de minimis value aren’t taxable income, but cash equivalents like gift cards are fully taxable. Employee service awards allow up to $400 deductions with specific restrictions. Branded items under $4 don’t count toward the $25 limit. Entertainment expenses are no longer deductible as of 2018, so documentation is critical to prove gifts aren’t entertainment.

Table of Contents

• Introduction: Why Gift Tax Rules Matter
• The $25 Rule for Client Gifts
• Employee Gifts: Three Categories
• Entertainment vs. Gift: The 2018 Rule Change
• Record-Keeping Requirements
• Strategic Gifting Action Plan

Introduction: Why Gift Tax Rules Matter

As a small business owner, showing appreciation to your team and clients can benefit your tax situation when done correctly. And who doesn’t love a gift?!

However, the IRS has specific rules about what qualifies as a deductible gift, and misclassifying expenses could cost you during an audit.

Coresight Research found that 80% of companies report corporate gifting improves relationships with both employees and clients, making it essential to structure these gestures correctly for maximum tax benefit.

This guide will help you understand the difference between how gifts are treated, so you can make informed decisions about your gifting strategy while maximizing legitimate tax benefits.

The $25 Rule for Client Gifts

For gifts to clients, remember this number: $25 per person, per year. This is your maximum tax deduction.

Important distinction: You can spend as much as you want on gifts, but the IRS only allows you to deduct up to $25 per person from your taxable income. If you spend $100 on a client gift, you’ve incurred a $100 business expense, but only $25 reduces your taxable income on your tax return.

This limit hasn’t changed since 1962. What cost $25 in 1962 would cost approximately $254 today. Crazy, right?

The good news – iIncidental expenses like postage, shipping, engraving, and gift wrapping can be deducted separately and do not count towards the $25 limit.

Employee Gifts: Three Categories

According to Snappy’s 2024 Holiday Gifting Report, 66% of businesses give gifts to employees for appreciation or milestone occasions. But employee gifts require careful consideration and fall into three categories.

Category 1: Tangible Property (De Minimis Fringe Benefits)

Small tangible gifts can be excluded from employees’ taxable income if they qualify as “de minimis fringe benefits” – items so small in value that accounting for them would be impractical. Examples include occasional snacks, coffee, birthday flowers, fruit baskets, or small holiday gifts.

ASI’s 2017 Corporate Gift Spending Survey found that businesses spend an average of $79 per employee on holiday gifts. But the $25 rule applies here too.  If you give an employee a $100 concert ticket as a tangible gift, you’ve spent $100 (the expense), but only $25 is deductible on your taxes. 

Category 2: Cash, Gift Cards, and Gift Certificates

Good news. These are not subject to the $25 deduction limit. However, they are always considered taxable income to employees and you must report them via payroll.  

Category 3: Service and Safety Awards

You can deduct up to $400 per employee per year for these awards if you follow IRS guidelines. 

Service awards recognize employees for length of employment with your company (work anniversaries, not military service):

• Cannot be given during the first 5 years of employment
• Cannot be given more frequently than every 5 years 
• Must be tangible personal property (Check out the IRS Tax Guide for specifics)

Safety awards recognize workplace safety achievements (accident-free records, safety milestones):

• Cannot be given to more than 10% of eligible employees in the same year
• Must be tangible personal property 

After the 2017 Tax Cuts and Jobs Act, awards cannot include cash, gift cards, vacations, meals, lodging, tickets, stocks, or bonds. You CAN give: Watches, jewelry, plaques, or other physical items employees can keep and display. (Check out the IRS Tax Guide for specifics)

Research shows that 82% of employees say workplace recognition is important to their happiness at work. So keep on gifting!

Record-Keeping Requirements

The IRS requires documentation to support any business deduction. For gifts, maintain:

• Receipts showing itemized purchases and amounts paid
• Names of recipients and their relationship to your business
• Business purpose for each gift
• Dates gifts were given

If your receipt shows a lump sum, annotate it immediately. For example, if you spend $100 on four gift baskets, write “4 gift baskets at $25 each” with recipient names. Use accounting software that allows you to photograph receipts and add notes in real-time for better audit protection.

Strategic Gifting Action Plan

Harvard Business Review reports that businesses can see a 25-95% increase in profits from just a 5% increase in customer retention rate, and strategic gifting plays a key role in building that loyalty.

For client gifts:

• Stay at or under $25 per person annually for maximum deduction
• Keep detailed records with names and business purposes

For employee gifts:

• Use tangible property for de minimis benefits that aren’t taxable
• Remember gift cards and cash require full tax withholding
• Take advantage of the $400 award limit for service and safety recognition

For everyone:

• Document everything immediately
• Understand the entertainment vs. gift distinction post-2018
• Consider incidental costs separately from gift values

By strategically planning your business gifts with tax rules in mind, you can show appreciation, strengthen relationships, and legitimately reduce your tax liability while staying fully compliant with IRS regulations.