Business Gifts: What’s the Tax Treatment?

One person giving another person a gift.

During the holiday giving season, keep the following tax limits in mind. Your business can deduct only up to $25 per person per year for gifts to recipients such as clients and business partners. You can also generally deduct $25 per person per year for employee gifts.

If gifts to employees are infrequent and of minimal value (de minimis), they generally aren’t taxable to workers. Although the IRS doesn’t specify a dollar amount for a gift to qualify as a de minimis benefit, you should aim to spend $100 or less. However, if you give cash or cash-equivalents (such as gift cards), the gifts are considered compensation and taxable to employees regardless of the amount.

Photo by Antoni Shkraba: https://www.pexels.com/photo/person-giving-a-gift-box-5493207/

Use It or Lose It: Your 2024 Gift Tax Annual Exclusion

Gifts wrapped in brown paper and twine, with sprigs of evergreen and a soft dusting of snow on top of them.

As the year winds down, you may want to combine estate planning with tax savings by taking advantage of the gift tax annual exclusion. It allows you to give cash or property up to a specified amount to an unlimited number of family members and friends each year without gift tax implications.

That specified amount is subject to annual inflation adjustments. For 2024, the amount per recipient is $18,000. Notably, in 2025, this amount will increase to $19,000 per recipient. Why is this significant? The amount was stagnant at $15,000 for several years (2018 to 2021). Beginning in 2022, the amount has increased by $1,000 annually due to inflation.

Each year you need to use your annual exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add the $18,000 unused 2024 exclusion to next year’s $19,000 exclusion to make a $37,000 tax-free gift to her next year. 

For frequently asked questions on gift taxes, visit the IRS website. Contact the office with any additional questions.

408-252-1800

Photo by Unsplash from Freerange Stock

Tips on the Tax Treatment of Gifts

Gift tax returns generally do not need to be filed unless you give someone, other than your spouse (if he or she is a U.S. citizen), money or property worth more than the gift tax annual exclusion for that year. Here are four more tips regarding the tax treatment of gifts:

1. The annual exclusion amount for 2023 is $17,000. You and your spouse can make a gift of up to $34,000 to a third party without making a taxable gift.

2. You do not have to file a gift tax return to report gifts to political organizations or qualified charities or for gifts made by paying someone’s tuition or medical expenses, as long as the payment is made directly to the institution.

3. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

4. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

If you have any questions about the gift tax, please contact the office for assistance.

San Jose: (408) 252-1800
Watsonville: (831) 726-8500