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Provision Business Services LLC

A Professional Bookkeeping Firm

Located in Albuquerque, Serving all of New Mexico

505-269-3783

Your best client is getting married and you spend a couple hundred dollars on a nice gift. Or your insurance agent’s mother dies and you send flowers. We give gifts to business associates for all types of reasons throughout the year. Everybody enjoys receiving a gift and they make an impression.

Many business owners are not aware that only a small portion of the cost of a business gift is deductible as as a business expense.  The IRS limit is $25 per person per year.  The remaining cost of the gift counts as a member withdrawal / shareholder distribution.  So anything over $25 per person per year counts as money you take out of the business, and you are taxed on it.

Let’s look at the math:

$100 flower bouquet

-$25 deductible gift expense

= $75 member draw

You have reduced your business profit by $25.  If you are in the 35% tax bracket, that amounts to a reduction of your tax bill of $8.75.  However, your personal tax bill has increased because of the $75 draw.  Your personal tax bill in the 35% bracket would go up $26.25.  Your total cost of the $100 gift becomes:

$100 to buy the gift

-$8.75 reduction in business tax

+ $26.25 increase in personal tax

= Total cost of $117.50

This is a big difference from what most people expect.  Most people expect that the $100 gift is 100% deductible reducing their business tax by $35.  They expect the total cost of the gift to be $100 – $35 = $65.

This really hits home when I have to explain to the business owner that they took money out of the business they didn’t think they were taking out.  So keep in mind that anything over $25 per person per year is money you will be taxed on.