Overview
Who doesn't love a gift? Gifts are a great way to let your clients know that you are thinking about them. You can celebrate holidays, project milestones, and finalize business arrangements by giving gifts.
Client/Vendor Gifts - $25 is the Sweet Spot
When it comes to gifts, the IRS is the grinch. While you are out there shopping for gifts for clients and other business associates, bear in mind that the company can only deduct up to $25 per person for gifts given during the tax year.
For purposes of the $25 per person limit, don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis. For more info, see here.
Gifts purchased for clients and other business associates should be paid for using your business checking account or business credit card. Though your profit and loss statement may reflect the full cost of gifts, the company tax return may not (due to the deductibility limits mentioned above).
Employee Gifts
Gifts from the company made to a W-2 employee have their own limitations and may be treated as taxable compensation. An employer is generally allowed to deduct the full cost of gifts made to employees as long as the gift is properly recorded in the payroll system.
Entertainment Is Not A Gift
Entertainment (for example, taking a client out to a bar for drinks) is not considered a "gift" for tax purposes. Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted. For more information on meals and entertainment, see here.