Smith & Gesteland Quick Tip

Tax Breaks Can Help Some Businesses During Holiday Season

'Tis Better To Give & Deduct
If you give business gifts in the ordinary and necessary course of your trade or business, under current tax rules, you may deduct up to $25 per business associate per year. Your associates may include clients, suppliers, basically anyone who has helped grow your business. If you choose to have the gift item engraved, or need to have it packaged, insured, and mailed to a recipient, those related incidental costs are deductible as well, even if it brings your cost to more than $25 per recipient.

What about pens and magnets and assorted trinkets? An item that costs $4.00 or less and has your name or your company's name clearly and permanently imprinted on the gift and is one of a number of identical items you give out to business associates is not considered a gift for the purpose of the $25 limit.
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Whether you give the gift directly or indirectly, the cost of the gift counts toward the $25 maximum deductible amount. If, for example, you are a pharmaceutical sales representative and you bring a cheese tray to a physician's office as your way of thanking the receptionist who has been helpful in providing access to the doctor, the gift counts toward your $25 allotment. Similarly, a gift given to a member of a customer's family is considered a gift to the business associate.

Should you and your spouse both give gifts to the same business associate, you are treated as one taxpayer, even if you do not file a joint return. That means that, together, you can only deduct gifts of $25 per recipient. This is true if both you and your spouse have separate businesses and even if you each have an independent business relationship with the recipient.
It is important that you keep good records. Whenever you give a business associate a gift, be sure to record the date, description and cost of the gift, as well as name and relationship of the person to whom you gave it, and the reason for giving it. Should you be audited, the rule is quite simple: no receipt, no deduction.

Deck The Halls For Employees
Reasonable costs of giving a holiday party for your employees are fully deductible under IRS law. What's more, there is no requirement to discuss business before, during, or after the event. Bear in mind that to be fully deductible, the party must be primarily for the benefit of employees and not limited only to top executives.

'Tis The Season For Entertaining Clients
Deductions for expenses related to entertaining customers and clients have come under increased scrutiny in recent years. Generally, business meals and entertainment expenses are 50 percent deductible when they qualify as ordinary or necessary expenses of carrying on a trade or business. In addition, entertainment expenses must also meet the "directly related" or "associated with" test.

To meet the "directly related" test, the entertainment cost must involve an active discussion in which you pursue a business opportunity. Thus, if you take a client to lunch and want to deduct the cost, be sure that the meal is held in a place that is conducive to business.
Meeting the "associated with" test requires that the entertainment directly precedes or is followed by a bona-fide business discussion. If you decide to take a business client to the theatre, make sure you begin or end your outing with a business discussion, then 50 percent of the cost of entertaining the client is deductible. Deductible expenses include the cost of tickets, food, beverages, and parking. The cost of transportation to and from the event is not subject to the 50 percent limit.

I'm Dreaming of A Lower Tax Bill
While people tend to do more entertaining during the holiday season, CPAs remind you that legitimate business entertaining expenses are deductible year round. Just be sure to keep good records concerning the date and location of the event, the benefit you expect to gain, and the business relationship you have with the associates you entertain.