Gift or Entertainment Deduction Which is it?

If you give gifts in the course of your trade or business, you can deduct all or part of the cost.

Gift or Entertainment.   Any item that might be considered either a gift or entertainment generally will be considered entertainment. However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift.
 
If you give a customer tickets to a theater performance or sporting event and you don’t go with the customer to the performance or event, you have a choice. You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage. 
 
If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. You can’t choose, in this case, to treat the cost of the tickets as a gift expense.
 
Entertainment Deduction Limited to 50% of Expense.  Generally, only 50% of business-related meal and entertainment expenses are allowed as a deduction, when entertaining a client, customer, or employee.

You must have records to prove the business purpose and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.

You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests: 1) Directly-related test or 2) Associated test.
Directly-related Test
To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:
  • The main purpose of the combined business and entertainment was the active conduct of business,
  • You did engage in business with the person during the entertainment period, and
  • You had more than a general expectation of getting income or some other specific business benefit at some future time.
Associated Test
To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is:
  • Associated with the active conduct of your trade or business, and
  • Directly before or after a substantial business discussion
Directly before or after business discussion.   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion.  If the entertainment and the business discussion aren’t held on the same day, you must consider the facts of each case to see if the associated test is met. Among the facts to consider are the place, date and duration of the business discussion. If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion didn’t take place on the same day. 
Example.  A group of business associates comes from out of town to your place of business to hold a substantial business discussion. If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion.

$25 Gift Limit.
 You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
 
If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to the customer. This rule doesn’t apply if you have a bona fide, independent business connection with that family member and the gift isn’t intended for the customer's eventual use.
 
If you and your spouse both give gifts, both of you are treated as one taxpayer. It doesn’t matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.

Gift Example. Bob Jones sells products to Local Company. He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. They paid $80 for each gift basket, or $240 total. Three of Local Company's executives took the gift baskets home for their families' use. Bob and Jan have no independent business relationship with any of the executives' other family members. The limit applies and they can deduct a total of $75 ($25 limit × 3) for the gift baskets.
 
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