The IRS limits business gifts to $25 per recipient per year.
The limit treats married couples as a single giver. Therefore, you and your spouse can’t each give $25 gifts to the same person and then deduct $50. Similarly, partners in a partnership are considered a single giver.
A gift to a family member of a customer is considered as a gift to that customer. If you give a customer a $25 baby gift, then any additional gifts that year to that customer will not be tax deductible.
Incidental costs, such as engraving, packaging or shipping are not included in the $25 limit, as long as the incidental costs don’t have their own inherent value. If you are shipping fruit with a basket, a cheap basket would be incidental (and can also be deducted). An expensive basket would be considered part of the gift (and subject to the $25 limit).
Cheap items that cost less than $4 each are not included in the $25 limit. Don’t worry, you don’t have to count the number of free pens you give each customer to make sure their value doesn’t exceed $25.
Display or promotional materials used in a store are not included in the $25 limit.
Gifts can sometimes be taxed as entertainment. For example, if you bring a customer to a Mets game for their birthday, that’s considered to be entertainment, rather than a gift. On the other hand, if you give a customer Mets tickets and you stay home, you can account for the tickets either way – as a gift or as entertainment. Choose whichever alternative will give you the bigger deduction.
Packaged food is a gift as long as it was meant for the customer to open later.
Read more about gifts on the IRS’ website.