What business gifts are tax deductible is one of the first questions small business owners ask as the holidays get closer. Isn’t it funny how end-of-year gifting can feel joyful and stressful at the same time? You want to thank clients, show appreciation to referral partners, and treat your team. But the IRS rules around gifting are surprisingly specific, and they catch many people off guard.
Here’s a little guidance, so you can enjoy the giving season without wondering how it affects your books.
1. The $25 Rule for Business Gifts
The IRS allows you to deduct up to $25 per person, per year for business gifts. That limit has not changed in decades. It applies to specific people, not entire companies. In other words, the deduction is tied to the person receiving the gift rather than the business they work for.
Here’s a simple example. Imagine one of your client companies has four team members you interact with often. You decide to give each person a small year-end gift. You can deduct $25 for each person. That adds up to a total of $100.
But you cannot give one $100 gift to the company as a whole and deduct the full amount. The IRS wants the gift connected to real individuals. Not to an organization. If you give a client a $60 gift basket, your deductible amount is still $25. The rest is simply a kind gesture.
This rule includes gifts to clients, prospects, referral partners, etc.
There are a few exceptions. Small incidental costs do not count toward the $25 limit. These are things like engraving, gift wrapping, or shipping. The key is that they cannot add significant value to the gift. They are simply part of the presentation.
Pro Tip: If you enjoy giving thoughtful gifts that exceed the IRS limit, go for it. Just record the amount the IRS allows and mark the remaining cost as a non-deductible expense. That way your books stay clean and your generosity stays intact.
2. Gifts to Teams and Contractors Work Differently
Employee gifts follow a different rule. Small items may qualify as de minimis. That word simply means the gift is so small in value that it is not practical to track. Think of items like cookies, a holiday treat, or a small token for the office. These are usually deductible.
Gift cards are different. The IRS treats them like cash. Even a $20 card is taxable income and must run through payroll. Cash gifts are treated the same way. If you hand an employee cash for the holidays, the IRS sees it as wages. Bummer, I know. It takes a bit of the joy out of it, but it keeps everything compliant.
Contractors fall under the client gift rule, not employee rules. So if you want to thank your graphic designer with a gift, the $25 limit applies.
Pro Tip: I have seen many businesses unintentionally create payroll problems by handing out gift cards. I also saw a business owner take cash out of her account to give each employee a holiday bonus. She thought cash would be tax free. It was not. Cash is always taxable. So are gift cards. If you want to give something that stays simple for everyone, stick with true de minimis items. Or check with your payroll provider first. Make sure the tax treatment is correct. It saves a lot of clean-up later. My favorite: Gusto. It makes life (and payroll) so simple, I use it exclusively.
3. When a Gift Becomes Entertainment (and Is Not Deductible)
Some gifts land in a gray zone. A concert ticket or special outing may look like a gift, but the IRS often puts it in the entertainment bucket instead. And here’s the tricky part. Entertainment expenses are no longer deductible for federal tax purposes.
This rule catches many business owners by surprise. A pair of tickets to a show feels like a thoughtful gift. But if the experience is entertainment, the IRS does not allow a deduction. It does not matter whether you attend the event or not. The purpose and nature of the item define how it is treated.
If you plan to attend the event with the person and talk about business, the rules shift again. Now you have an entertainment outing that is fully non-deductible. If you give the ticket without attending, you may still have a gift, but only the first $25 is deductible.
Remember, Intent matters. Documentation matters too. A short note in your accounting system can help you remember why you purchased the item and how you planned to use it.
Pro Tip: When you want to give something meaningful without crossing into entertainment, choose a physical item. A favorite book, a small piece of art, or a thoughtful office gift keeps things simple. It also avoids the frustration of buying something generous and discovering later that none of it is deductible.
4. Charitable Giving Is Not the Same as Business Gifting
Many service-based business owners donate at the end of the year. It feels good and helps causes you believe in. But charitable contributions are not business gifts. They are handled under separate IRS rules and appear in a different place in your tax return.
This also means donations to individuals are not deductible. Only contributions to qualified organizations count, and the organization must be recognized by the IRS.
You can use this link to confirm whether your chosen nonprofit qualifies: IRS Charitable Contribution Rules
Pro Tip: If giving is part of your values, include it in your annual planning instead of squeezing it in during December. This keeps your cash flow steady and supports the organizations you care about in a more sustainable way.
5. How to Track Gift Expenses So They Are Easy to Report
The hardest part about year-end gifting may be choosing ‘just the right gift.’ But tracking those gifts often the tracking. But tracking those gifts comes in a close second. Even when you use separate cards, business and personal receipts can still get mixed up in holiday shopping. It happens fast. One swipe in the wrong checkout line and your bookkeeping gets messy.
To stay organized, assign a consistent category for business gifts in your accounting system. Using cloud tools helps a lot. FreshBooks and Xero let you tag expenses, add notes, and attach receipts right from your phone. This makes it easy to remember who the gift was for and why you bought it. QuickBooks Online can do this too, but most creatives and small business owners find the first two apps much simpler to navigate. This makes reporting easier and keeps confusion to a minimum.
If you are not sure how to keep things tidy during year-end, my article Fall Into Success: Avoid These Year-End Financial Pitfalls for Your Service-Based Business shares helpful tips that pair well with this topic.
Pro Tip: I donate a portion of my revenue to TreeSisters.org for every new client I welcome. I also keep an eye out for times when my donation will be matched. It is a small habit that makes my giving feel intentional and aligned with my values. You can do something similar with your own favorite cause. Plan it in advance. It keeps your cash flow steady and makes your generosity go further.
6. When Generosity Is Just Generosity
Not every thoughtful gesture needs to fit inside the IRS rules. Sometimes you give just because you want to. A gift basket to a favorite client, flowers to someone navigating a tough year, or a generous team celebration can all be worthwhile even if they are not fully deductible.
Part of running a small business is strengthening the relationships that keep your work meaningful. The tax deduction is simply a bonus.
Pro Tip: A simple, heart-felt note attached to a gift often means more than the gift itself. And those notes cost nothing. Let your generosity carry your message, not your budget.
Final Thoughts
Gifting is one of the bright spots of the year. Understanding what business gifts are tax deductible helps you stay compliant. When you know the rules, you can give with confidence and keep your books accurate at the same time. But remember: the heart of gifting is about connection.
If year-end is already feeling busy and confusing, you do not have to sort through every detail alone. You are welcome to book a complimentary 20-minute Let’s Get Acquainted call. It is a simple conversation to see if we are a good fit to work together. No deep problem-solving and no free advice… just a friendly check-in to understand your needs and whether my services are the right match for you.
