Outdated IRS Limit on Business Gifts

Gift Limit

Questiona

During the holiday season, I send gift baskets to colleagues, referral sources, and select customers. My purpose is to keep my name in front of these people for obvious business reasons. Can I write off the cost of the gift baskets as a business expense?

Answer

Yes, you may write off the gift baskets as business gifts but only up to $25 annually for each recipient.1

If the total cost of all your business gifts to one individual during the taxable year exceeds $25, you may deduct only $25.2

If you have an independent business relationship with both the husband and wife, the $25 rule applies separately to the husband and the wife.3

Proof Required

To prove the holiday gifts, you need to write down the following five facts:4

1. Cost of the gift

2. Date of the gift

3. Description of the gift

4. Business purpose for the gift

5. Your business relationship with the person to whom you gave the gift

You will find it easy to document the business purpose and the business relationship. Your business purpose for a gift

• to a colleague is to maintain the collegial relationship for future business consulting and ideas;

• to a referral source is to stimulate referrals and maintain referral relationships; and

• to select customers is to maintain the customer relationship for future business and move the customer toward the idea of referrals.

Why Such a Low Limit?

You might ask: “Why such a low limit? Twenty-five dollars buys almost nothing.”

That’s true. The $25 limit is the original limit enacted in 1962.5 It has never been updated for inflation.

That’s 63 years without a single adjustment for inflation, during which time we’ve seen dozens and dozens of new tax laws, most of them claiming fairness, equity, and reform.

Older tax laws are a problem. If no automatic inflation adjustment is enacted with a tax law, history shows that lawmakers seldom adjust for inflation later. That’s unfortunate, as it makes some laws unfair, like this limit on business gifts.

We put the $25 into the government’s consumer price index calculator and found that this 1962 amount, when adjusted for inflation, comes close to $268. To add further perspective, consider that in 1962

• the cost of a Ford Galaxie was $2,645,6

• a gallon of gas cost 31 cents,7

• a postage stamp was 4 cents,8 and

• the minimum wage was $1.15 an hour.9

Solution 1

The best solution would be for lawmakers to exercise common sense and update this rule for inflation. A $268 limit on the deduction for a business gift is reasonable in 2025.

You might want to give your lawmakers a push to fix the $25 limit that resides in Internal Revenue Code Section 274(b). To nudge them, go to www.house.gov and www.senate.gov.

Solution 2

The second-best solution is to spend very little money. Keep your gifts at or under the $25 limit so that you can deduct the entire amount.

Keep in mind that the limit means the cost of the gift, other than incidental costs for custom engraving on jewelry and costs for packaging, insurance, and mailing or other delivery.10

A related cost is “incidental” only if it does not add substantial value to the gift.11 The cost of custom gift wrapping is an incidental cost.12 The cost of an ornamental basket for packaging fruit is not incidental if the basket has a substantial value in relation to the value of the fruit.13

When the $25 limit on gifts became law, sales taxes were just gaining a foothold. In Texas, for example, the sales tax became law around 1962, at a rate of 2 percent.14

We doubt that lawmakers considered state sales taxes when the $25 limit on business gifts was imposed. Accordingly, we think that you have a strong case for excluding sales taxes from the limit as an incidental cost.

Takeaways

Business gift baskets are deductible, but the tax law limits your deduction to $25 per recipient per year—a number set in 1962 and never adjusted for inflation.

To secure the deduction, you must document the cost, date, description, business purpose, and relationship for each gift.

While the limit is outdated, your practical options are to

• encourage lawmakers to update the rule, or

• keep gifts at or below $25 so the full cost is deductible, excluding incidental costs like custom wrapping or sales tax.

Outdated IRS Limit on Business Gifts

1 IRC Section 274(b)(1).

2 Rev. Rul. 63-144, Q&A 87.

3 Rev. Rul. 63-144, Q&A 90.

4 Reg. Section 1.274-5A(b)(4).

5 Revenue Act of 1962, PL 87-834 (Oct. 16, 1962).

6 Morris County Library – Historic Prices: 1962 (Automobiles) — Ford Galaxie “new: $2,645.”

7 U.S. Department of Energy, Fact #741: August 20, 2012 Historical Gasoline Prices, 1929–2011.

8 U.S. Postal Service – Rates for Domestic Letters Since 1863.

9 U.S. Department of Labor – History of Federal Minimum Wage Rates Under the FLSA (1938–2009).

10 Reg. Section 1.274-3(c).

11 Ibid.

12 Ibid.

13 Ibid.

14 Historical State Sales Tax Rates for the State of Texas.

Outdated IRS Limit on Business Gifts. Information in this article is based on materials and analysis provided by the Bradford Tax Institute.