Entertainment, gift, and other small business tax deductions

Dustin Johnson
By Dustin Johnson

If you’re in the type of business that requires you to nurture relationships with vendors, craftspeople, clients, or referral partners, then you’ve likely spent money on a gift. Or perhaps you’ve taken a potential client to dinner or invited them to a show. Entertainment and gift-giving are tried and true business activities. But the rules around what you can write off on your taxes can be tricky and confusing. Here are some things to consider to make sure you’re staying on the right side of claiming entertainment and gift deductions. 

What is a gift for business purposes?

If you’ve been in business for some time, you’ve likely gotten a small token of thanks from a referral partner or vendor. The reason for the smallness of the gift may have been IRS rules. The IRS only allows businesses to deduct $25 per gift recipient per tax year. So while it would be more impressive to give a more lavish gift, keep in mind that you can only claim the first $25 of the gift as a tax deduction. 

| The IRS only allows businesses to deduct $25 per gift recipient per tax year.

How can I maximize my gift and entertainment deductions?

While gifts are capped at $25, a nuance of the tax code says that things categorized as “entertainment” are not. For example, if you give a valued referral partner tickets to a play, those can be considered “entertainment” and, therefore, not subject to the rules about gifts. Entertainment expenses can be written off on taxes at 50% of the cost. The thing that makes this write-off attractive compared to the gift deduction is that there is no cap on the cost. If you’ve got a business contact that you want to reward above the $25 mark, you may want to go with a gift that can be classified as entertainment. Some ideas include tickets to shows, local experiences, and sporting events. 

Keep in mind that although there’s no dollar limit to entertainment expenses, other rules do apply. The costs need to be incurred to entertain prospective clients or existing ones, suppliers to your business, people who work for you, agents, or advisors, both current and prospective. It also needs to be associated with the running of your business. If in doubt, check with a tax professional to make sure you’re categorizing your deductions correctly.

Beware “goodwill” entertainment

Goodwill entertainment does not qualify as a deduction. Goodwill entertainment is when you provide entertainment or host an event, but it has no direct bearing on your business. For example, if you host an event in your local area, this alone does not qualify it as a business expense. If you offer a presentation explaining the goods and services your business provides, then it does qualify. There can be nuances to this rule, so be sure you’re directly tying your entertainment to something related to your business. If you’re taking clients out to a ball game, for example, be sure that you’ve had a business meeting beforehand to qualify it as an entertainment deduction. 

Entertainment costs while traveling

If you’re traveling for work and entertaining clients or business associates on the road, you’ll want to keep careful records. Say, for example, you travel to a trade show to exhibit your wares. There, you connect with a potential wholesale buyer. You invite him out to dinner to discuss the possibility of doing business together. Your portion of the dinner would qualify as a travel expense. Theirs is an entertainment expense. Keeping clear accounts makes it easier at the end of the year when it comes time to classify your deductions. Don’t forget to document all associated costs, like parking and tolls, for your travel expenses.

While there’s some nuance to how gift and entertainment deductions as classified, the key is being meticulous about recording expenses. Note the date of the expense, who was present, and what the purpose of the meeting or meal was. Armed with this information, you can be sure to make the most of the deductions available to you. 

Besides managing deductions, the other big task with taxes is staying on top of all your tax filing deadlines. ComplYant allows you to manage your e-commerce business taxes in one dashboard. Stay on top of tax deadlines with less stress and confusion.

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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