tax prep

The Tax Implications Of Giving Gifts To Clients

Giving gifts is a great way to show your appreciation for special clients during the holidays. However, when it comes to giving business gifts, things can get complicated beyond figuring out what to buy someone.

Business gifts are a tax-deductible expense but special rules do apply. The IRS states, “You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.” So you’re free to spend as much as you want on a client gift but can only claim up to $25 per person per year on your taxes.

Say there are two clients you enjoy working with so you send them both holiday gift baskets that cost $25 a piece. However, earlier in the year you sent another $25 gift basket to one of those clients to thank them for their business. So within the tax year, you’ve spent $25 total on gifts for Client A and $50 total on Client B. That means you can deduct $50 of the $75 spent on gift baskets that year.

The IRS specifically states that incidental expenses are not included in the $25 limit. Incidental expenses include costs like postage, insurance, engraving or gift wrapping. However, if something adds value to the gift itself, it cannot be considered an incidental expense.

You can also give a gift that qualifies as an entertainment expense and you’ll be able to deduct 50 percent of it on your taxes. For instance, you can take a client out to dinner or give them tickets to the theater or a sporting event. You’re still showing your appreciation for the client and you’ll reap a better tax benefit.

Another tax implication to consider is when giving branded marketing collateral to clients. An item is not considered a gift (and the $25 limit doesn’t apply) if it costs less than $4, has your company name and/or logo clearly imprinted on it, and is one of many identical items you give away on a regular basis.

When it comes to giving business gifts, the tax rules are clearly stated. However, applying the rules to specific situations can be difficult and is often best left to an expert.

You can make things easier for your bookkeeper and tax preparer by holding on to the receipts for gift purchases and writing any relevant details on them (like what you bought, who you bought it for and why). The explanation helps your bookkeeper properly expense the purchase and your tax preparer understand how much can be claimed.  

BookKeeping Express (BKE) can manage your accounting and bookkeeping for you. Sign up before December 31 and you’ll get free set-up and 25 percent off clean-up work. You can learn more at bookkeepingexpress.com/year-end-special.

Why You Should Clean-up Your Books At The End Of The Year

As the end of the year nears, every business must attend to their 2015 books one last time. Transactions need to be recorded, accounts must be reconciled and outstanding bills have to be settled once and for all. A clean set of books gives you an overview of how your business performed over the past year and positions you for a strong start in the new year. Below are three specific advantages to cleaning up your books before the year ends.

1. Get prepared for tax time

Tax planning is one of the main reason your books need to be cleaned up before the end of the year. It allows your tax accountant to take your current books, add estimated income through the end of the year and arrive at projected taxable income. In some cases, there are financial decisions that you and your tax accountant can make prior to years-end that reduces your taxable income.

Too many businesses push off their clean-up work until their tax deadline approaches. By doing your cleanup work now, you’ll have everything ready to hand off to your tax preparer when the time comes. It will make their life much easier and allows them to focus on maximizing your deductions and putting you in the best possible tax situation.

2. Uncover what worked and what can improve

Your books tell the story of the past year of your business. By diving deep into your records you can come to understand all the areas of your business that made or lost you money throughout the year. Perhaps a specific sales channel outperformed others? Maybe the entirety of a particular expense was more than you budgeted for? Was your COGS appropriately proportionate to your revenue? These are the types of insights you can get from working on your books at the end of the year. 

3. Start strong in 2016

Once you understand everything that impacted your business throughout the year, you can use those learnings to improve your operations next year. You can create a thorough budget that will guide you towards a successful 2016. And you’ll have the assurance that you're starting the year with clean and current financial records that you can refer to at anytime.

An updated set of books can provide a wealth of information about your business and prepare you for your tax filing. That being said, doing the clean-up requires a great deal of work.

The good news is BookKeeping Express can help you begin 2016 with accurate and up-to-date books. Sign up for our bookkeeping services before December 31 and get free set-up and 25 percent off clean-up work. Learn more at bookkeepingexpress.com/year-end-special.