Q As a real estate broker, I give gifts to my clients and referral sources. Since these gifts are for the furtherance of my business, I assume that they are all deductible. Correct?

A Yes, deductible, but with significant limitations and rules!

You can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person, or a limited class of people (for example, a company’s sales staff) will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.

A gift to the spouse of a business customer or client is generally an indirect gift to the customer or client. This rule does not apply if you have an independent bona fide business connection with the spouse and the gift is not intended for the other spouse’s eventual use or benefit. These rules also apply to gifts you give to any other family member.

If you and your spouse both give gifts, both of you are treated as one taxpayer. It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.

Incidental costs, such as engraving on jewelry, or packaging, insuring and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit.

The following items are not included in the $25 limit for business gifts:

1. An item that costs $4 or less and:

a) has your name clearly and permanently imprinted on the gift, and

b) is one of a number of identical items you widely distribute.

Examples include pens, desk sets, plastic bags and cases.

2. Signs, display racks, or other promotional material to be used on the business premises of the recipient.

Gift or entertainment?

Any item that might be considered either a gift or an entertainment expense generally will be considered an entertainment expense and not deductible. However, if you give a client packaged food or beverages (bottle of wine, champagne, etc.) that you intend the client to use later, treat it as a gift expense.

If you give a business client tickets to a theater performance or sporting event and you do not go with the client to the performance or event, you have a choice. You can choose to treat the tickets as either a gift or a non-deductible entertainment expense.

If you go with the client to the event, you must treat the cost of the tickets as an entertainment expense. You cannot choose, in this case, to treat the tickets as a gift expense.

Unfortunately, the gift limits have been in place for many years and are not indexed for inflation. It may be time for Congress and the IRS to take some action on this issue as the limits seem unreasonably low (just one man’s opinion!).

Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with offices in Monterey. He can be reached at (831) 372-7200. Please address any questions to P.O. Box 710 Monterey, CA 93942 or email: bdolowich@gmail.com