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Taxing Ideas: Making Long-Term Disability Benefits Tax Free

In general, any gift to an individual from your business is limited to a deduction of $25. Gifts made to other than individuals are not subject to this limit. If a gift is made to the spouse of your client, it is the same as if you have given the gift to your client and the $25 limit applies to both parties as one unit unless you have a separate business relationship with the spouse and then the husband and the wife may each receive a gift of up to $25 from you.

There are, of course, exceptions to the $25 limitation. If your name is clearly imprinted on the item and it is part of a number of identical items widely distributed (pens, calendars, etc.) and each item costs $4 or less, the limitation is disregarded. Also exempted from the rule are items such as display racks or other promotional material used on the business premises of the recipient. Incidental costs of engraving or shipping are not included in the calculation for the $25 limitation.

However, you need to be careful to determine if your gift is really a gift or if it is entertainment. For example, if you are at a restaurant and buy your client a bottle of wine, it is entertainment. If you buy that same bottle of wine and send it to your client to use at a later date, it is a gift. Another example would be theater tickets. If you just give them to the client and do not attend the event with him, it is a gift. If you go with him, it is entertainment. The difference between a gift and entertainment is that entertainment does not carry a dollar limitation for deductibility.

In either case, proper substantiation must be available for IRS. The information to be kept includes the cost of the item, the date it was given, a description of the item, the business purpose of the gift and the name of the donee.