Publication 911 |
2000 Tax Year |
Business Gifts
Giving prizes, awards, and gifts may be an ordinary and necessary
part of doing business as a direct seller. In each of the three
situations illustrated next, you can deduct the cost as a business
expense.
Situation 1.
You do your direct selling on the sales party plan. As an incentive
for people to host your parties, you offer them a variety of gifts.
The choice of gift depends on the success of the party-the
higher the volume of sales, the more valuable the gift.
In this situation, your gift to the host or hostess is actually
payment for hosting the party, and the host or hostess must report the
fair market value of the gift as income.
You can deduct the cost of the gift. If you give hosts and
hostesses items from your inventory or items you purchase from the
company at the same time you purchase goods you sell, their cost will
be included in the cost of goods sold. You cannot deduct their cost
again as a business expense. However, if you purchase the gifts
separately from the goods you sell, deduct their cost as an ordinary
and necessary business expense.
Situation 2.
You have several direct sellers working under you. Because your
income depends in part on their sales, you regularly meet with them,
encourage them, and provide them with incentives and support. As an
incentive to make sales, you sometimes offer a prize-such as an
evening on the town or tickets to a sporting event-to the person
who sells the most during the month.
In this situation, the prizes you give are actually payments for
the winners' selling efforts. You can deduct the cost of the prizes as
ordinary and necessary business expenses. The direct sellers who
receive your incentive prizes must report them as income at their fair
market value. For more information, see Other Income,
earlier.
Situation 3.
You sell cosmetics door-to-door. To spur sales, you often give away
small samples.
In this situation, you can deduct the cost of the samples. If you
purchase samples separately from the products you sell, you can deduct
their costs as an ordinary and necessary business expense.
Do not deduct the cost of the same item twice. If the item was
included in inventory, you cannot later deduct it as a business
expense. The item will already be part of the cost of goods sold.
Gift limit.
Do not deduct more than $25 for business gifts you give directly or
indirectly to any one person during the year (see the exceptions
discussed later). You can deduct only business gifts. Personal gifts
are not deductible.
Figuring the limit.
A gift to the spouse (or family member) of a customer is generally
considered an indirect gift to the customer. However, if you have bona
fide independent business connections with the spouse (or family
member) and the gift is not intended for the customer's eventual use,
this rule does not apply.
If you and your spouse both give gifts, you are treated as one
taxpayer. It does not matter whether you have separate businesses or
independent connections with the recipient.
Incidental cost.
Costs that do not add substantial value to a gift, such as
engraving on jewelry, packaging, insuring, and mailing, are generally
not included in determining the cost of a gift for purposes of the $25
limit. For example, the cost of gift wrapping is considered an
incidental cost. However, the purchase of an ornamental basket for
packaging fruit is not considered an incidental cost if the basket's
value is substantial in relation to the value of the fruit.
Exceptions.
The following items are not included in the $25 limit for business
gifts.
- Items that cost $4 or less, on which your business name is
clearly and permanently imprinted, and which are part of a number of
identical items you widely distribute. This includes such items as
pens, desk sets, and plastic bags and cases.
- 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 entertainment
will generally be considered entertainment and not subject to the $25
limit. However, if you give a customer packaged food or beverages to
be used later, they are gifts.
If you provide business associates with tickets to a theater
performance or a sporting event and you do not accompany them, you may
treat the tickets as either a gift or entertainment, whichever is to
your advantage. However, if you go to the event with them, you must
treat the cost of the tickets as an entertainment expense.
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