Nonprofit Resources
Gift Week: Business Gifts
Dr. Garrison is the president of Saltwater Christian College (SCC). SCC is a public charity under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A). Dr. Garrison is playing golf with a long-time donor at the college. On the front nine, the donor breaks his putter. At the term, Dr. Garrison uses his SCC-issued corporate credit card to purchase a new ZZZAPP3 putter for $300. He presents the putter to the donor as a gift from SCC as “a token of our appreciation for your support.” SCC’s Controller calls us to ask about the tax treatment of this gift.
Analysis:
First, because of the $25 business gift limit, Dr. Garrison has incurred taxable income of $275 ($300 – $25). This is because, by using the corporate credit card, he has run the expense through an accountable plan. SCC should add this amount to his reportable compensation for the tax year. Also, if the donor is an Officer, Director, or Trustee (O/D/T) of the organization, the gift would be compensation — reportable on Form 990, Part VII.
Further, if the donor is deemed a “disqualified person” under Internal Revenue Code section 4958, he could be subject to “excess benefit transaction” penalties. For this situation, SCC’s Controller confirmed that the donor is not a disqualified person.
Interestingly, if Dr. Garrison had gone down to SCC’s Development Department and — out of “donor gift stock” — gotten a ZZZAPP3 and taken it to the donor, there would likely be no tax effect. That would presume that the donor was not an O/D/T nor a disqualified person. Also, the donor gift could not be directly related to a contribution the donor had made. This would generally trigger the quid pro quo rules.
Tax Rules
From IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses”:
If you give gifts in the course of your trade or business, you can deduct all or part of the cost.
$25 limit. You can deduct no more than $25 for business gifts you give directly or indirectly to each 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 will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer’s eventual use.
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.
Example – Bob Jones sells products to Local Company. He and his wife, Jan, gave Local Company three gourmet gift baskets to thank them for their business. They paid $80 for each gift basket, or $240 total. Three of Local Company’s executives took the gift baskets home for their families’ use. Bob and Jan have no independent business relationship with any of the executives’ other family members. They can deduct a total of $75 ($25 limit × 3) for the gift baskets.
Incidental costs – 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.
A cost is incidental only if it does not add substantial value to the gift. For example, the cost of gift wrapping is an incidental cost. However, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit.
**There is one Publication 463 codicil, below, that may change the verdict. However, it seems a stretch to try to classify a putter as “entertainment”.**
Gift or entertainment – Any item that might be considered either a gift or entertainment generally will be considered entertainment. However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift.
If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. You can treat the tickets as either a gift or entertainment, whichever is to your advantage.
