As we are about to enter the fourth quarter of the year, many of you may be considering ways to reward your clients and customers for the business they have provided for the year. Rewarding good clients and customers at the end of the year with gifts, meals, and entertainment perks can be an excellent way to strengthen business relationships and show your appreciation for their business.
BONUS - current tax regulations allow businesses to deduct some - but not all - of the costs associated with reward clients and customers - AKA "business development".
There are some rules as to how much your business can deduct and you need to understand these rules and consider them before you start spending money out of your business development budget.
Tax regulations recognize three different types of business development expenses: gifts, meals, and entertainment. Each type has rules and limits so keep reading to see what your best options are!
Many businesses send gifts to client and customers on special occasions, deal closings, holidays, and end of year. The tax code allows a business owner to deduct up to $25 per client/customer within a single tax year. (Yes, this $25 limit hasn't been updated since 1954.) This means that a $100 bottle of wine for a client might be a business expense, but you can only deduct $25 of that expenditure.
One major exception to this rule is if the gift is to another business AND the recipient has a business use for that gift. For example, if you were to purchase a $200 piece of software and gift it to another company as a thank you for a referral, your business could deduct the total cost of that software.
Gifts do not include small, inexpensive promotional items such as pens, notepads, magnets, and USB drives (i.e. typical things you might order from VisaPrint) as long as the promotional items do not cost more than $4 each.
Business meals provide excellent opportunities to develop your business relationships. For a meal to count as a business meal, it must meet a few requirements: 1) the expense can't be lavish (you can enjoy a steak and a cocktail, but no caviar and champagne); 2) an owner of the business must be present; and 3) a business associate - customer, client, vendor, partner, current or prospective - attends the meal.
Meals are generally only 50% deductible. Presumably, your portion, or half the bill, is to feed you, personally, which isn't ordinarily deductible. However, a temporary exception to this exists to all 100% deductibility for food or beverages from restaurants in 2021 and 2022. All other requirements still apply.
When you treat a business associate to a meal, you must document the expense to substantiate it on your taxes in case of a future audit, so be sure you do the following: 1) keep the receipt; 2) write the name of the business associate who joined you; and 3) write a short description of the business purpose of the meal.
Entertainment expenses have been non-deductible since the Tax Cuts and Jobs Act of 2017 (TCJA) and it will remain the law until 2025.
Prior to TCJA, the cost of entertainment for business purposes - buying concert tickets, sporting event tickets, or other public events with a business associate - was 50% deductible. We presume that partial deductibility may return after 2025.
Food purchased separately at an entertainment event that would otherwise meet the requirements of a business meal - i.e. buying snacks at a concession stand at a sporting event - is deductible as a business meal expense.
Also, don't try to be clever and deduct $25 of entertainment expenses by calling them "gifts". This isn't allowed as is a great way to get yourself audited.
We hope this article helps you budget for business development and reward those fantastic clients and customers for their wonderful business and relationships. As always, if you have questions on how to properly budget and track for these kinds of expenses, book a Strategy Session with us today and let us help!