It is essential to know which gifts are tax-deductible, as the Internal Revenue Service (IRS) can impose steep penalties for misreporting income. In terms of gifts, a business owner must distinguish the difference between deductible and non-deductible for both gifts given and gifts received.
Giving gifts can provide significant tax breaks for businesses by reducing the amount of taxable income a company has when reporting their yearly earnings. On the other hand, gifts received can present harsh ramifications if you fail to report those gifts that are subject to be taxed by the IRS.
Failing to follow the laws and requirements for these types of incomes and expenses can result in an unsatisfactory audit or financial penalties that can be difficult to pay or recover from paying. For this reason, it is always a good idea to work with a tax professional, so you can be sure that your taxes are filed correctly.
What is a “Gift,” as Defined by the IRS?
In the eyes of the Internal Revenue Service, gifts have a precise definition. As such, a gift is defined as a thing given without expecting something of at least equal value in return. This can include objects, money, or interest-free and/or reduced-interest loans. This can also be anything that is sold for significantly less than fair market value.
Despite the commonly held beliefs that gifts are not subject to the IRS’s taxation, there is something enforced by the IRS called a “gift tax” that applies whether the business owner or donor intends for the item or capital to be a gift or not.
Generally, this tax only applies to gifts given above a specific dollar amount, but as with any rule, there are exceptions when it comes to the gift tax exclusion.
What is the Difference between Tax-Deductible and Tax-Exempt?
Although they are sometimes used interchangeably by misinformed parties, tax-deductible and tax-exempt are not the same thing.
Tax-deductible gifts are those which can be applied on your annual tax return to reduce your taxable income. Generally, the gift’s nature determines whether it will be exempt or deductible, but not all gifts are one or the other. Some can be neither.
What Gifts are Tax-Exempt?
In the IRS’s eyes, specific guidelines determine what a taxable gift is, and most gifts that fall outside of these guidelines are exempt from the gift tax.
So which gifts are tax-free?
Chances are, if the gift is valued below the $15,000 total gift tax limit, it will be exempt. Additionally, specific categories of gifts are not taxed at all, regardless of whether they surpass this amount or not.
The following are examples of gifts that the gift tax does not apply to:
- Any gift for a spouse that is a lawful United States resident
- A gift given to a dependant
- Political donations
- Charitable donations
- Donations given directly to an educational institution
- Medical or health insurance donations
If the gift you are receiving is over $15,000 and is not one of the above categories, the gift tax will be applied.
Are gifts taxable to the recipient?
It is important to note that, in nearly every circumstance, the donor is responsible for paying the tax rather than the recipient. Because of this, you will want to keep detailed records of all outgoing donations and gifts no matter what type they are or whether you have determined they are exempt, deductible, or neither.
Which Gifts are Tax-Deductible?
In general, most gifts are not tax-deductible. In fact, there are only two types that are allowed to be deducted on your tax return: business gifts and charitable donations.
In case you are unclear on what classifies as either of those, here is a quick overview:
Business gifts can be defined as either a gift that your business pays for or something given on behalf of your business. Not all of these are tax-deductible, though, so you will want to pay special attention to which ones you choose to take on your tax return. These can be things like promotional items or entertainment gifts.
These are items like pens or keychains. Still, these can only be deducted if they are less than $4 each and distributed to a broad audience (meaning you can’t get away with only giving them to one or two clients to try and buff up your deductions for the year).
These are things like business trips and meals and are only deductible at 50% or less of their original value.
This is precisely what it sounds like: gifts that are given to a not-for-profit organization intended to help them further their cause. However, the charity you give to cannot just be any charity; it has to meet specific requirements in order for you to be able to deduct the donation.
These requirements are simple. The organization must be a registered 505(c)3 entity, and it must be in good standing. Gifts to any other charitable organization are not deductible, regardless of their not-for-profit status. Gifts given to a trust or estate, for example, do not count as a charitable donation.
You can be relatively confident that gifts that are neither of the above will not be eligible for tax deductions.
We recommend hiring a qualified tax consultant to help you distinguish whether the gifts you are giving are tax-exempt, tax-deductible, or neither. Doing this can help take the guesswork out of doing your taxes and prevent you from having to pay taxes along with steep penalties later for filing incorrectly or omitting items you should have taxed.
When you decide to hire a tax professional, however, you’ll want to know about the different types of tax professionals in order to determine which one you need.
At Borshoff Consulting, we can steer you in the correct direction. We are qualified for all of your business tax needs and offer free consultations for individuals and businesses, so you can be certain you are receiving the best service possible. You can trust Indiana’s tax expert!
Contact us today to learn what Borshoff Consulting can do for your business!