‘Tis the season for giving! Many are inspired to give back to the community by donating their time, services, and goods during the holiday season.
As you take part in the giving tradition, don’t forget about the tax benefits you may earn in doing so!
If you plan to give gifts to customers or employees, you can deduct all or part of the cost, up to $25. This $25 limit applies to each recipient, not to each gift.
If you give a gift to a company that’ll be used by a particular person or group of people, the gift is considered an indirect gift to that person or all individuals within the group. The $25 limit will apply to each person.
Example: You buy three chocolate baskets at $75 each to give to Bob, Jill and Sue. The baskets total $225. You’re able to deduct $75.
By contrast, if you buy three chocolate baskets at the same price, and give them all to Bob, you can only deduct $25.
Incidental costs, such as engravings or packaging, generally aren’t included in the cost of the gift, unless it adds substantial value to the gift.
If entertaining a client, customer, or employee you may be able to deduct entertainment expenses – if they’re business-related. Generally, you can only deduct 50% of your business-related meal and entertainment expenses that haven’t been reimbursed by your company.
However, the Tax Cuts and Jobs Act made changes to this deduction for 2018 and beyond. Make sure you know the new rules.
Expenses include taxes and tips, cover charges, room rental fees, and parking fees.
The expense must be ordinary and necessary – meaning the expense is common and accepted in your industry, as well as helpful and appropriate for your business.
To qualify for the deduction, the expense must also meet the conditions of one of two tests – the directly-related test or the associated test. These tests clarify the location, purpose, and relation of the entertainment to your business.
Note: The cost of your meal can’t be claimed as both an entertainment and travel expense. Expenses must be reasonable, not extravagant.
You’re able to deduct your charitable contributions if you donate to a qualified organization, and the money or property is for the use of the organization.
If you make a charitable contribution and receive a benefit in return, the monies that exceed the value of the benefit qualify as a charitable contribution.
Example: You buy a wreath from your church. The wreath has a fair market value of $20 and you pay $100 for it. You can deduct $80 as a charitable contribution.
Generally, your deduction can’t be more than 50% of your adjusted gross income. In some cases, you may be limited to 20% or 30%.
If you make a contribution greater than $75 which combines a contribution and payment for goods or services, the organization must provide you with a written statement – detailing the fair market value of the goods or services.
Examples of qualified organizations are below:
- Nonprofit charitable organizations
- Nonprofit educational organizations
- Nonprofit hospitals and medical research organizations
You can search for qualified charitable organizations and their tax-deductible status here, or ask the organization directly.
If you volunteer for an organization, you may be able to deduct some expenses related to volunteering. Your time and services aren’t deductible, but you can deduct costs related to travel if you attend a convention. If you’re required to wear a uniform, you can deduct dry cleaning costs.
The provisions surrounding gifts, entertainment, and charitable contributions can be complex and specific, but your potential tax savings are a great incentive to give – in addition to the goodwill you’re spreading.
Have questions about holiday giving? Let’s talk!