Business Gift Tax Rules: The $25 Per Person Limit and What Actually Counts
Under IRC 274(b), business gifts are deductible up to $25 per recipient per year. This limit hasn’t changed since it was set in 1962 (when $25 had the purchasing power of about $260 today). The $25 limit applies per person, not per gift. If you send a client a $15 wine bottle in June and a $15 gift basket in December, only $25 of the combined $30 is deductible. Incidental costs like gift wrapping, engraving, and shipping do NOT count toward the $25 limit. Items costing $4 or less that are widely distributed and bear the business name (pens, calendars, magnets) are excluded from the gift rules entirely and fully deductible as advertising expenses.
Business gift deduction rules:
| Rule | Details |
|---|---|
| Deduction limit | $25 per recipient per year |
| Applies to | Gifts to clients, customers, vendors, referral sources |
| Doesn’t apply to | Employees (different rules), gifts of entertainment |
| Incidental costs excluded | Gift wrap, engraving, shipping, insurance |
| Promotional items excluded | Items $4 or less with business name (treated as advertising) |
| Signs and display racks | Excluded from gift rules (promotional items, not gifts) |
What counts as a gift vs. other categories:
| Item | Category | Deduction |
|---|---|---|
| $20 bottle of wine to a client | Gift | $20 (under $25 limit) |
| $50 bottle of scotch to a client | Gift | $25 (limited to $25) |
| $150 gift basket to a client | Gift | $25 (limited to $25) |
| $3 branded pen | Advertising | $3 (fully deductible) |
| $4 branded calendar | Advertising | $4 (fully deductible) |
| $10 branded hat | Gift (over $4, not advertising) | $10 (under $25 limit) |
| Lunch with a client (you attend) | Meal (not a gift) | 50% deductible (no $25 limit) |
| Gift card to a client | Gift | Up to $25 |
| Gift card to an employee | Compensation (W-2) | Fully deductible as wages |
| Tickets to a game (client goes, you don’t) | Gift | $25 limit applies |
| Tickets to a game (you both attend) | Meal/entertainment | 50% meal deduction if food involved |
Employee gifts vs. client gifts:
| Recipient | Treatment |
|---|---|
| Client/vendor/referral source | $25 gift limit |
| Employee (cash or gift card, any amount) | W-2 wages (fully deductible, fully taxable to employee) |
| Employee (de minimis fringe, e.g., turkey, flowers) | Tax-free to employee, deductible by employer |
| Employee (achievement award, tangible, length of service/safety) | Tax-free up to $400 ($1,600 if qualified plan) |
The de minimis fringe benefit rule for employees: Small, infrequent gifts to employees (holiday turkey, birthday cake, flowers for a hospital stay) are tax-free to the employee and deductible by the employer under the de minimis fringe benefit rules. These aren’t subject to the $25 gift limit. But cash and gift cards to employees are ALWAYS W-2 income regardless of amount (a $25 gift card is $25 of taxable wages).
How do you handle gifts and promos for tax?
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Yarik Yarosh, CPA. "Business Gift Tax Rules: The $25 Per Person Limit and What Actually Counts." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-gift-deduction-rules-25-dollar-limit
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.