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Columns by June Walker: IPs Face Unique Tax Challenges Tax Deductions Are There For The Taking You Say You're Self-Employed -- Will the IRS? Criteria for Self-Employment Do You Have a Business or a Hobby? Proving That You're a Business Keeping Records -- It's Not Just for Taxes Three Ways to Expand Your Business Deductions Can I Deduct Disneyland and Other Questions Mixing Business with Pleasure and Other Gray Areas Quicken for IPs Courses That Qualify Training You Can't Deduct Getting There is Half the Battle Taking Deductions on the Road Getting Credit and Taking Allowances Advertising: Do It, Then Deduct It The Subtle Art of Advertising Deductions Billy Bridesnapper's Start-up Saga Starting Up and Shutting Down Start-Up Wrap-Up Giving Gifts, Taking Deductions

Giving Gifts, Taking Deductions Rob Rolf has just about finished converting his garage into a two-room office where he will see patients in his massage therapy practice. Friday promises to be a busy day -- after rolfing a plumber first thing in the morning he has to rush across town for an eight-hour workshop. And, to top it off, Friday happens to be the day his new massage table arrives. So Rob asks his next-door neighbor Ned, who is also an IP, if he would watch for the truck and let in the deliveryman with the table. No problem, says Ned. Everything goes well, the table is delivered, and Rob buys Ned a bottle of wine as a thank-you present. Rob can deduct the cost of the wine as a business gift. What Does the IRS Say About Business Gifts? If you give business gifts in the course of your trade or business, you can deduct all or part of the cost of the gifts. But don’t think that you can rush out and buy that potential client a set of golf clubs. Sorry. Two packs of golf balls are more like it. That's because there's a $25 per-year-per-person limit on business gifts. No matter how much you spend on gifts for a particular business associate over the course of a year, you may deduct only $25 per individual. If Rob Rolf had bought Ned a bottle of Grand Marnier for $30, he could deduct only the $25 limit. If, on the other hand, he bought Ned a $10 bottle of Merlot, Rob could deduct the $10, give Neighbor Ned another gift before the year was out, and then deduct $15 of the cost of that gift. The Soviet empire has collapsed, a new millennium has arrived, and yet the IRS gift limit was, is, and will probably always be $25, so get used to it. However, the IRS does allow you to deduct related incidental costs beyond the $25 limit -- costs such as engraving on jewelry, or packaging, insuring, and/or mailing a gift. A cost is incidental only if it does not add substantial value to the gift. For example, the cost of gift-wrapping is considered incidental. The purchase of an ornamental basket for packaging fruit is not an incidental cost, however, if the value of the basket is substantial compared to the value of the fruit. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you can -- if Gram has some connection to your business. Did she show you how to hook up your printer? Make curtains for your office? Your business relationship with Grandma brings up the recurring subject of how an IP can stay in the "I'm a business" mind-set, which is particularly pertinent where gifts are concerned. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business-gift deduction. But what about your friends with whom you have a business connection? This is where in a flash you become Captain Business, the IP with a black belt in deductions who sees all the connections between your life and your work. If your Web designer friends invite you to their place for dinner and you bring a gift for them, are they primarily business associates or primarily friends? Depends on your mind-set. A gift to a business associate is deductible; one to a friend is not. Who Gets the Gift? A gift may be deducted as a business expense when it is given in the ordinary and necessary course of your business to a business associate. Those associates include clients, dealers, distributors, employees, Neighbor Ned, your Web-designer pals, Grandma -- anyone who has helped to nurture your enterprise. The gift counts toward the $25-per-year limit whether given directly, or indirectly, to a business associate. Therefore, if you send something over to the Callous Company -- like a $25 cheese-and-nut sampler because Reggie Receptionist has been so pleasant and helpful to you -- it's obviously intended as a personal gift for him. If later in the year you give him a box of chocolates on Secretaries Day, it's nice of you -- but you've already used up your gift deduction to Reggie for the year. You can't deduct it. The same holds for a gift to a spouse or child of a business associate. If you give Teletubby action figures to the child of a business associate, it's considered a gift to the business associate. If you've already given a client a gift that costs at least $25 and you are then invited to your client's daughter's wedding, you get no business gift expense deduction, regardless of the value of the wedding present. This rule does not apply if you have a bonafide, independent business connection to that family member -- in this case, the bride (or maybe the groom). If you and your spouse both give gifts to the same business associate, both of you are treated as one taxpayer and so together you can deduct gifts of only $25 per recipient. It does not matter whether the two of you have separate businesses, or whether each of you has an independent business relationship with the recipient. Gift Chronicles When I was a child, one of my sisters-in-law kept a record of every gift she ever gave to anyone. (I think she's still compiling it.) You would do well to copy her careful watchfulness, but as I'll show you, there is a particular method you must use in keeping records of business gifts. If, during an IRS audit, you are unable to produce records of certain business expenses, in many cases the IRS will estimate the amount of your expenses and allow you to deduct them. The estimate is allowed if it is clear that the expenses have been incurred -- for example, in the purchase of business equipment or telephone use. That isn't the rule, however, with business gifts, or with business meals and entertainment expenses. Because the IRS suspects that such expenses are often invented or inflated, you are required to have records. If you have none, the deduction will be disallowed in an audit. When you give a business associate a gift, write the following information on the receipt to ensure that you'll get the deduction: Date the gift was given Cost of the gift Description of the gift Name and business relationship of the person to whom you gave the gift Business reason for the gift, or the business benefit you expect to gain For example, Rob Rolf would have written on the receipt from the liquor store: 5/5/00, Neighbor Ned, Let in table deliveryman, Thank you. Gifts should always be documented and annotated. If a collection is taken for the baby shower of a business associate, for example, it's best to write a check. If that's impossible or inappropriate, and you contribute in cash, be sure to write the information on a piece of paper that you will later use as your "receipt." (c) 2000 June Walker. All rights reserved. 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