January 2014 - Amy Northard, CPA - The Accountant for Creatives

How to deduct gifts to clients

Posted by | Tax Tips | 2 Comments

are client gifts deductibleI know quite a few business owners who send out fun little gifts around the holidays to their clients, and I think it’s great. Today, I’ve just got a quick little tip when it comes to deducting the gift expenses.

You can only deduct gifts up to $25 per person.

That’s it. Easy peasy, but something not everyone’s aware of. If you’re a nerd, like me, and want more info, the IRS has some fun examples for you!

Are gift cards considered income?

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do gift card sales count as incomeAround the holidays, there are quite a few gift certificates sold. Technically, once it’s sold, you’ve got the money in your pocket, but is it considered revenue on your books?

Since a gift certificate is essentially a promise to do work or produce a product in the future, it’s considered a liability (similar to a debt owed) on your financial statements. Once you perform the service or hand over the merchandise they purchased with the gift certificate, you take that amount out of the liability bucket, and move it into your revenue bucket.

Lucky for us, the accounting world likes to be complicated. There are different rules for financial statements and the info that gets put on your tax return.

The IRS says that you can hold off on recognizing the inflow of cash from gift cards sold (shocking, I know!) for the year they are sold, but the amount must be recognized in the following year.

The best way to track this is with a good, old-fashioned spreadsheet. I know that for some creatives out there, the mere thought of having to open Excel stresses you out, but the good news is that it’s fairly simple!

1) Record sales of gift certificates (track date of sale and the amount)
2) When a gift certificate is used, track the date and amount used
3) At the end of the year, the amount of gift certificates used will be included in your revenue.
4) Any left over needs to be included in the following year, whether it gets used or not.

Now you’ve probably learned way more than you ever wanted to about gift certificate income recognition!

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