Gifts, in general, are not tax-deductible. Gifts to individuals are not tax-deductible. Tax-deductible donations only apply to contributions you make to qualifying organizations. While employee gifts have their own limitations and can be treated as taxable compensation, the employer is generally allowed to deduct the full cost of gifts made to employees.
Unlike donations to charities, donations you make to unqualified individuals or organizations are not eligible for a tax deduction. The IRS requires you to report all taxable gifts you make during the year and pay the appropriate tax. In some situations related to the gift of tickets for sporting events or other events, the taxpayer may choose whether to claim the deduction as a gift or as entertainment. However, due to generous exclusions and deductions available, the average taxpayer never files a gift tax return or pay gift tax.
Whether in the form of cash, gift cards, or a token of appreciation, gifts have tax implications that small business owners should consider. However, keep in mind that the elimination of the entertainment expense deduction has been included in the proposed tax reform legislation. The IRS requires all taxpayers who make a gift that exceeds the annual exclusion amount to file a return, even when they eliminate all taxes with the unified credit. Form 4506 has multiple uses and special attention should be paid when completing the form for a gift tax inquiry.
Finally, people who make donations as part of their overall estate and financial plan often engage the services of lawyers and CPA, EA and other professionals. If you make a single gift during the year that exceeds the annual exclusion amount, the tax law gives you a unified credit to offset any gift tax you may owe. This may include occasional snacks, coffee and bagels, or birthday or holiday gifts with a low fair market value, such as flowers, fruits, books, etc. A gift that big at the same time would put you above your lifetime exclusion and you would have to pay gift taxes.
It is also important to note that the lifetime exclusion applies to both gift tax and inheritance tax. For most people, claiming the charitable deduction simply doesn't make sense, since the amount donated is less than what you get using the standard deduction. The amount of gift tax you may owe is directly related to the value of the property or the amount of cash you donate.
