Planning to buy gifts for employees or clients this holiday season? Tax write-offs for gifts have the potential to lower your tax bill. And that’s good news with the end of the financial year—and the start of tax season—just around the corner.
There are some limitations on just how much you can deduct, however, and on what types of gifts are eligible for the deduction. Also, if you’re planning to give gifts to clients, there are ethical considerations to be made beforehand. Here’s what you need to know.
The holiday gift tax deduction for therapists
The good news is that if you purchase a gift for an employee, contractor, or client, it’s tax deductible. The not-so-good news is that you’re limited in how much you can deduct.
Cash isn’t a gift (according to the IRS)
If you give an employee, contractor, or client a gift of cash, it doesn’t count as a gift in the eyes of the IRS. This applies to cash-equivalent gifts like gift cards, or anything else that behaves like cash.
In fact, if you give a cash gift to an employee or contractor, you’re expected to report it as compensation paid to them. And the recipient is expected to report it as income.
Now, whether you decide to report a $20 Dunkin Donuts gift card as employee compensation is between you and your accountant. But the bottom line is that you can’t deduct that $20 from your taxes.
Non-cash gifts over $100 should be reported as compensation
It’s something of a gray area, but generally, if you give someone a gift costing over $100, you should be prepared to report it as compensation paid to them. And they, in turn, should be ready to report it as compensation earned.
Why? The de minimis rule. De minimis gifts are literally “the minimum,” ie. too small for the IRS to care about. When you exceed de minimis, the IRS starts to consider your gifts a form of compensation.
Here’s the tricky part: the IRS has no hard-and-fast rule for what constitutes de minimis. It’s considered on a case-by-case basis. Mainly, the IRS wants to make sure employers aren’t giving their employees gifts in lieu of regular compensation in an effort to dodge taxes.
First of all, take into account the frequency and regularity with which you give gifts to employees, contractors, or clients. For instance, if you give your administrative assistant a $50 bottle of cognac for Christmas, it most likely falls within the de minimis limits and counts as a gift. But if you give them a $50 bottle of cognac every Friday, the IRS is likely to see it as part of their compensation.
As far as the cost or value of one-time gifts and whether they exceed de minimis, the IRS says it depends on particular circumstances—no hard-and-fast rules, here—but note that they have, in the past, ruled that gifts worth more than $100 almost never meet the requirements for de minimis.
The per-person gift deduction limit is $25
Whether you’re giving gifts to an employee, contractor, or client, the total amount you can deduct in gifts per person, per year is $25.
So, if you give your employee a $30 potted orchid for Christmas, you can only deduct $25 from your taxes.
And if you buy the same person multiple gifts throughout the year, totalling $120, you can still only deduct $25.
On the other hand, suppose you buy 12 books about meditation for $25 each—a total expense of $300—and give one copy to each of your clients. In that case, you can deduct $25 for each client you give a gift to, for a total tax writeoff of $25.
Should you give holiday gifts to therapy clients?
All financial considerations aside, is it a good idea to give gifts to clients at all?
A holiday gift for an employee or contractor may be used to show your appreciation of the hard work they do. So long as the gift is appropriate—an edible arrangement as opposed to, say, edible underwear—it doesn’t risk crossing work-life boundaries.
But there’s a good chance your relationships with your clients are a little more complex and dynamic than your relationships with your employees. And since clinical outcomes for your clients depend partly on the relationships you build with them, it’s important to consider seriously what effect gift-giving could have.
Before hitting the pavement with your holiday shopping list, ask the following questions:
Does your client expect to receive a gift?
Depending on your client’s cultural background and personal habits, they may not expect to receive a gift at all. Conversely, if you don’t give them a gift—or even a card—they may feel hurt or neglected.
For some people, holiday gift-giving is a strictly friends and family affair. For others, it’s an excuse to play Santa and give presents to everyone they know. Try to get a sense of your client’s attitudes before you break out the wrapping paper.
How will your client interpret the gift?
Closely tied to your client’s expectations of gift-giving (and -receiving) is the meaning such a gift might have.
If gift-giving is a strictly friends-and-family affair for them, a gift from their therapist may seem like an attempt on the therapist’s part to build a personal relationship outside of therapy. On the other hand, it may be something they take in stride.
What is your purpose for giving a gift to a client?
Your own attitudes towards gift-giving partially underlie the choice you make to give your client a holiday gift. Is the gift a casual, friendly gesture, a way of showing regard for someone and wishing them the best during the holiday season? Or is it a means of deepening your relationship with someone else and inviting them to your “inner circle”?
Also, what are your expectations? Is your sense of personal value or your regard for your client riding on how they react to their gift?
If you feel awkward about giving your client a gift in the first place, or the idea makes you anxious, now is a good time to address those feelings and look at the underlying cause. Be clear to yourself about your boundaries and expectations. If you feel stuck, consider reaching out to another therapist and learning about their own gift-giving policies and experiences.
Guidelines for gifts to clients
If you do decide to give your clients gifts this holiday season, here are some simple guidelines to follow:
- Make gifts impersonal. It may seem counterintuitive, but sometimes the best gifts are the least personal—particularly when it comes to maintaining boundaries with clients. Avoid personal items like clothes or jewelry, and opt for gifts just about anyone can enjoy regardless of circumstances. Options include candy, gift baskets, or houseplants.
- Consider giving them something that contributes to therapy. Books or recordings pertinent to what you and your client are working through in therapy make great gifts. Other options include journals and therapeutic art supplies. Not only do these keep the tone professional by focusing on your client-therapist relationship, but they can be seriously useful tools for treatment and growth.
- Keep it cheap. A gift costing under $25 is more than enough to be thoughtful without pushing it into “too much” territory. And you reap maximum tax benefits, as well.
If you’re considering giving clients therapy-related gifts, consult with your accountant. You may be able to write them off as therapeutic tools (which are 100% deductible, without limits) rather than gifts (which have a $25 limit.)
This holiday season, give yourself a gift: take some time off. Here’s what you need to know about how to take holiday time off as a therapist.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.