I'm getting ready to purchase some year-end gifts for some of my business associates. I assume I can take a deduction for these gifts. Where on the tax return do I take the deduction?
Business owners are limited to a deduction of $25 per recipient per year for business gifts. Not included in this $25 amount are incidental expenses, such as gift-wrapping and shipping. Also not included in the $25 limit are promotional items such as mugs or pens that sport the business name, as long as each of these items are valued at $4 or less, or are expected to be used on the business premises.
If you give gifts of over $25 your choice is to either not take a deduction for the gift, or include the gift in the income of the recipient. For example, if you give a $100 bonus to your employees, you should include the bonus amount in the W-2 form of the employee, and then you will be entitled to take a deduction for the bonus. If you give a $35 ham, you can deduct only $25.
Tangible items given to employees, such as a gold watch or diamond lapel pin for length of service, or similar honors, are subject to a $100 limit rather than the $25.
Gifts to companies, rather than individuals, are not subject to the $25 limit. If one of your suppliers provides you with great service all year and you send a year-end fruit basket worth $100, to be shared and enjoyed by anyone at the company, you may deduct the entire $100.
You must keep in mind that there are rules about business gifts. You can't deduct your entire holiday gift list, including gifts for friends and family, as a business expense. There must be a business relationship with the person receiving the gift, such as a client, employee, or prospective customer. You must also have a business-related reason for giving the gift.
Business gifts are deducted on Schedule C as an "other expense" and on corporate or partnership tax returns as "other deductions."
I bought new computers for my business. Do I deduct the cost or depreciate, and if I depreciate, how many years will it take to recoup the cost?
You've raised a question that, on the surface, seems very easy and straightforward, but one that can get into some complicated areas. First, the computer equipment gets depreciated rather than deducted. The depreciation is calculated over a five-year period with the assumption that you purchased the equipment in the middle of the year. Therefore, the depreciation expense actually appears on six years' worth of tax returns, part of one year's expense being reported in the first and sixth years with four full years in the middle.
The most common method of depreciation, MACRS, results in 20% of the cost being depreciated in year 1, 32% in year 2, then 19.2%, 11.52%, 11.52% and 5.76% in subsequent years. There are situations when these amounts will differ and you should consult an accountant or a good reference guide for more information.
Another consideration is the right of a business-owner to elect to expense certain depreciable assets in the year of purchase instead of spreading the depreciation over several years. This election is called a "Section 179" deduction, referring to the section of the Internal Revenue Code that permits the deduction. You are limited to a total of $18,500 in Section 179 deductions for 1998, and you must carry over to future years any Section 179 amount that puts your business into a loss situation. In other words, if your net business income is $5,000 before any Section 179 deduction, and you have purchased $7,000 worth of equipment that qualifies for this deduction, you may only deduct $5,000 this year and the remaining $2,000 will be available on your tax return for next year.
Be aware that if you take a Section 179 deduction for your computer equipment, the equipment is still considered as five-year property. If you sell or dispose of the equipment before the end of five years, you may be required to take some of the Section 179 deduction amount back into your tax return as income.
The IRS publishes a booklet about depreciation, Publication 946, How to Depreciate Property. This booklet can be ordered from the IRS by calling 1-800-TAX-FORM, or you can download it from their website at www.irs.ustreas.gov/prod/forms_pubs/forms.html . There are many options and considerations regarding depreciation, and how you calculate depreciation depends a lot on the type of business that you have and the other types of purchases that you make. I highly recommend consulting with a tax professional in this matter.