Many child care providers give gifts to the children in their care and to their parents. But what about gifts to children who are no longer in your care?
Are these gifts tax deductible?
The general IRS rule is that you can deduct $25 per person, per year for gifts you purchase in connection with your business. This would apply to gifts you give to the parents in your program. You could give $25 to the mother and $25 to the father and deduct $50. But if you gave the mother a total of $40 in gifts (Christmas, birthday, Mother's Day) in one year, you could only deduct $25.
I've written an article about whether or not items you give the children in your care are "gifts" or "activity expenses." Basically, if a child takes home a wrapped gift and does not play with the item in your business, it's a gift and subject to the $25 limit. If the "gift" is opened by the child at your business and used by the other children, it's an "activity expense" and there is no limit to how much you can deduct.
What about gifts to children who have left your care? Many child care providers give high school/college graduation gifts, wedding gifts, or birthday gifts to children long after they have left their program. As I said, providers are very generous.
Is such a gift an "ordinary and necessary" business expense? Is it helpful, useful, typical or appropriate in your business? You'd have to be able to answer "yes" to be able to deduct it. If can't answer yes, don't deduct it. If you do deduct it, you are limited to the $25 rule. Put these expenses on Schedule C, Other Expenses (line 27a).
You could argue that the only reason you are giving gifts is because of your past business relationship. You could also argue that this is good advertising by telling others at the graduation about your business. On the other hand, your business relationship was many years ago and attendees at a graduation are not likely customers. If you do deduct these expenses, put them under Advertising on Schedule C (line 8).
So, unless you have some circumstances in which you can argue that there is a business purpose to your gift, I'd probably take the conservative view and not try to deduct it.
What circumstances do you have that would justify gifts to past graduates of your program?
Tom Copeland - www.tomcopelandblog.com
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