The cost of business gifts to customers may be deducted whether the gift was direct (given to the customer) or indirect (giving to the customer’s family, or giving to a business for eventual personal use, for example.) Here’s the catch: there is a limit of $25 per gift.
Here’s how it works. Let’s say you give three different customers each a gift that costs $50 apiece, or a total of $150 for all three. You may deduct $25 per gift, or a total of $75. If your gift costs less than $25, you may deduct the whole cost (but see the exceptions below).
When you are calculating the cost of a gift, incidental costs are not usually included. Examples of incidental costs include gift-wrapping, postage for mailing, or other costs that do not add substantial value to the gift. On the other hand, let’s say you are giving a pineapple and oranges, and you purchase an ornamental basket to use to wrap up the items. In this case, the basket would be part of the cost since it adds value to the gift.
This does not apply to quantities of similar items of small value (under $4) that have your company name on them and you frequently distribute. An example might be your company pens, tote bags, calendars or notepads that you give to customers or prospects. Signs, display racks, or other promotional material to be used on the business premises are also not considered gifts.
You can read more on deducting business gifts here: http://www.irs.gov/uac/Deducting-Travel,-Entertainment-and-Gift-Expenses
Keeping good records is essential if you want to maximize your deductions at tax time. If you need help with the bookkeeping aspect of gifts, contact your CPA for more information.