You plan to send holiday gift baskets to colleagues, referral partners, and select customers, and you want to deduct the cost. You can take a deduction, but the IRS limits you to $25 per recipient per year.
This rule dates back to 1962, and lawmakers have never increased the limit—even though real-world prices have climbed dramatically over the past six decades.
You may give a much more expensive basket if you choose, but you can deduct only the first $25. If you maintain separate business relationships with both spouses, you may deduct $25 for each person.
The IRS does not let you treat higher-value packaging or decorative containers as “incidental,” so those items count toward the $25 cap. However, you may treat shipping, sales tax, and basic wrapping as incidental because they do not add significant value to the gift.
To protect your deduction, you must keep simple records. For each gift, write down the cost, the date, the description, the business purpose, and your business relationship with the recipient. You can easily explain the business reason: you strengthen colleague relationships, encourage referrals, and maintain customer loyalty.
The real problem comes from the outdated limit. A $25 bill from 1962 is roughly $268 today, adjusted for inflation. Meanwhile, everyday costs from cars to postage have increased many times over. Congress has not updated this rule, which now creates an unfair outcome for business owners seeking to maintain normal professional relationships during the holiday season.
You have two practical options: first, urge lawmakers to address this issue. A simple inflation adjustment would bring the deduction cap into line with current reality. Second, you can keep each gift at or below $25 to guarantee a full deduction. Many business owners take this approach, focusing on thoughtful yet modest gifts.