Effective branding can be a game changer for a Real Estate Agent. According to businessdictionary.com branding is: “The process involved in creating a unique name and image for a product in the consumers’ mind, mainly through advertising campaigns with a consistent theme. Branding aims to establish a significant and differentiated presence in the market that attracts and retains loyal customers.”
Creating this significant and differentiated presence is why you spend so much time (and money) getting your name out there, your face out there, your tag-line and logo out there. When someone needs to buy or sell a property, you want them to think of you! To increase the chances of being first-to-mind, many agents put their names, pictures, and contact information on items given away to customers and prospects. Common promotional items are branded pens, coffee mugs, refrigerator magnets, rulers, mini-fans, coolers, hats, notepads, frisbees, rulers, flash drives, golf balls - ANYTHING you can put an agent’s information on!
Many agents give housewarming gifts to clients when they purchase a new home. Others will buy anniversary or seasonal gifts celebrating their client’s purchase (and their agent’s excellent service).
However, there are tax consequences to such gifts and giveaways, and many agents are surprised to learn just how stringent the IRS rules are. In this article, we’ll discuss the tax rules governing promotional giveaways and gifts.
Taxes and Promotional Giveaways: To be considered a promotional giveaway, any item offered to the public must meet three criteria:
If a promotional giveaway meets the criteria above, it is a fully deductible advertising expense. If it does not meet these criteria, it is not an advertising expense. It is considered a gift by the IRS.
For example, let’s say you purchase 100 pens adorned with your name and phone number for $150 to give away at a local home show. The unit cost of each pen is $1.50. The pens are an advertising expense.
However, if you purchase 100 coffee mugs wrapped with your name, picture, and contact information for $600, their unit cost is $6.00. The cost of each mug exceeds the limit. They are no longer an advertising expense. Each mug is a gift. Although gifts can still be deductible, there are limits and recordkeeping rules that must be followed to take the deduction.
Taxes and Gifts: Gifts have specific limits and recordkeeping requirements and are covered extensively in our Real Estate Agent Tax-Cut Library.
Gift Cost Limits: The cost of a business gift cannot exceed $25 per individual per year. If the value of the gift exceeds this amount, your Business Gift deduction is limited to $25. So, if you give a set of five promotional coffee mugs that cost $6.00 each to a client or prospect, the cost of the collection is $30. Your deduction, however, is limited to $25.
It is important to remember that a gift has a $25 per person limit and to deduct the gift, you must have a business relationship with each recipient. For example, if you buy a mailbox for a client-couple as a home warming gift for $200, your deduction is limited to $50, $25 for each spouse. If the client has a teenage son who may also use the mailbox, you cannot increase your deduction to $75 because you lack a business relationship with their son.
The $25 limit applies only to individuals; it does not apply to businesses. For example, you buy a $100 fruit basket and place it in the lobby of a commercial client for all to enjoy. Because the gift basket is for everyone entering the establishment, the $25 limit does not apply. On the other hand, if you gave the basket to the owner of the building and she decides to place it in the lobby, the $25 limit applies because you intended the gift for an individual.
The $25 limit does not include incidental costs such as engraving or wrapping. However, items that become part of the present (such as a basket holding fruit or a vase holding flowers) are included in the $25 limit.
Gifts at Closing: Here is a question for which I lack a solid answer but have a pretty solid hunch as to what it might be (and, as always, our articles and classes are for information purposes only and do not constitute tax advice). What if, for example, you pay for a $400 home warranty for a client at closing? Is this a deductible gift?
On the one hand, the home warranty is definitely a gift given to your client. However, on the other hand, it’s paid at closing - at the time you receive your commission. For this reason, I would argue (and I may be wrong) that the fact that it reduces your commission makes it a concession paid at closing. So, therefore, it is not a gift (and it’s not an expense). It’s a commission-reduction that reduces your income. If my hunch is right, the amount should not be included on the Form 1099-MISC you receive at the end of the year. If it is, deduct it as a reduction to income, such as Returns and Allowances. Note: If anyone has a court case or Revenue Ruling concerning this issue, please send it to me via email.
Per Year Per Person Limit: Keep in mind that the cost of gifts is limited to $25 per individual per year. Additionally, you have to track information on those receiving gifts to prove you met the requirements.
Recordkeeping: The amount of recordkeeping required to prove your deduction will depend on whether you are deducting promotional items or gifts.
For items qualifying as promotional giveaways, you will need a receipt for the purchase. Make sure the receipt includes the number of items ordered so you can easily prove a unit cost within the $4.00 limit. You may also need to show how you distributed the items.
Records needed to prove deductible gifts are much more stringent. For each gift, you must show:
There is one exception to this reporting requirement as specified in IRS Publication 463, Travel, Gifts, and Car Expenses as follows:
You don’t always have to record the name of each recipient of a gift. A general listing will be enough if it is evident that you aren’t trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients.
Antiquated Tax Code: The $25 gift limitation is one of many examples where the tax code has not kept up with reality and has increased the tax burden of small business owners. The $25 gift-cost limit was established in 1954 and is not indexed for inflation. Twenty-five dollars in 1954 had the purchasing power of over $230 today! If the $4.00 giveaway limit was created the same year, it would be worth $36 today!
Summary and Invite: We hope this article has helped you understand some the deductibility of promotional items and gifts for Real Estate Agents. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
I just completed the 1099-NEC/MISC course - this was very helpful to me. It is greatly appreciated.- Tammy L, Anchorage, AK, 1099-NEC & 1099-MISC Course (Training Edition) Course
Jam packed with info. I feel ready to finalize the year and tackle my taxes!- Cassie, Biloxi, MS, Real Estate Agent Tax-Cut Library, Agent Edition Course
Very good class. It basically convinced me that our HOAs situation is too complex for me to handle and I need professional help.- Brant, Poulsbo, WA, 1120-H Basics Course
I haven’t practiced in the accounting field in quite some time and wanted a refresher. The Overnight Account course 1099-Misc Basics was very helpful! It was simple to follow along and understand each section. I would highly recommend this course! Staff were quick to answer my question as well. I love that I can review the modules again, if needed, at any time. I will definitely be using them again for more classes.- Tammy, Anchorage, AK, 1099-MISC Basics (Training Edition) Course
I haven’t practiced in the accounting field in quite some time and wanted a refresher. The Overnight Account course 1099-Misc Basics was very helpful! It was simple to follow along and understand each section. I would highly recommend this course! Staff were quick to answer my question as well. I love that I can review the modules again, if needed, at any time. I will definitely be using them again for more classes.- Tammy, Anchorage, AK, 1099-MISC Basics Course