Can a business owner write off promotional giveaways?

[christianpatin]

The last time this question was asked was 5 years ago. If a business owner gave away a promotional gift (e.g., a gift card, merchandise, etc) to drive business (requiring the applicants of the giveaway to like, share, subscribe, etc. to our page or something like that), is this deductible?

[MichaelL1 · Accepted solution]

Yes, you can deduct promotional give aways as advertising expense of the business.

It meets the definition of IRC 162, ordinary and necessary business expense.

Now, say for example you run an ice cream shop and your promotion is an extra scoop of ice cream.  That ice cream is already included in the purchases that goes into the Cost of Goods Sold (COGS), so while it can be deducted, it already is.

Now if the same ice cream shop gives away a $5 card to a hardware store, that is deductible and can be deducted as it not already in the COGS. 

[bluestar127]

If you purchased the item that you were giving away, would you deduct the cost that you paid for it or the retail value that you would sell it for (if you had sold it instead of giving it away) for that giveaway item?

[MichaelL1]

Your cost gets deducted, it does not matter what the retail value is to you.

[huntandleroux]

When youre writing off a giveaway. (I own a boutique ) For example I a gave away a shirt to an instagram influencer for promoting. I paid $10 for the shirt but I have it for sale for $25 do I write off $10 or can I write off $25?  

[VolvoGirl]

I think some answers here are wrong.  

You can't deduct income you never received.  You will just have less income to be taxed on.  You take the loss by still deducting all your expenses but not your time or labor.

You already wrote off and expensed the shirt when you bought it.  So you got a $10 Deduction.  But not an extra $10.  Just the original cost what (and when) you paid for it.

[_johnyjohn]

Hello VolvoGirl! I purchased an item that will be given away as a prize for a sweepstakes I’m running (retail $1500). I did research and this is considered institutional advertising.. can I write it off as an advertising expense since it came out of the business’ pocket? Any help is appreciated. Thank you!

[Critter]

Ok ... you cannot deduct the RETAIL value for any reason ... if you give away an item you paid $100 for then you will either deduct it as a $100 advertising expense OR it is taken care of automatically in the inventory COGS section by virtue of it not being in the end of year inventory total. You cannot do both.

[_johnyjohn]

Hello Critter! I actually meant that I paid 1500 for the item and will be using it as a giveaway.. and your answer is really helpful thanks for clearing everything up! 

[smtuschen]

Is the giveway of a store giftcard (to the same business) deductible?

[JotikaT2]

Yes.

It could be classified as an advertising expense to promote your business.

Business expenses

[cwilliambrown]

Would greatly appreciate help with a similar question.

We gave away several gift certificates at a promotional event held onsite, catered and open to the public. The prizes we gave away were gift certificates for use in our business (Salon and Spa). Can I deduct the full value (what we charge for the service)? If not, what portion is deductible?

[AnnetteB6]

You would not deduct anything for the value of the gift certificates (except the actual cost of the certificate itself if there was a cost for printing, etc.).  

The gift certificate when redeemed will reduce your income because the patron using the certificate will not pay you, but they will receive goods or services in exchange for the certificate.  You will still incur expenses for those goods or services.

@cwilliambrown

[cwilliambrown]

Thanks Annette for your reply. There seem to be conflicting answers everywhere I look.  I hope you not mind answering a couple of follow up questions.

1. One expense I will incur is paying the staff member who performed the service. (All GC's were for specific services only). Can I deduct the commission I paid the IC to perform the service? If so, under what section would I do so? And if not, would you please explain why not. Just realized that would be deducted under payments to IC's. What about the opportunity cost? Does that play a role in this, since I gave an appointment that could have otherwise been booked by a paying client.

I'm still trying to wrap my mind around this. I gave quite a few gift certificate prizes away at a 10th Anniversary event. I wanted potential new clients to try our services in hope that they would become regulars. It's tough to see how that can't be an advertising expense, at least the 50% that I would normally receive from the service.

2. Would it be possible to deduct each giveaway as a gift? I would prefer option one above to be acceptable, as all services are above $25.

@AnnetteB6 

[AnnetteB6]

I'll try to explain further:

1 -- You can deduct the commission you pay to the staff member who performs the service when the gift certificate is redeemed.  That is part of the cost I mentioned earlier that you can still deduct.  However, you will only deduct this commission when the service is performed. 

You cannot deduct it now because of the outstanding gift certificates since some may never actually be redeemed.  That would be like paying the commission to the staff member now for all the gift certificates that are outstanding just in case they are redeemed some day.  Your staff member would be happy for the extra income, but it is not logical for you to prepay (or pre-deduct) that cost.  

I understand that it seems that this would be an advertising expense, but you have not spent anything by giving a gift certificate for a future service at your business.  You have not incurred an expense for your business by giving away a future service. 

If the gift certificates had been for another business (WalMart for example), then you would have incurred an actual cost to purchase the gift certificates given away.  You would then be able to deduct the money that you spent in advance to purchase the gift certificates.  

2 -- Claiming the gift certificates as a gift valued at $25 is a bit problematic because gifts are deductible if given to current clients instead of potential clients.  

When the gift certificates are redeemed, then you will see the savings on your tax return in the reduced income instead of through deducting the value of the gift certificate.  Suppose 50 $100 certificates are redeemed in 2020.  That is $5000 in income that you will not be reporting on your Schedule C. 

If it costs you $50 in commissions and supplies to perform the service shown on the gift certificate, you will still be deducting $2500 in expenses against your other income.  

Hopefully this helps. 

@cwilliambrown