The $25 cap
Section 274(b) limits the deduction for business gifts to $25 per recipient per tax year. Incidental costs like wrapping, engraving, mailing, and insurance are not counted toward the $25 limit. Each spouse and family member is treated as the same recipient if both have a business connection to you.
Promotional items not subject to limit
Branded promotional items (calendars, pens, notepads) costing $4 or less per item are not subject to the $25 limit. Items with your name or logo prominently displayed and distributed widely (not directed to a specific recipient) are advertising, not gifts.
Entertainment vs gift
Tickets to a sporting event, concert, or theater performance can be treated as either entertainment (now non-deductible) or as a gift. The 2017 TCJA disallowed the entertainment deduction, so the only way to deduct tickets is to characterize them as a gift, capped at $25.
Substantiation
Records must show the cost, date, description of the gift, business purpose, and business relationship of the recipient. The $25 limit makes this an unforgiving area — better to track each gift in a small log than to estimate at year-end.
Where it goes
Most filers report business gifts on Schedule C line 27 ("Other expenses") with a labeled detail. The annual total is small for most businesses, but the substantiation discipline matters in audit.
Where this fits in the larger Schedule C picture
Schedule C has more than two dozen named expense lines plus an "Other expenses" catch-all. For most small businesses, four or five lines drive the bulk of the deduction total — vehicle, home office, depreciation, contract labor or wages, and supplies — and the remaining lines individually contribute small amounts that nevertheless add up. Treating each named line as a recurring decision rather than an afterthought, and revisiting the categories each January, often surfaces $2,000–$5,000 in additional legitimate deductions that a less disciplined process would have missed entirely.
Documentation that survives an exam
An IRS examination of this deduction will request three things: proof of payment (bank or card statement), proof of the underlying transaction (invoice or receipt), and proof of business purpose (a contemporaneous note or calendar entry). The first two are usually trivial to produce; the third is where most filers fall short. Capturing business purpose at the moment of the expense — a one-line note in your bookkeeping software or a category and memo on the receipt-capture app — converts a generic charge into a documented deduction that will withstand scrutiny three to six years later when memory has faded.