Which Promotional Items are Tax Exempt (and Which Aren't)?

Creating customized merchandise and promotional items for your employees, your trade show and expo booths, your special events, and other purposes has a lot of potential benefits. The branding and exposure you can get, the attraction to your booth for a useful swag bag, and the engagement from your visitors, customers, and staff are all huge benefits.

Many businesses wonder, though; is it worth the cost? It's very difficult to calculate the return on investment for branded merch, and with the up-front cost of the items, it's easy to wonder if the value is there at all.

Fortunately, there's one option you may be able to pursue: tax exemption. With tax exemption, the money you spend on your branded merchandise can be factored into taxes such that it reduces your business tax burden – yet another benefit to the merchandise and one you can directly factor in as a financial balance.

The question is, what items are tax-exempt, and what aren't? Let's talk about it.

Standard Disclaimer

Before we begin, we have to make a huge disclaimer here: tax laws and liabilities are an immensely complicated system, especially for businesses. They can change between states, and state rules can differ from federal rules. There can be limits, there can be minimum thresholds and standard deductions that make it worth more or less, and there can be all manner of details that throw a wrench in the works.

More importantly, at Ethix, we aren't lawyers, tax professionals, CPAs, or anyone else involved in tax prep or financial planning. We're a merchandise store. If you decide that it's beneficial to procure branded merchandise for your business, we can help with that. If you want merchandise that has a high degree of ethical review and humane production behind it, we're your one-stop shop. If you want tax advice, please see a CPA specialized in business taxes to get individualized information for your location and situation.

Tax Exempt vs Tax Deductible

Another consideration is that there are two – well, four, actually – ways that merchandise can be counted.

First, an item can be taxed as normal. Something that you buy for personal use, even if you use it at your business location, is not considered a business expense and can't be written off on your taxes.

Second is tax credits. This largely won't matter for our discussion, fortunately. There are quite a few business tax credits, all of which are specifically itemized in terms of what they incentivize and how they work. Tax credits reduce your tax burden (or increase your tax return) by a specific amount as long as you meet the qualifications for the credit. For the most part, though, tax credits are for things like improving disabled access, employing certain minority groups, investing in green energy, and other improvements.

At Ethix, we love when businesses invest in improvements like these. They're usually aimed at improving society in terms of equity, humane treatment of impoverished groups, and in various green, environmental, and beneficial ways. Sadly, merchandise usually isn't one of them.

The third and fourth are tax deductions and tax exemptions. While they're similar in concept, they differ in functionality, and different kinds of merchandise may apply to each of them differently.

Both exemptions and deductions function by reducing the amount of income that is factored into taxes. If your business earns $150,000 in a year gross income, and you have a $10,000 deduction or a $10,000 exemption, your gross income for tax purposes is $140,000.

The difference between exemptions and deductions is largely on how dynamic they are. Exemptions are usually fixed within a given criteria; something like "if your business bought uniforms for everyone, you can claim the uniform exemption of $4,500 for this year." If you spent $1,000 on uniforms, or $8,000 on uniforms, it doesn't matter; the exemption would be the same.

Note: exemptions are usually limited to specific kinds of organizations. You've heard of "tax-exempt status" before, right? Usually, it applies to charitable foundations, religious organizations, educational institutions, governmental organizations, and other such groups. Your typical LLC or corporation generally won't qualify. That said, specific kinds of items may qualify depending on how they're used.

Deductions, meanwhile, are dynamic and are based on your expenses. If your business spends $2,500 on branded merchandise that is tax deductible, you would deduct $2,500 from your taxable income.

Standard deductions can throw a wrench into this as well. The IRS understands that itemizing every expense requires a lot of record-keeping and paperwork, which can be an excessive burden on individuals, sole proprietors, and small businesses in particular. They generally offer a standard deduction (say, of $7,500), which you can claim as-is. If your deductible expenses were lower than that amount, itemizing would be worse for you than simply claiming the standard deduction.

Again, every single thing we've said so far is generalized and may or may not be applicable to you. A lot of this can vary based on where you are, the kind of corporate structure you use, and the specific classifications of the items you're buying.

Examples of Tax-Exempt Promotional Items

First, let's talk about some examples of promotional items that can be tax-exempt, depending on the situation.

First up, we have printed materials. For this, we're talking about promotional items like flyers, mass mailers, brochures, and other printed items. These items are promotional in the most direct sense; they're advertising materials. Advertising and marketing are a common expense in business, and many businesses are able to mark those expenses as tax exempt (or deductible, depending on state tax laws.)

There are some limitations to this. You can't hire the most expensive boutique printer you can find to make $5-each mass mailers when you could get similar mailers for pennies each. In order for the expense to be exempt, it needs to be reasonable expenses. This can be tricky to define sometimes, but it's an important element of writing off these advertising costs.

Another example would be items donated to a charity. For example, if you wanted to strike up a partnership with a charity and created promotional items for that charity that used your brand and theirs as part of a set of logos, along with a message of outreach, you could do so and likely be able to write off the expense.

One of the limitations on this one is that the charity receiving the donation needs to be a tax-exempt organization. You can't declare your CEO's brother a "charity" and "donate" the items as a way to balance the books.

Free product samples are another example. This doesn't really apply to branded merchandise like t-shirts or totes like what we sell, but if you're making a product yourself and you make sample-sized versions (or full-size versions sent as teasers to potential vendors), then those outreach samples can be exempt.

In some cases, you can also get what is called a "resale certificate" for items you purchase with the intent to resell them. This is very much a state-by-state situation, so make sure you talk to a qualified CPA to determine what options are available to you.

Examples of Non-Exempt Promotional Items

Flipping the coin, it's worth talking about some specific items that aren't tax-exempt.

One of the biggest is just branded apparel. All of the products Nike makes with the Nike Swoosh on them aren't tax-exempt products; they're just part of operations. One of the big differentiating factors comes down to whether or not you're selling them. You may be able to exempt a set of branded t-shirts if their sole purpose is to be given to employees of a team for a milestone or other celebration. The moment you try to put them on a company store, you lose that potential exemption.

Similarly, company merchandise like mugs, pens, stationery, and other items aren't exempt. They're subject to the usual sales taxes and other applicable taxes as determined by your local state and, obviously, federal tax laws.

Gift baskets are another example of items that aren't tax-exempt.

You may have read this and thought "but we've written off several of those before and it was fine!" That may be true. Except, it wasn't a tax exemption, but a deduction. That's why the difference can be crucial.

One final note about tax exemptions: they're frequently being changed and rewritten by state and federal legislative groups. Most personal tax exemptions, for example, are scheduled to be abolished by 2025 and replaced with either lower taxes in general or more specific deductions. Business exemptions are often classified by type of business, so it's harder to generalize, as well.

Examples of Tax-Deductible Promotional Items

Now, let's talk about tax deductions. Deductions function slightly differently and are, at once, both broader and narrower. They're narrower in that you have to pay more attention and be more specific to itemize the items you're trying to write off (unless, as mentioned above, you're claiming a standard deduction.)

Branded merchandise, in general, can be deducted from your taxes. In fact, in business operations, it's one of the largest deductions most businesses make. It falls under the heading of business expenses, which balance out the taxes on the income you make. When you manage your expenses well, you can even potentially reduce your tax burden to effectively nothing. Many of the largest businesses in the world have entire teams of tax professionals working to ensure that this happens, using every tax rule and loophole possible.

Advertising costs are also frequently tax deductible. Again, it's a business expense, and it's something we all have to spend on over time to keep our businesses going. Much like the exemption above, it does need to be generally reasonable, if you want to avoid an audit. Wildly over-spending on inefficient advertising can cause problems.

Trade show expenses – including both the costs of attendance, setting up a booth, and registration, as well as the items you create for giveaways, can be deductible as well. Again, they're a business expense and a marketing cost, so as long as their use is related to business purposes, they can be deducted.

One thing to remember about merchandise is that the expense you deduct is the cost, not the sale price. When you buy ethical t-shirts from us, you're often spending somewhere between $10 and $25 each for them. If you were to sell those shirts for $30 – or even just assign them a value of $30 based on comparable shirts – you wouldn't be writing off a value of $30 per shirt, but the actual purchase price of the shirts.

Examples of Non-Deductible Promotional Items

To round things out, we can talk briefly about items that aren't deductible. This is really the biggest category because it's "everything not listed in another category." There are some specifics that can trip people up, though.

For example, giving a gift to a client as a way to gain their attention or hook them can be an effective marketing tool. Businesses often want to count client gifts as a deductible marketing expense, but there are specific rules about these kinds of gifts. The limit is actually just a mere $25 per recipient (not per gift!), and anything that costs more than $25 – or even the sum total of multiple gifts exceeding $25 – is not deductible. You can certainly give a potential client a $30,000 car, but only $25 of that is deductible.

Personal use items are also not deductible, as we mentioned at the start. Something you purchase for personal use simply isn't deductible, even if you mix business and personal uses. This often trips up sole proprietors when they want to write off, say, a computer, but they use that computer for personal as well as business use.

Finally, again, remember that we aren't tax or law professionals; we're just highly ethical vendors of promotional items. If you want branded merchandise, we can hook you up, but if you want tax advice for your brand, talk to a local CPA instead.