The IRS rules on gift cards given to customers come down to three moving parts: your deduction, the customer’s tax bill, and your reporting duties. You can deduct the cost as an ordinary business expense, but if the card is a true goodwill gift the deduction is capped at $25 per recipient per year. The customer generally owes income tax on the full face value because the IRS treats gift cards as cash equivalents. And for 2026, once your taxable payments to a single non-employee customer reach $2,000 in a calendar year, you have to file a 1099.
Deducting What You Spend on Customer Gift Cards
Gift cards you hand out to customers are deductible when the expense is ordinary and necessary for your business under Internal Revenue Code Section 162.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Cards used for advertising, loyalty programs, and promotional giveaways generally clear that bar.
Timing follows your accounting method. Cash-method businesses deduct the cost in the year they pay for the cards, whether or not the customer has redeemed them yet. Accrual-method businesses deduct the expense once all events fixing the liability have occurred and the amount can be determined with reasonable accuracy.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods
Keep the paperwork. For every card, record the date, the amount, who received it, and the business reason. On audit, “we gave them to customers” is not specific enough to survive.
The $25 Per-Person Cap and Its Big Exception
Section 274(b) caps the deduction for business gifts at $25 per recipient per year.3Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses Send a $100 holiday gift card to a loyal customer, and only $25 of it is deductible. Husband and wife count as one recipient.
The cap looks worse than it is, because it only applies to true gifts. Section 274(b) defines “gift” as something excludable from the recipient’s income under Section 102. When the gift card is payment for something the customer did, or a prize the customer won, it isn’t a “gift” for tax purposes and the $25 cap doesn’t touch it.
So a $75 gift card given to a customer for completing a testimonial or focus group is compensation for services, fully deductible under Section 162. A $500 gift card awarded as a sweepstakes prize is a taxable award to the winner under Section 74, and again fully deductible to the business. The cap bites hardest on unconditional thank-you cards where the customer owes no tax.
Branded promotional items costing $4 or less with your name permanently imprinted don’t count toward the $25 limit either.4Internal Revenue Service. Income and Expenses 8 That covers a branded keychain at a trade show. It does not cover a gift card.
Does the Customer Owe Tax on the Gift Card?
Usually yes. The IRS treats gift cards as cash equivalents, and the customer owes income tax on the face value in the year they receive the card, not the year they spend it.5Internal Revenue Service. De Minimis Fringe Benefits A $100 card that sits unused in a drawer is still $100 of income for that year.
Three common situations all produce taxable income to the customer:
- Prizes and sweepstakes winnings. A customer who wins a $500 gift card in a promotional drawing reports $500 in gross income under Section 74.6Office of the Law Revision Counsel. 26 USC 74 – Prizes and Awards
- Payment for services. Cards given for surveys, reviews, testimonials, or focus groups are compensation.
- Loyalty rewards handed out as standalone cards after a purchase, rather than as a discount at checkout.
No De Minimis Break for Small Amounts
Business owners often assume a $10 or $25 card is too small to count. The IRS has said the opposite: cash and cash equivalents are never excludable as de minimis fringe benefits, and gift cards are cash equivalents.5Internal Revenue Service. De Minimis Fringe Benefits A small card is still taxable to the customer. The exclusion that might cover a company-branded mug does not reach anything that spends like cash.
Gift Card or Discount? The Line That Changes Everything
Whether a value transfer is a taxable gift card or a non-taxable discount depends on when and how it happens. Get this wrong and you either issue 1099s you didn’t plan for or fail to issue ones you should.
A discount reduces the price of a specific transaction. Apply a $50 coupon to a $200 sale, and the customer paid $150. No income, no reporting.
A gift card is a separate benefit. Sell someone a $200 item and later mail them a $50 loyalty card, and that $50 is income because it isn’t tied to lowering the price of the earlier sale. The card can be spent on anything.
The practical test is timing and structure. Value knocked off at the register during the sale is a price adjustment. Value delivered afterward as a card the customer controls is income. Design promotional programs with that distinction locked in from the start; reclassifying after the fact creates retroactive reporting problems.
1099 Reporting for Customer Gift Cards in 2026
For 2026, the general information return reporting threshold rose from $600 to $2,000.7Internal Revenue Service. 2026 Publication 1099 If total taxable payments to a single non-employee customer stay below $2,000 for the calendar year, you generally have no 1099 filing obligation for that person. Cross the threshold and you must file.
The threshold looks at all taxable payments in aggregate, not just gift cards. A $1,500 card for a testimonial plus a $600 cash payment for a later survey combines to $2,100, and you’re over.
Which form depends on why the customer got the card:
- Form 1099-NEC when the card was payment for services, such as a survey, testimonial, or focus group. The 2026 threshold is $2,000.7Internal Revenue Service. 2026 Publication 1099
- Form 1099-MISC when the card was a prize, award, or other income not tied to services performed.8Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information
Copies go to the recipient by January 31 of the following year, and the same information is filed with the IRS.9Internal Revenue Service. General Instructions for Certain Information Returns (2025) Track the running total for each customer through the year. Sorting this out in January invariably misses recipients who crossed the line.
One thing that catches people out: the threshold governs your filing duty, not the customer’s tax bill. A customer who receives a $500 prize card still owes tax on $500 even though no 1099 is required.
Collect the W-9 Before You Hand Over the Card
Before making any payment that could end up on a 1099, get a completed Form W-9 with the customer’s taxpayer identification number.10Internal Revenue Service. Instructions for the Requester of Form W-9 If the customer refuses to provide a TIN or gives you a wrong one, you must withhold 24% as backup withholding and send it to the IRS.11Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide On a $2,500 card, that’s $600 held back.
The workable approach is to collect the W-9 upfront and make providing a TIN a condition of participating in the program. Chasing tax information after the card is already spent is much harder. A retailer with a casual referral program that never asks for tax paperwork can find itself scrambling if a single customer’s cumulative rewards cross $2,000 during the year.
Penalties for Missing or Wrong 1099s
Late or inaccurate 1099s carry per-return penalties that escalate the longer they go unfixed:12Internal Revenue Service. Information Return Penalties
- Up to 30 days late: $60 per return.
- 31 days late through August 1: $130 per return.
- After August 1 or not filed at all: $340 per return.
- Intentional disregard: $680 per return.
Because the penalties are per return, a business that misses the deadline for 50 customers at the top tier is looking at $17,000. Small businesses with average annual gross receipts of $5 million or less get lower annual caps, but the per-return amounts are the same. Missing or incorrect TINs trigger the same penalties, which is the second reason to collect W-9s before the card changes hands.
Sales Tax and Expiration Rules in Brief
Two adjacent rules often come up in the same breath as the IRS rules, so it helps to place them. Gift cards are generally not subject to sales tax when purchased; sales tax applies at redemption if the product or service the customer buys is itself taxable. And under the Credit CARD Act, a gift card cannot expire earlier than five years from issuance or the last load, dormancy fees are prohibited unless the card has been inactive for at least 12 months, and only one such fee may be charged per month.13Office of the Law Revision Counsel. 15 USC 1693l-1 – General-Use Prepaid Cards, Gift Certificates, and Store Gift Cards Some states go further; where the customer resides usually decides which extra protections apply.