IRS Rules on Gift Cards to Customers: $25 Cap and 1099s

The IRS rules on gift cards to customers come down to three questions: how much your business can deduct, whether the customer owes income tax on the card, and when you must file a Form 1099. The short answers: the cost is deductible as an ordinary business expense, but true goodwill gifts are capped at $25 per recipient per year under Section 274(b); the customer generally owes tax on the full face value because gift cards are cash equivalents; and starting in 2026, the information-return threshold is $2,000 in aggregate taxable payments to a single person.¹

Deducting the Cost of Customer Gift Cards

Gift cards you give to customers are deductible when the expense is ordinary and necessary for your business under Internal Revenue Code Section 162.² Advertising giveaways, loyalty rewards, and promotional cards clear that bar in nearly every case.

Timing depends on your accounting method. Cash-method businesses deduct the cost in the year they pay for the cards, whether or not customers have redeemed them. Accrual-method businesses deduct the expense once all events fixing the liability have occurred and the amount can be determined with reasonable accuracy.³

Keep records that tie each card to a business purpose: the date, the dollar amount, the recipient, and the reason. On audit, a vague “we gave them to customers” rarely survives, and the IRS can disallow the deduction without specifics.

The $25 Per-Recipient Cap and Its Exceptions

Section 274(b) caps the deduction for business gifts at $25 per recipient per year.⁴ A $100 holiday thank-you card to a loyal customer yields a $25 deduction, not $100. For married couples, the IRS treats both spouses as a single recipient.

Two small carve-outs sit outside the cap. Branded promotional items costing $4 or less with your business name permanently imprinted, distributed as part of a regular marketing effort, are ignored. So are signs, display racks, and other promotional materials used on the customer’s premises.⁵ A $3 branded keychain doesn’t count against the limit. A $50 gift card does.

Here is the exception that matters most. Section 274(b) defines “gift” as something excludable from the recipient’s gross income under Section 102. The $25 cap only reaches true goodwill gifts where the customer owes no tax. When the gift card is really compensation (a payment for a focus group, a testimonial, a survey), it isn’t a “gift” at all. It’s an ordinary business expense under Section 162, fully deductible with no $25 ceiling. The same logic covers sweepstakes prizes, which are taxable to the winner under Section 74 and therefore fall outside the Section 274(b) definition. Full deduction, no cap.

What the Customer Owes

The IRS treats gift cards as cash equivalents, and in most situations the recipient owes income tax on the full face value in the year the card is received, not the year it’s spent.⁶ If a customer gets a $100 card in June and never uses it, they still owe tax on $100 that year.

Three common scenarios cover most promotional programs:

Prizes and sweepstakes. A $500 gift card won in a drawing is $500 of gross income to the winner under Section 74.⁷
Payment for services. A card given in exchange for a survey, review, or testimonial is compensation taxed at face value.
Loyalty rewards. A card given after a purchase as a standalone reward (not a discount applied at checkout) is a distinct economic benefit and is taxable to the customer.

No De Minimis Exception for Gift Cards

A small-value card is not a tax-free trinket. The IRS has stated that cash and cash equivalents are never excludable from income as de minimis fringe benefits.⁶ Gift cards are cash equivalents. A $10 card is as taxable as a $500 one. The exclusion that would cover a branded coffee mug does not reach anything that spends like cash.

Gift Cards vs. Discounts

Whether a card creates a taxable event at all turns on whether it functions as a discount or a separate benefit. A discount or rebate reduces the price of a specific transaction. A $200 item sold with a $50 coupon applied at checkout is a $150 sale. Nothing to report.

A gift card typically arrives after the sale or stands independent of it. A customer who buys a $200 item and later receives a $50 loyalty card has received a separate economic benefit of $50. The test is timing and structure: value reduced at the register is a price adjustment; a card the customer can spend later on anything is income. Programs are much easier to run correctly when they’re designed with this line in mind, because reclassifying after the fact produces retroactive reporting problems.

The 2026 1099 Reporting Threshold

For 2026, the general information return reporting threshold rose from $600 to $2,000.¹ If total taxable payments to a single non-employee customer stay under $2,000 for the calendar year, you generally have no 1099 obligation for that person. Cross it, and you file.

The threshold is aggregate. A $1,500 gift card for a testimonial plus a $600 cash payment for survey participation adds up to $2,100 and triggers reporting.

Which form you file depends on why the card was given:

Form 1099-NEC when the card was payment for services such as surveys, testimonials, or focus-group participation. The 2026 threshold is $2,000.¹
Form 1099-MISC when the card was a prize, award, or other income not tied to services performed.⁸

Furnish a copy to the recipient by January 31 of the following year and file the same information with the IRS.⁹ Track cumulative payments to each customer across the year; businesses that wait until January invariably miss recipients who crossed the threshold.

The reporting threshold determines your filing obligation, not the customer’s tax liability. A customer who wins a $500 gift card owes tax on $500 whether or not you file a 1099.

Collecting a W-9 and Backup Withholding

Before making a payment that could trigger a 1099, collect a Form W-9 from the customer. The W-9 captures the taxpayer identification number you need to file the 1099 correctly.¹⁰

If a customer refuses to provide a TIN or gives an incorrect one, you must withhold 24% of the payment as backup withholding and remit it to the IRS.¹¹ On a $2,500 gift card, that’s $600 held back. In practice, most promotional programs make providing a TIN a condition of participation, which is far simpler than chasing tax information after the card has been handed over.

The requirement catches casual programs off guard. A retailer running a small referral promotion may not think to collect tax paperwork before giving out a $50 card. If cumulative payments to that customer cross $2,000 later in the year, the business suddenly needs a TIN it never collected.

Penalties for Late or Incorrect 1099 Forms

Per-return penalties for filing a 1099 late or with incorrect information escalate the longer you wait:¹²

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

These apply per return. A business that misses the deadline for 50 customers can face $17,000 in penalties at the highest tier. The same penalties apply to returns with a missing or incorrect TIN, which is why collecting a W-9 upfront matters. If the IRS flags a return for a missing TIN, you may need to show reasonable cause to avoid the penalty.¹²

What the IRS Rules Don’t Cover

Two neighboring rules often get confused with the IRS treatment. Federal law under the Credit CARD Act, not the IRS, sets the floor on gift card expiration and fees: a card cannot expire earlier than five years after issuance or the last load of funds, and dormancy fees are prohibited unless the card has been inactive for at least 12 months.¹³ Many states impose stricter rules on top of that floor.

Sales tax is generally not collected when a gift card is purchased, because buying a card is treated as acquiring a cash equivalent rather than a taxable good or service. Sales tax applies at redemption, if the product or service bought with the card is itself taxable.

1
Internal Revenue Service. 2026 Publication 1099
2
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
3
Internal Revenue Service. Publication 538 – Accounting Periods and Methods
4
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
5
Internal Revenue Service. Income and Expenses 8
6
Internal Revenue Service. De Minimis Fringe Benefits
7
Office of the Law Revision Counsel. 26 USC 74 – Prizes and Awards
8
Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information
9
Internal Revenue Service. General Instructions for Certain Information Returns (2025)
10
Internal Revenue Service. Instructions for the Requester of Form W-9
11
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
12
Internal Revenue Service. Information Return Penalties
13
Office of the Law Revision Counsel. 15 USC 1693l-1 – General-Use Prepaid Cards, Gift Certificates, and Store Gift Cards