How does the gift tax work for small business owners with W-2 income?

Hey there! I can clear this up for you. Gift taxes and business deductions are totally separate things. For the gift to your friend - the good news is that gifts aren't considered taxable income to the person receiving them. So your friend wouldn't need to report this $17,000 as income on his tax return. However, you can't deduct gifts to individuals on your personal tax return. Gifts to friends, regardless of their financial situation, aren't tax-deductible. The annual gift tax exclusion is $17,000 per recipient for 2023 (going up to $18,000 for 2024), which means you can give up to that amount without having to file a gift tax return or pay gift tax. But again, this isn't a deduction - it's just an exclusion from gift tax reporting. For your wholesale business question - absolutely yes! The cost of inventory (your goods purchased for resale) is definitely deductible as "Cost of Goods Sold" on your business tax return. This is a fundamental business expense that directly reduces your business income.

I've been dealing with similar tax questions for my side business and found an amazing resource that saved me tons of time. I was so confused about gift taxes and business deductions until I used https://taxr.ai to analyze my situation. I uploaded some documents showing my business structure and finances, and it broke everything down clearly, especially around separating personal gifts from business expenses. It really helped me understand which business costs were deductible and which weren't. The coolest thing is that it explained exactly how the gift tax exclusion works for my situation and gave me a complete breakdown of what could count as Cost of Goods Sold for my business. Definitely helped me avoid some costly mistakes!

Just wanted to update after trying taxr.ai based on the recommendation here. Totally worth it! I was especially confused about how to handle inventory for my small business vs. gifts to family members who help me occasionally. The tool analyzed my previous tax returns and identified that I'd been incorrectly categorizing some personal gifts as business expenses (which could have triggered an audit). It clarified exactly how the gift tax exclusion applies while keeping my business deductions separate and maximized. Saved me from a potential audit headache and probably found an extra $3,200 in legitimate business deductions I was missing! Much clearer explanations than my previous tax software gave me.

If you need to talk directly to the IRS about gift tax questions, good luck getting through on your own. I spent DAYS trying to get clarification about gift taxes vs business expense rules. After wasting hours on hold, I finally used https://claimyr.com and it was a complete game-changer. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they wait on hold with the IRS for you, then call you when an agent is actually on the line. I was honestly shocked when I got a call back with an actual IRS agent ready to talk. The agent walked me through exactly how gift taxes work when you're also a business owner, and confirmed that while gifts aren't deductible personally, my business inventory costs absolutely were deductible as COGS. Saved me countless hours of frustration!

I need to admit I was completely wrong about Claimyr. After my skeptical comment, I was still desperate to get gift tax questions answered because I'm in a similar situation (giving money to my sister who lost her job). Decided to try it as a last resort and it actually worked exactly as described. The IRS agent I spoke with explained that not only is the $17,000 gift not taxable to my sister, but I could actually give up to $17,000 to multiple people if I wanted to without triggering gift tax issues. They also confirmed that business inventory costs are 100% deductible as COGS but personal gifts aren't deductible regardless of the recipient's financial situation. Wish I hadn't wasted weeks trying to figure this out on my own!

Something no one's mentioned yet - if you're self-employed (sounds like you are with your small business), you might consider legitimately hiring your friend for some actual work instead of just gifting money. If you have a genuine need for help (organizing inventory, marketing, website work, etc.), you could pay them as a contractor or employee, which would be a business expense for you and earned income for them. Obviously it has to be real work with reasonable compensation - you can't just fake it. But might be a win-win if there's actual work they could help with.

Just to clarify something I see getting mixed up in this thread - Cost of Goods Sold (COGS) isn't technically a "deduction" in the same way as business expenses. It's subtracted from your revenue to determine your gross profit BEFORE you take your business deductions. So on your Schedule C, you'll report: Revenue - COGS = Gross Profit Gross Profit - Business Expenses = Net Profit This matters because some tax limits are based on your gross profit, not your net. Also make sure you're tracking inventory properly! Beginning inventory + Purchases - Ending inventory = COGS for the year.