How to Account for Gifted Product in Your Books

Gifted product is a business expense at what it cost you, not what it sells for. Book the landed cost of the units, plus shipping and packaging, as a marketing expense (or leave it inside cost of goods sold), and count it exactly once. A $48 serum that cost you $11 to make and land is an $11 deduction, not $48.

The rest of this post covers where that cost belongs, what $0 gift orders do to your Shopify reports, a monthly entry that takes 15 minutes, and a use-tax issue most brands don't know about. This is a practical guide, not tax advice. Have your CPA confirm your inventory method once. After that, this is routine bookkeeping.

Why cost, not retail?

The deduction comes from IRC section 162, which allows "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Sending product to creators to get it in front of their audience is an ordinary marketing cost for a DTC brand. But the expense is what you paid or incurred, and you never paid the $48. You paid the $11.

The IRS applies the same logic elsewhere. When a business donates inventory to charity, Publication 334 limits the deduction to the smaller of fair market value or basis, meaning cost. Your own markup is profit you never earned, so it's never deductible.

The mistake to avoid is booking gifts at retail, for example as $48 of "revenue" and $48 of "marketing." That inflates both lines, overstates your sales, and can end up counting the product cost twice if the $11 is also still sitting in COGS.

COGS or marketing expense?

For taxes, the answer is the same either way as long as the $11 is deducted once. For running the business, it matters.

Most bookkeepers who work with DTC brands recommend the marketing line once gifting is a real program. You can't judge whether gifting works if you can't see what it costs. The post on calculating cost per gifted post depends on that number, and that number only means something once you know how many of those gifts actually turned into content. See what to do when a creator takes free product and never posts for the no-post rate to expect.

Does the $25 business gift limit apply?

This is where accountants genuinely split. IRC 274(b) caps deductions for business gifts at $25 per recipient per year. But the statute defines "gift" as an item the recipient can exclude from income as a gift under section 102. Product sent to a creator to generate promotion usually isn't a gift in that sense. The Supreme Court's Duberstein test requires "detached and disinterested generosity," and a PR box sent in hope of a post is neither detached nor disinterested. So most CPAs treat creator seeding as advertising, deductible in full at cost.

A conservative CPA may point out that if you call the shipments pure gifts (for example, to argue that no 1099 is needed), the $25 cap arguably applies to your deduction. You can't call it a gift on one form and advertising on another. See do you need to send a 1099 for gifted product for the reporting side of the same question.

How $0 gift orders show up in Shopify

Shopify defines gross sales as product price times quantity, before discounts, taxes, shipping, and returns. Net sales is gross sales minus discounts and returns. So it matters how the order got to $0:

• 100% discount on the line item: the full price lands in gross sales and the same amount lands in discounts. Net sales is $0, but both gross sales and discounts are inflated by every gift.
• Price overridden to $0: the line records a $0 price, so gross sales is untouched, but you lose the record of what the gift was worth.

Either way, inventory drops when the order is completed, which is correct. The unit is gone. The fix for reporting is tagging. Tag every gift order and filter the tag out when you read sales, AOV, or discount rate. Seed creates gift orders as draft orders with a 100% line discount titled "Influencer Gift" and tags them seed-gift, so one filter separates them. The mechanics of the different methods are in how to create $0 gift orders in Shopify.

One setting worth checking: Shopify's profit reports only calculate cost for products that had a "Cost per item" recorded when they sold. Fill that field in for every variant you gift, and you can pull gifted COGS straight from Shopify instead of guessing.

A simple monthly entry

Once a month, 15 minutes:

1. Export orders tagged as gifts for the month, with line items.
2. Multiply units by cost per item. Use landed cost if you track it.
3. Add outbound shipping labels and any gift-specific packaging or inserts. These are often already expensed wherever you paid for them, so just reclassify them.
4. Post one entry.

Example month: 40 gift orders, 52 units at an average cost of $11.20, $7.80 average label cost, $60 of inserts.

The product entry depends on how your books relieve inventory:

• If your Shopify-to-accounting connector already booked COGS for the $0 orders: debit Marketing: Creator seeding $582.40, credit COGS $582.40.
• If you adjust inventory from counts (periodic method): debit Marketing: Creator seeding $582.40, credit Inventory (or Purchases) $582.40, so the gifted units don't also show up as COGS at the next count.

Connectors differ in whether they sync $0 orders, and in whether they post the 100% discount as revenue plus contra-revenue. Check one gift order end to end in your accounting software before trusting the numbers. For shipping and packaging, move them from wherever they landed (often "Shipping expense") to the same seeding line.

If you're a small business taxpayer (average annual gross receipts of $31 million or less for 2025, indexed each year), you may not keep inventories in the formal tax sense and can instead treat inventory as non-incidental materials and supplies. The idea is the same: the product is deducted at cost when it's used, and giving it to a creator is a use. Your CPA picks the method. The monthly entry just follows it.

The sales tax catch: use tax on giveaways

Most brands miss this one. When you buy finished goods tax-free with a resale certificate, you're promising to resell them. If you give them away instead, many states treat that as your own use, and you owe use tax on what you paid.

California's tax agency is explicit: use tax applies to a retailer's use of items bought under a resale certificate, "including withdrawing items from inventory for personal or business use," and it's measured by the purchase price. In the example month, that's tax on $582.40 at your rate, not on retail. Many states follow a similar rule. Rules differ for brands that manufacture their own product, since ingredients and components are handled differently, and a few states treat promotional items in their own way. So look up your own state's rule on "withdrawals from inventory" or "promotional use." If you gift more than a few hundred dollars of product a month, ask your CPA.

One thing you don't need to do is collect sales tax from the creator on a $0 order. There's no sale.

Where accountants differ

• COGS vs. marketing. Both are defensible. It's a management reporting choice, not a tax one.
• Advertising vs. business gift. Most treat seeding as advertising. Some cap unconditional gifts at $25 per person under 274(b).
• Cost basis detail. Some include inbound freight and duties (landed cost). Some use the Shopify cost field as-is. Pick one and stay consistent.
• Revenue presentation. Some let the 100% discount flow through as gross sales plus a contra-revenue discount. Others strip gift orders from revenue entirely. For taxes, net revenue is $0 either way. For investors and lenders, stripping them is cleaner (see the creator gifting report for your board).

When to pay for an hour of CPA time

Pay for it once, when gifting becomes a regular program, to confirm three things: your inventory method, which line seeding lives on, and your state's use-tax rule. After that, the monthly entry above is bookkeeper work. Come back if you start paying creators cash or running conditional deals large enough to trigger 1099s.

FAQ

Can I deduct gifted product at retail value?

No. You deduct what the product cost you: landed cost of goods, plus shipping and packaging. IRC 162 allows ordinary and necessary expenses "paid or incurred," and you never paid the retail price. A $48 product that cost you $11 is an $11 deduction.

Should gifted product go in COGS or marketing expense?

Either is acceptable for taxes as long as the cost is counted once. Most bookkeepers move it out of COGS into a marketing line such as "Creator seeding" so gross margin reflects real sales and you can see what gifting costs. Leaving it in COGS is simpler but hides the spend.

Does the $25 business gift limit apply to influencer gifts?

Usually not, though CPAs differ. The $25 cap in IRC 274(b) only applies to items that are a tax-free gift to the recipient. Product sent to creators to generate promotion is usually treated as advertising, which is fully deductible at cost. If you treat it as a true gift instead, the $25-per-person cap can apply.

How do $0 gift orders show up in Shopify reports?

Shopify counts gross sales as price times quantity before discounts. A gift order zeroed out with a 100% discount shows its full price in gross sales and the same amount in discounts, netting to $0. That inflates both lines, so filter gift orders out by tag when you read sales reports.

Do I owe sales or use tax on product I give away?

Possibly. If you bought the product tax-free for resale and then give it away, many states treat that as your own use and charge use tax on your cost. California's tax agency says so explicitly. Check your state's rules, especially if you gift a lot.