Gregory S. DuPont
Taking Advantage of Advertising and Marketing Deductions
Businesses are permitted to deduct a wide range of expenses, but many small business owners may be unaware of the full range of the deductions they are entitled to claim. If you operate a company that advertises and markets its products and services, you should keep careful track of these expenses as you may be able to deduct them as a business operating expense.
Under IRS rules, you are generally allowed to deduct reasonable advertising expenses that are directly related to your business activities. Most types of business-related advertising are currently considered deductible business operating expenses. You are permitted to deduct advertising to sell a particular product or service, to help establish goodwill for your business, or to promote your business to the public more broadly.
Deductible advertising expenses include amounts paid for advertisements in newspapers, magazines, trade publications, radio, television, and websites. In addition, you can deduct the fees you pay to advertising and public relations agencies. Generally, you can also deduct the costs associated with producing and distributing business cards, brochures, flyers, catalogs, direct mail, billboards and other signs, package designs, and display racks.
However, some advertising materials may be considered long-term business assets if they have a useful life of more than one year, such as a permanent metal sign, or a catalog that is intended to be kept by the client for a longer period of time. Instead of deducting these items as a business operating expense, you must depreciate the cost over several years or deduct them in a single tax year under Section 179. Similarly, a mailing list may be considered an intangible asset that must in some cases be amortized over a longer period. The cost of designing and maintaining a business website is also a gray area. The costs of maintenance, updating, and adding to an existing website are generally treated as normal business expenses; but costs that are incurred for the development, creation, design, and programming of a website may be treated as capital expenditures.
In addition, you can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. For example, you are allowed to deduct the cost of advertising that encourages people to contribute to charities such as the Red Cross or to participate in similar causes. You can also deduct the cost of sponsoring a local sports team or tournament, or holding an informational seminar. You are not, however, permitted to deduct the time and labor that you give away as an advertising expense, even if doing so promotes goodwill.
Generally, you are also allowed to deduct the cost of giving away product samples, and of holding contests and giving away prizes. Smaller giveaway items that you use to publicize your business, such as pens and t-shirts, are also deductible. However, you are not permitted to deduct more than $25 in business gifts to any one recipient each year. This limitation applies to advertising giveaway items unless they cost $4 or less, have your company’s name clearly and permanently imprinted on them, and are one of a number of identical items your business has widely distributed.
Amounts paid to influence government legislation, or lobbying, are not deductible under IRS rules. Contributions or gifts to political parties or candidates, whether direct or indirect, and expenses paid or incurred to take part in any political campaign of a candidate for public office are also not deductible. However, the cost of public service or other politically impartial advertising, such as ads that encourage people to register to vote, are deductible.
When claiming these deductions and others, it is important to keep supporting documents in case of an audit, such as any invoices and canceled checks that document payments made for advertising expenses. Your accountant can help you determine which of your advertising expenses are immediately deductible, and how best to structure your marketing strategy to take advantage of the available tax breaks in future tax years.