Advertising Expenses That Qualify for Business Tax Deductions

In our first blog post, we identified two leading industry definitions of promotional marketing. This revealed a broad swathe of advertising and marketing communication categories. We started this way because the IRS clearly stipulates that advertising and marketing costs must be “ordinary and necessary”.

So from our delve into industry definitions, what are the specific advertising and marketing expenses that qualify for tax-deductible status?

List of Tax-Deductible Advertising Expenses

We believe that you should be safe to claim any expenses under these marketing categories as tax-deductible:

  • Branding
  • Advertising including:
    • Consultant or Marketing Agency Retainer
    • Goodwill Advertising (see paragraph below)
    • Radio Advertisements
    • Television Commercials
    • Outdoor Advertising
    • Direct Mail
    • Merchandising ‘hardware’ and ‘software’
  • Digital Media including.
    • Website
    • Content Marketing
    • Search Engine Marketing (SEM/ Paid Search)
    • Inbound Marketing
    • Search Engine Optimization (SEO)  
    • Email Marketing
    • Mobile App
    • Social Media Outreach
    • Digital Sales Funnels
    • Video Marketing
  • Public Relations (PR)
  • Launch Events
  • Exhibitions
  • Sales Management
  • Special Offers
  • Marketing Research
  • Print Advertising e.g. product/service brochures
  • Sales Promotions
  • Personal Selling
  • Business Cards
  • Product Samples
  • Leave-Behinds/Door-Hangers
  • Lead Generation
  • Influencer Marketing
  • Telemarketing
    • Cold Calling
    • Ringless Voicemails
    • Voicemail Broadcasts
    • SMS marketing
  • Viral Marketing
  • Guerilla Marketing
  • Outbound Marketing
  • Marketing Technology Expenses e.g. Marketing Automation, Marketing Software Set Up Fees & Subscriptions

This dizzying array of promotional marketing expenditures eligible for tax-deduction will come as a welcome surprise to some business owners. And we haven’t even begun to delve into promoting your business using a growing collection of Web 3.0 channels!!

Other business owners who rely more on good old “word-of-mouth” advertising will simply shrug their shoulders, of-course.

It’s a fair assumption that your accountant may not have heard of every type of promotional marketing or advertising medium on the above list.

Can You Deduct Meals and Entertainment Costs?

If you offer entertainment, meals and/or recreation facilities to the public, then such costs do count as legitimate promotion or advertising activities. So, yes, these can be deducted. In fact, entertainment expenses are no longer deductible unless they’re purely for advertising reasons.

Launch Events

Event Marketing

Here’s an acceptable example of such an event. Say you organize a grand opening event to publicize:

– launching your new business; or
– re-launching your business; or
– announcing a new service or product line; or
– promoting your new retail premises

… and you wanted to attract attention from both the local community and media too. The IRS considers this type of event as advertising. As such, the costs of the event and meals and even entertainment can be deducted from your tax liability in full.

In this case, the cost of meals is not subject to a 50% limit as would apply for other business purposes.

Is Goodwill Advertising Deductible?

If it relates to increased sales that you hope to realize in the future, you can deduct the cost of “Goodwill Advertising” in your business tax returns. Goodwill advertising examples include:

– Leave-behinds
– Giveaway items
– Key chains
– Pens
– Branded apparel
– Cups
– Fridge magnets
– Calendars etc.

For example, AAA Service Company procures 1,000 pens and each one is branded with the company name and logo. The company hands out the pens at conventions and exhibitions as gifts to the visiting members of public and exhibition attendees. Even if the pens cost $1 each, AAA Service Company may deduct the entire $1,000 invoice. These pens do not count towards the $25 limit for gifts.

Signage, merchandising hardware and promotional literature given to other businesses for use on their premises are not considered as gifts. Therefore, these items, too, are tax deductible.

The Acid Test

Litmus Paper to test for Acid

For expenditure under any of the above headings to be eligible for tax-deduction, the IRS says marketing and advertising costs must be ordinary and necessary.

An expense is ordinary if its common and accepted in the industry. An expense is necessary if it’s helpful and appropriate for the business.

IRS’ Wriggle Room

So it’s fair to say that you can deduct most advertising expenses if they are related to your business operations. However, bear in mind that the IRS wording leaves them breathing room to decline some tax write-off claims. This might happen if the underlying types of advertising are not commonly employed used in your industry.

From IRS’ viewpoint, it would be hard for them to maintain a comprehensive list of all current, eligible and commonly used promotional activities for every U.S. industry sector. I think this has more to do with the IRS’ ambiguous wording than a desire to decline reasonable tax deduction claims.

The U.S. Government wants your business to do well by attracting new customers and by retaining existing clients. The Government knows that this would be hard to do without the use of marketing communications materials, whether offline or online in nature. And so they will allow tax-deduction claims for “ordinary and necessary” marketing expenses.

It’s All Fun and Games Until It’s Not

Sure, it’s fun sharing a brightly colored toy box of business marketing tools with you. Costs incurred here can be written off to tax if they are legitimate business expenses i.e. the costs of carrying on a trade or business. Everyone’s a winner, right? But bear in mind that it is possible to go too far with your deductions claim. Willful avoidance of paying tax can risk financial penalties and/or prison time. So, please… check with your accountant to learn what tax filings and deductions are appropriate for your business.

Disclaimer – The Author is neither a tax accountant nor a tax attorney. The information is supplied here for guidance only and you should seek professional tax support if you need assistance in completing your tax filing