U.S. small business advertising expenses are tax-deductible so long as they’re “reasonable and necessary”.
In this short series of articles, we explore which promotional expenses can be written off to tax, which can’t and what the legislation says. We’ll include as many references and links to relevant tax guides as we can source.
What’s the point?
The purpose of this website is to help you, a U.S. small business owner, write off as much of your marketing expenditure as the IRS legally allows; up to 100% of it, in fact. In this way, you’ll retain more of the profits from your business.
We’re constantly surprised that more small businesses are not advertising effectively, especially in today’s connected, digitized world. Many owner-operators we talk to rely too heavily on ‘word of mouth’ advertising. This is fine until a new, aggressive competitor sets up in town. Or there’s a downturn in the economy and you need more sales.
How does this benefit small business owners?
Knowledge is power. We want to share what we know about the tax breaks that are open to small and medium-sized enterprises in U.S., particularly regarding deductible marketing expenditures. In this way, more business owners will have a better chance to expand profitably and at the IRS’ expense. Heck, the information here might even save their businesses from oblivion during downturns in the economy.
A win-win for small business owners
Our clients win with great leads, more sales and higher profits. They also win by writing off reasonable marketing invoices to reduce their tax bill by the amount they spend on advertising.
Why do small business owners under-invest in marketing?
You might be aware that 89% of all American adults have a smart phone and a similar percentage will regularly research a purchase or a company online before buying. This includes checking the seller’s website or read reviews left by previous buyers, for example.
So why is it that only around two thirds of businesses have a website (Blue Corona research)?
We don’t know.
Nor do we know why those businesses with a website, spend so little on them. 28% of small business website owners spend less than $500 on their site and next to nothing maintaining it.
So a third of all businesses have no website and a further one quarter spend no more than $500 on one.
It means that more than one half of all small businesses are under-represented online and missing out on new business.
We can only surmise that they simply do not know that for every dollar invested in a website or advertising, all of it can be written off as a tax-deductible within reason.
What does the Inland Revenue Service (IRS) say?
The IRS is suitably vague in its guidance on this topic. Perhaps they realize that there are many new channels to market nowadays and have decided not to mention any of them. View IRS’ official guidance by copying their page link into your browser:
To save clicking, here is their exact guidance note below:
Advertising and marketing costs must be ordinary and necessary to be tax deductible.IRS
• An ordinary expense is one that is common and accepted in the industry.
• A necessary expense is one that is helpful and appropriate for the trade or business. An expense does not have to be indispensable to be considered necessary.
Here are a few advertising expenses that are usually deductible:
• Reasonable advertising expenses that are directly related to the business activities.
• An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.
What is “ordinary and necessary” advertising and marketing?
IRS mentions marketing. This is an extremely broad area. For example, the American Marketing Association defines marketing as follows:
“Marketing is the activity, set of institutions, and processes for creating, communicating, delivering and exchanging offerings that have value for customers, clients, partners and society at large.”
This covers a multitude of sins and goes too far, we feel. So instead of suggesting that you can write off a vast swathe of marketing and organizational-related costs, we will err on the side of caution. Let’s restrict ourselves to promotional marketing. It’s just our view but we feel this is at least consistent with IRS’ advertising context.
Which promotional costs are tax-deductible?
The promotional element of Marketing is defined by the Chartered Institute of Marketing as:
Promotion is the way a company communicates what it does and what it can offer customers. It includes branding, advertising, PR, corporate identity, social media outreach, sales management, special offers and exhibitionsCIM
This is much like the American Marketing Association’s definition of Marketing Communications:
“Marketing communications are coordinated promotional messages and related media used to communicate with a market. Marketing communications messages are delivered through one or more channels such as digital media, print, radio, television, direct mail, and personal selling.”AMA
Aha! We’re now getting closer to what IRS mean.
In our next post, we’ll summarize which type of advertising expenses that we feel qualify as deductible business expenses. Check it out here.
What’s in it for us?
We run a small digital marketing agency in a quiet corner of U.S.. Professional marketing services is a legitimate category of allowable deductible costs. Therefore, marketing agency costs such as their monthly retainer and/or percentage of media budget or (as in our case) lead charges can also be included in a business’ tax return.
We point to the tax breaks available to encourage prospective clients to purchase more, quality leads from us. That’s how we benefit from the facts provided here.
Disclaimer – we are not tax accountants, nor do we possess any formal tax training. Whilst we have researched the subject matter as carefully as possible, we could have made some mistakes inadvertently. It’s also possible that by the time you read these posts, the information provided here might be superseded by more recent legislation. Always check your planned tax deductibles with your local, qualified Certified Public Accountant (CPA).
Read more of our posts on the topic of writing off marketing expenditure to tax. For a bit of fun, we’ll even delve into some tax write-off ideas that may not have even crossed your mind.