As a small business owner, you are most likely going to incur some expenses related to the promotion of your business. Generally, most of the expenses you incur are deductible either as advertising expense or as some other expense. Some expenses that you may incur are not deductible. In any case, the Internal Revenue Service requires that your expenses be ordinary and necessary to the operation of your business in order to be deductible.
There are typically three types of expenses that are considered advertising for tax purposes, ordinary advertising expenses, public relations expenses, and promotional activities.
Ordinary advertising expenses include a wide range of items including, but not limited to, business cards, print advertisements, radio or television advertisements, yellow page advertisements, Internet advertising and billboards.
The cost of maintaining your website is most likely fully tax deductible but whether or not it falls under advertising expense for tax purposes will depend on your individual website. Some websites are designed to promote the business while others are essentially the operations of the business (for example, Amazon.com).
The second major type of advertising expense that your business may incur is public relations expenses or expenses that are designed to promote goodwill toward your business. Examples of this would be the distribution of samples to clients or the sponsorship of a Little League team or community softball team.
Promotional activities can include things such prizes and contests for your clients. For example, if you hold a monthly drawing for your clients and the monthly winner receives gift certificates to a local restaurant, the cost of the promotion and the cost of the gift certificates can be deducted as advertising expenses. If as part of a promotion, you provide free food or drinks to the general public, you are permitted to deduct 100% of these cost as advertising expenses – they are not subject to the 50% limitation on meals and entertainment expenses.
Now is time for the bad news – what is not deductible. Generally, any type of lobbying expense is not deductible in amounts in excess of $2,000 in a given tax year. These include expenses that were incurred in connection with or against a particular political campaign and expenses incurred in the attempt to influence the public about elections or legislative matters. There are also exceptions for expenses that influence local councils and boards to allow for the tax deduction.
Where many taxpayers get into trouble are in areas that are both personal and business in nature. Just because an expense appears to be both personal and business in nature does not mean that it is not deductible. If you invite a large number of clients to your Annual Client Appreciation Cruise on the lake, these expenses are likely to be tax deductible. If you invite the same people on a similar cruise but it happens to also be your daughters wedding reception, it will not be tax deductible.
In order to support your deduction, be sure to maintain a copy of the invoice and your proof of payment. It is also a good idea to save a copy of the advertisement. If you have any questions about a grey area, be sure to contact your tax advisor for clarification.