CHAPTER 15
Advertising Expenses
You may run advertisements on websites, in newspapers, on the radio or television, or in magazines or trade journals to sell your products or services. You can deduct these costs, as well as the costs of other promotional activities. At the same time, you will discover that some costs cannot be deducted or that certain costs need to be deducted as another type of business expense.
For further information about deducting advertising costs, see IRS Publication 535, Business Expenses.
Ordinary Advertising Expenses
Like all other business expenses, advertising costs must be ordinary and necessary business expenses in order to be deductible. They must have a reasonable relationship to your business activities, and they must be reasonable in amount. However, there are no guidelines on what is “reasonable” in amount.
Deductible advertising expenses include the costs of:
Business cards
Ads in print or the media (such as newspaper or magazine advertisements, charitable organization publications, radio or television spots, or online and mobile messages)
Ads in printed or online telephone directories (such as YP listings)
Package design costs that are part of an advertising campaign
Billboards (rental fees are an advertising expense)
Signs with a useful life of not more than one year. (Signs expected to last longer than a year can be depreciated, as explained in Chapter 14.)
In the case of signs placed on the sides of cars or trucks, only the cost of the sign is deductible as advertising. The cost of the driving is not an advertising expense (although business use of the car may be otherwise deductible as explained in Chapter 9).
The cost of public relations can be deducted as an ordinary advertising cost. PR expenses can include fees to PR professionals and agencies, costs associated with PR events (e.g., press conferences), and costs for developing, printing, and distributing press kits.
Some businesses treat the cost of maintaining their websites as an advertising expense. The IRS has not yet ruled on whether this treatment is correct (see “Websites and Apps” later in this chapter). However, if a business uses the site only for advertising (e.g., a law firm that posts its areas of specialty and personnel) and not for selling (e.g, a bricks-and-mortar store that posts its online catalog and accepts purchases through the Internet), it seems reasonable to handle the cost in this manner.
Promotion of Goodwill
Expenses designed to create goodwill in the public's eye rather than to obtain immediate sales are also deductible. For example, the IRS says that the cost of advertising that encourages people to contribute to the Red Cross, to buy U.S. Savings Bonds, or to participate in similar causes is usually deductible. In fact, the advertising program can be of a long-term nature and still result in an immediate deduction. The IRS has ruled that the ordinary costs of advertising are currently deductible despite the fact that they produce a long-term benefit.
In some instances, design costs may be considered deductible advertising expenses. In one case, the Tax Court said that graphic design costs could be currently deductible as advertising expenses even though they may produce future patronage or goodwill. The IRS has announced its disagreement with this decision, so if you claim a deduction for package design costs, you may face an IRS challenge.
The cost of distributing a company's samples can be deducted as an advertising expense when the distribution is designed to engender goodwill.
Another type of advertising involves sponsorships of teams. Your business may, for example, sponsor a bowling team or a Little League team. In return for the sponsorship, your company's name is displayed on the team uniform and may also be a part of the team's name. These costs of sponsorship are deductible as advertising expenses.
Free services provided to generate goodwill cannot be deducted as an advertising expense. For example, in one case, a doctor provided free medical services and deducted the value of his uncompensated services as an advertising expense. The Tax Court disallowed the deduction because the doctor's labor was not an expense (it was not an amount paid or incurred).
Personal versus Business Expenses
Expenses that smack of a personal nature may still constitute deductible advertising costs when it can be shown that the expenses were incurred primarily for business purposes. The following examples demonstrate when expenses may be considered primarily for business and when they may not—the distinction is not always clear.
Lobbying Expenses
In general, the costs of advertising to influence legislation at the federal, state, or even local level are not deductible. Nondeductible expenses include:
The costs of participating or intervening in any political campaign for or against any candidate in public office.
The costs of attempting to influence the general public or segments of the public about elections, legislative matters, or referendums.
The costs of communicating directly with certain executive branch officials in any attempt to influence the official actions or positions of such officials. These executives include the president, vice president, any officer or employee of the Executive Office of the President and the 2 most senior officers of each of the other agencies in the Executive Office, and certain other individuals.
The costs of research, preparation, planning, or coordinating any of the activities already mentioned.
Not all lobbying expenses are nondeductible. You can still claim a deduction for de minimis in-house lobbying expenses. These are expenses that do not exceed $2,000 per year to influence legislation or communicate directly with a specified executive branch official. There is also an exception for expenses to influence local legislation, such as decisions by a local council. And, of course, professional lobbyists are entitled to deduct their own business expenses even though payments to them are not deductible.
Some types of goodwill activities may constitute deductible entertainment expenses (see Chapter 8).
Prizes, Contests, and Other Promotional Activities
Amounts paid for prizes, contests, and other promotional activities may be deducted as advertising expenses if you can show that the expenses have a relationship to your business. The amounts expended must be reasonable; they must not be out of proportion to the amount of business expected to be obtained as a result of the prize, contest, or other promotional activity.
Sponsorships of teams and other events can be deducted as advertising expenses (e.g., sponsorship of a tennis match or golf tournament).
Prizes and other awards given to employees are not treated as advertising costs. They are part of compensation (see Chapter 7).
Help-Wanted Ads
Most advertising is designed to sell products or services. However, you may also advertise when trying to fill a position in your company. The cost of running help-wanted ads in newspapers, trade magazines, and online (such as paid postings through Indeed.com, LinkedIn, Monster.com, and Glassdoor.com) is deductible as an ordinary and necessary business expense. It is not an advertising cost.
If you are out of work and take out an ad in a newspaper to seek a position, again, the cost may be deductible, but not as an advertising expense. Instead, it may be deducted as a cost of finding a job. For a further discussion on deducting job-hunting costs, see Chapter 22.
Websites and Apps
Today, websites are an integral part of advertising and promoting a business. Some companies use websites to transact business online; others use their sites as online brochures to highlight the features of their businesses and establish credibility. Mobile versions of websites are also a growing part of advertising and promotion, enabling businesses to offer coupons or direct readers to their websites. So too are apps that can be viewed on mobile devices. The cost of acquiring a domain name in the secondary market is covered in Chapter 14.
Costs of Creation
Creating a website and, perhaps, a mobile version of it is an important way to brand your business and keep your name before the public because 97% of consumers search for products and services online. Yet it has been reported by Clutch in a 2017 survey that 29% of all small businesses still lack a website and only about half with websites are mobile compatible. Website creation includes domain registration fees, site design, and, in some cases, professional copy, photography, and artwork used to populate the site. While there have not yet been any cases or rulings on the extent to which website-related expenses are deductible, it can certainly be argued that these expenses relate to the promotion of goodwill for the company using a site for promotional purposes and should be treated as fully deductible ordinary advertising costs. For those using their sites for transacting business (e.g., online stores), the IRS may argue that costs should be amortized rather than immediately deductible (see Chapter 14).
The cost of adapting a website for mobile viewing may be treated similarly to website creation costs. They may qualify as fully deductible ordinary advertising costs under the right circumstances.
Another 2017 Clutch survey found that 42% of small businesses already have mobile apps, and that 67% plan to have them by the end of 2017. Nearly half (49%) use in-house resources to develop and maintain apps, which would not trigger separate deductions (deductions for employee wages are explained in Chapter 7). However, if you use an outside firm to develop and maintain an app for your business, the costs likely are deductible. As with costs for websites, the IRS has yet to rule on deductibility.
Maintenance Costs
Web hosting is an ongoing cost for maintaining a website. So, too, is the cost of keeping your website up to date, which can entail fees to outside webmasters. These maintenance fees are fully deductible, as is the cost of search engine optimization (SEO) services.
Social Media
Increasingly, small businesses are relying on social media, such as LinkedIn, Facebook, Pinterest, and Twitter, to market their products and services. Many are using blogs and e-newsletters to reach customers and prospects. Much of social media is free (other than the cost of your own or your staff's time spent working on these sites). However, some social media-related services can cost money, and they are fully tax deductible. Examples:
E-mail distribution costs (such as Constant Contact)
Google Adwords or Facebook Ads
LinkedIn Premium, which is a paid upgrade
Paid blogging platforms (such as Joomla, which is free for the first month and subsequent monthly charges range from $20 to $100, Typepad monthly charges, or Blogspot add-ons)
Surveys (using sites such as Survey Monkey or Constant Contact)
Twitter ads