Advertising Costs: More (and Less) Deductible Than You Realized

Summary: Recent guidance from the IRS highlights the tricky nature of advertising costs. Some peripheral expenses are deductible, in fact, while a few seemingly acceptable ones are not. Click through for the details on advertising deductions.

In a recent release, the IRS reiterated that the tax law allows businesses to deduct advertising and marketing costs as “expenses that help them bring in new customers and keep existing ones.” These costs may include expenses for advertising and marketing. But as with most tax rules, there are fine points. Businesses may find that the regulations in this area are both wider and narrower than they realized.

As with many deductions, the costs must be both ordinary and necessary:

• 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. However, an expense does not have to be indispensable to be considered necessary.

The IRS takes a broad view

As many businesses probably already know, covered costs include reasonable advertising expenses that are directly related to business activities. But the IRS allows more, including:

• 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, says the IRS, “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.

When you pay a nonprofit for a notice that has a business purpose, it may be deductible. For example, according to the IRS, “You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. The purpose of the ad was to encourage readers to buy your products. Your payment isn’t a charitable contribution. You can deduct it as an advertising expense.”

Watch out for politics

However, the IRS also warns business to draw a bright line between advertising and lobbying, explaining that businesses “can’t deduct amounts they pay to influence legislation, which includes advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate.”

If you are unsure about whether various expenses your business has are covered as advertising expenses, talk with a tax professional.

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