How Is Marketing Taxed?

Can small business owners deduct marketing costs? According to the Internal Revenue Service (IRS), companies can take off the amount they spend promoting their products and services. In past years, the amount was used as a legitimate expense, reducing overall tax burdens and showing a more accurate reflection of profits for the previous year.

As with anything to do with taxes, it’s a good idea to consult with a tax professional and make sure each expense is legitimate. The last thing an organization wants is to claim something and later find out it wasn’t allowed — penalties and interest can add up if audited and wind up owing the IRS more money than it paid.

What Is Considered a Marketing Expense?

Gartner's CMO Spend and Strategy Survey found marketing budgets are back on the rise after a dip in 2020 and 2021. The average business spending was 9.5% of revenue, almost back to pre-pandemic amounts.

The IRS website states, "Advertising and marketing costs must be ordinary and necessary to be tax deductible." They go on to explain the expense must be common to the industry and widely accepted. The site also specifically states amounts contributed to affect legislation are not deductible — politics and tax deductions rarely mix.

Here are some key things to keep in mind when tracking expenses and deciding what to deduct alongside a tax professional.

1. Rethink Entertainment

Decision-makers might see the cost of taking a potential client or top customer to dinner as part of their marketing efforts. However, the IRS classifies this type of activity differently and it falls under entertainment and dining expenses. A company might not be able to deduct the total cost of the meal, even if staff members would have never eaten it if they weren't trying to sell a service to a new lead.

A better tactic might be to host a promotional event. Invite multiple contacts and write off the entire cost of the party. The Tax Cuts and Jobs Act of 2018 changed how organizations can deduct some expenses, but this is one way to take a write-off while promoting the organization.

2. Improve Valuation

If leaders plan to gift shares of the business or make charitable donations, they’ll need an IRS business valuation to see its true worth. Tracking all expenses and income is vital to ensure an accurate reflection. Businesses have a fair market value, but it’s impossible to predict what it is without all the facts.

3. Calculate Cell Phone and WiFi Expenses

Individuals can track how often they use their home WiFi and smartphone for business and calculate the costs based on the percentages they come up with. For example, those working from home eight hours a day, six days a week, could deduct that portion based on the number of hours in the month versus what they worked, even if they also use their WiFi for some other personal things.

The key is to keep careful records and ensure the organization only claims what’s fair based on usage for business purposes — the same goes for cell phones. Workers should be able to deduct a percentage of their costs, but if they also use the phones for personal reasons, they’ll need to reduce how much they claim.

If leaders are still determining which amounts to claim, it is best to consult a CPA. They can offer some guidelines to make an audit less likely. The IRS looks for red flags when it comes to small business deductions. If the costs outweigh profits substantially — especially after the first few years of being in business — they’ll dig deeper. Hopefully, all calculations will be accurate should the company be the recipient of an audit.

4. Track Website Costs

A website is a form of marketing. Most of the associated costs are tax deductible, including hosting, development and any themes or images purchased to reach current and potential customers.

People sometimes assume only direct advertising is considered marketing by the government. While things such as billboards, newspaper ads and email ads all contribute to any marketing deductions, less direct activities such as web design costs and social media posting also qualify in most instances.

5. Enter the Metaverse

The definition is still in flux, but the Metaverse is a world where people can interact with one another and companies in a virtual reality setting. Costs associated with creating a personality for the Metaverse or interacting with customers may be tax deductible.

Because the Metaverse is so new, marketing in it is still a gray area. Keep accurate records of what the business does and how it impacts the brand’s exposure in case someone ever questions it. Decision-makers should also chat with their tax professionals about what parts of Metaverse development are potentially tax deductible for the organization.

6. Pay a Few Consultants

One person can’t possibly know everything there is to know about marketing and advertising. Small businesses are often in a position where they cannot yet hire someone full-time to complete marketing work, but they need advice and help here and there. If the company pays a consultant to look over its marketing plan, schedule social media posts or work with influencers, all these expenses should be tax deductible.

7. Choose Charitable Giving

One place to spread the word about a business is by supporting nonprofits or organizations in the community. Companies can deduct part of their expenses as charitable giving and spread positive word-of-mouth about the brand. However, there are other ways to give back and create tax savings, such as paying employees to have a volunteer day.

Did the business support a local little league group? Deduct the cost of the shirts donated with the brand’s name on them or gifts it gave out. Some local youth sports locations allow organizations to purchase a banner for the ballpark or indoor arena, which would be a direct marketing expense it could take off what it owes on taxes.

8. Give Gifts

Giving gifts can be considered a promotional activity to retain current clients and attract new ones. There are some specific rules involving gift giving and how much of it is deductible, so leaders will want to be aware of how much they’re gifting and what is acceptable as a promotional expense.

Giving gifts is another gray area regarding tax deductions, so proceed cautiously. At the same time, don’t leave anything on the table — if there is a legitimate expense, the business can and should take it off its taxes.

Tax experts point to the $25 rule created in the 1960s that states companies can give a client a $25 gift. Though the rule is hopelessly out of step with inflation, there are a few ways around it, such as making sure any gift item is branded with a name and logo or passing out a number of freebies at a local community booth at the art fair in town.

Remember to Keep Records for Taxes

Track every penny the organization spends and categorize it. It’s better to have a trail for something and not take it off taxes than to miss saving the information and lose a potential deduction. Marketing and advertising can be taxed in a very straightforward way — businesses just have to know how to navigate the muddy waters of some spending and stick to what the IRS allows.