Deductible Marketing

Features - Finance & Accounting

Learn how tax deductions can substantially reduce the out-of-pocket cost of digital advertising, marketing and promotion

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October 14, 2019

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Growing a snow and ice management business relies on communication with potential customers. Without a solid marketing plan it is very difficult to collect leads, build the operation’s “brand” or increase sales. As important as traditional marketing has been in the past, digital marketing is quickly surpassing it. And, best of all, tax deductions can substantially reduce the out-of-pocket cost of digital advertising, marketing and promotion.

According to the IRS, advertising and marketing expenses must only be reasonable and directly related to the snow removal business in order to be tax deductible. Sponsoring a team named the "Northside Snow Fighters" or listing the business name in an events program, is usually evidence the expenditure is deductible. Unfortunately, in addition to neglecting web marketing expenses, many snow professionals all-too-often lump advertising, promotions, public relations and other sales support expenses under the “marketing” heading.

VIVA LA DIFFERENCE

Separating advertising and promotion budgets is the first step in reducing costs with tax deductions. In the eyes of the IRS, advertising consists of paid, scripted messages directed at potential customers or clients. Promotion is usually defined as paid exposure for the business.

Examples of advertising include magazine and newspaper ads, radio and TV spots, billboards, website banner ads and event signage. Advertising that does not directly relate to the operation’s services, such as supporting legislation or promoting a charity, may be tax deductible.

Additionally, advertising expenses include the cost of media buys, expenses associated with creating ads, agency fees and commissions. Promotional expenses are expenditures made by the snow removal business to make its services better-known to consumers. The IRS considers promotion expenses to be tax-deductible as business expenses – provided they are ordinary and necessary. Promotional expenses include fees charged by an event for the snow removal business to sponsor, signage created for an event, staff time creating and attending events and fees paid to consultants, event workers or endorsers.

WEB MARKETING AND OTHER EXPENSES

A snow business’s website, as well as its internet marketing/advertising expenses, are also tax deductible. In fact, many of the website and marketing services contracted for can be deducted in the same year they are incurred. Unfortunately, there are a few services where the cost can be recovered only through the long amortization write-off period.

Marketing via social media is becoming increasingly popular as recognized by our tax laws. The expense of social media creation and ongoing account management are considered advertising expenses and can be claimed as a tax deduction in the year paid or incurred. Consider, a few examples:

  • Google AdWords used to attract new customers or clients instantly; a simple campaign can be setup in minutes and display search results within a couple of hours.
  • Pay-per-click (PPC) campaigns. While AdWords, like the other internet marketing and advertising expenses, the cost for a PPC campaign also falls within the miscellaneous advertising section of the snow removal operation’s tax return.
  • Facebook ad campaigns.
  • Twitter ad campaigns.
  • Display banner ad campaigns.
  • Costs for hiring an agency to conduct any of these campaigns.
  • On-Page and Off-Page SEO (Basic and Ongoing), Search Engine Optimization (SEO) campaign results are a long-term campaign to keep your website at the top of search engine result pages, but it takes time if it’s done properly.
  • Link Building.

And, don’t forget Goodwill Advertising. If a snow removal contractor expects to benefit in some way from a promotional activity, the cost of institutional or goodwill advertising may be deducted. This is because the motive of advertising activity is to get the name of the snow and ice business in front of the public. Goodwill advertising includes:

  • Promotional activities that ask people to donate for charity;
  • Getting or business sponsorship, and
  • Organizing contests and offering rewards or prizes.

Unfortunately, labor costs involved in organizing such activities cannot be deducted. Actually, it is necessary that funds be paid to record it as advertising expense or a deduction.

On the off chance the website is being used for publicizing, web-support costs can be deducted as a promoting cost. In the event the site is utilized for sales and has an e-commerce option, it is a sales expense is considered independently. Of course, designing and maintenance costs for even an e-commerce website are deductible.

Naturally, detailed records and receipts for these marketing expenses are strongly recommended.

WEBSITE DEVELOPMENT COSTS

The IRS has yet to issue formal guidance on the treatment of web site development costs. However, informal internal guidance suggests that one appropriate approach is to treat those costs like an item of software and depreciate them over three years.

It is clear, however, that taxpayers who pay large amounts to develop sophisticated sites have been allocating their costs to items such as software development (currently deductible, like research and development costs), utilizing the Section 179 first-year expensing election and even as currently deductible advertising expenses.

In reality, the classification of web design and development services depend on when the work was done, who did it and the specifics of the actual work. If, for example, an outside contractor designs a simple template website for informational purposes that does not require extensive custom programming, it can be capitalized and the expenditures amortized over its “useful life” (usually three years) once put into service. Or, depending on the snow management operation’s accounting practices, the cost could be deductible as an advertising expense in the year it was completed.

If the website was purchased, a business is required to amortize the cost over a three-year period. Content or design updates and ongoing maintenance are considered advertising and can be deducted the same year. It is a similar story for hosting, domains, and other similar products that are usually deducted the same year.

Up to $5,000 of so-called “startup” expenses, can be deducted in the first year – even where the website is built before the snow business opens its doors to begin operations. While that immediate deduction for startup costs is reduced, dollar-for-dollar when start-up costs exceed $50,000, the balance is recoverable over a 15-year period.

A recent report by Campaign Monitor, an email marketing firm, indicated that 89% of those using email marketing considered it successful. By providing the snow removal operation’s Website with a steady stream of click throughs, email marketing is extremely important in converting potential customers into paying ones. Best of all, many of the costs associated with Web marketing, advertising and promotion are tax deductible.