Businesses may deduct all ordinary and necessary business expenses, including advertising expenses. But what does the broad category of "advertising expenses" include? What doesn't it include? And what expenses are deductible?
Advertising is a broad category of business expenses that includes business activities such as:
- Advertising in various media like newspapers, TV, internet, cable, and magazines
- Marketing activities, such as direct marketing.
- Promotional and public relations expenses, like sponsorship of sports teams and promotional items like mugs, caps, t-shirts, and pens.
- Online activities such as email newsletters, pay-per-click advertising, and SEO services
- Costs of producing advertising materials such as business cards, brochures, and web pages.
- Costs of advertising events such as a publicity campaign or special promotional event.
Advertising Expenses You Can Deduct
You may deduct expenses for advertising your business to customers. It's important to note that these must be ordinary and reasonable expenses for advertising. Some examples would be the printing of business cards, placing a Yellow Pages ad, running newspaper, TV, and radio advertisements (including production costs), and the costs for setting up your business website.
Doing business from your home office? You can deduct advertising expenses because they are the same, no matter where your business is located.
Costs for Promotion Activities
You can deduct the cost of providing meals, entertainment, or recreation facilities to the general public as advertising or promotion activities. The cost for meals isn't subject to the usual 50% limit for these costs for other business purposes. (Note that entertainment expenses are no longer deductible except for advertising purposes.) For example, if you have a grand opening event for your local community that includes a meal and entertainment, the IRS considers this advertising, and you can deduct the full cost of the event, including food and entertainment.
The IRS says your business can "usually" deduct the cost of goodwill advertising to keep your name in front of the public. For example, an ad by a company selling beer that promotes responsible driving would probably be deductible.
Costs for Advertising When Starting a Business
The IRS considers all costs for starting a new business as capital expenses. That means they are like an investment that you expense over time. All startup costs are lumped together when figuring tax deductions. You may deduct up to $5000 of startup costs, including advertising, in your first year of business. The rest must be depreciated over time.
What You May Not Deduct
You may not deduct costs that are primarily personal, even though they may have some promotion value. For example, if your daughter is getting married and you invite some of your best customers for the wedding, you can't deduct the wedding costs.
You can't deduct the cost of advertising in any publication or website used by or for a political party or candidate. No political expenses are deductible for businesses.
You may not deduct the costs of personal hobbies carried on with business associates. For example, if you and a customer like to go to NASCAR events, you can't deduct these costs as "advertising."
Ads on Vehicles Aren't Deductible
This cost is probably the most misunderstood of any advertising expense. You can deduct the cost of putting an advertisement for your business on your car (business or personal), but you can't deduct the cost of driving your car around town as an advertising expense. The IRS specifically discusses this subject because it's misunderstood.
Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.
Advertising Costs vs. Other Costs
Business costs for both advertising and selling are deductible, but in separate places on your business tax return. For example,
- If you use your website for advertising, you may deduct web maintenance costs as an advertising expense. If you use your website for selling (having a shopping cart, for example), this is a cost of selling and is considered separately.
- Costs for temporary signs are considered advertising. Costs for permanent signs (that last more than a year) are not advertising, but signs may be depreciated as long-term assets.
- Costs for help-wanted ads are a deductible business expense, but they are not considered 'advertising.'
Advertising Expenses on Business Tax Returns
- For sole proprietorships and single-member LLCs, this expense is recorded on Line 8 in Part II- Expenses of Schedule C.
- For Partnerships and multiple-member LLCs, this expense is recorded in Line 20, Other Deductions of Form 1065: Partnership Income Tax Return.
- For corporations filing a Corporate Tax Return on Form 1120: Corporate income tax return. this expense is recorded on Line 22.