-By MARK BATTERSBY- It is an unfortunate fact of life, but many builders and contractors often overlook the tax deductions for marketing expenses. According to the IRS, advertising and marketing expenses must only be reasonable and directly related to the rural building business in order to be tax deductible.
Promotional costs that create goodwill, such as sponsoring a peewee football team are also deductible so long as there is a clear connection between the sponsorship and the building business. Putting the operation’s name on the team or listing the building business’s name in the program is usually evidence the expenditure is deductible. Unfortunately, the same is not always true when it comes to Internet promotion.
Small building businesses often lump advertising, promotions, public relations and other sales support expenses under the heading of “marketing.” Others record the various types of expense separately, especially if the building business has designated a specific employee for these functions. Separating advertising and promotion budgets is the first step when reducing costs with tax deductions.
In the eyes of the IRS, advertising consists of paid, scripted messages directed at potential clients and customers. Promotion is paid exposure for the business. Examples of advertising include magazine and newspaper ads, radio and TV spots, billboards, website banner ads and signage at events. Advertising that does not directly relate to the builder’s services or products, such as supporting legislation or promoting a charity, may or may not be tax deductible.
Specific advertising expenses often include such costs as those for media buys, expenses associated with creating ads, agency fees and commissions. Promotional expenses are expenditures made by a builder to make its services better known to potential customers. The IRS considers promotion expenses to be tax-deductible as business expenses—provided they are ordinary and necessary. Promotional expenses include the fees charged by an event for the building business to sponsor, items given away, signage created for an event, staff time creating and attending events, products or services given away and fees paid to consultants, event workers or endorsers.
A building 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. Consider this breakdown of various website and internet marketing/advertising related services and how they must be treated under our tax rules:
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 clients instantly; a simple campaign campaign can be setup in minutes and display search results within a couple of hours.
- Pay-per-click (PPC) campaigns. With AdWords, like the other internet marketing and advertising expenses, the cost for a PPC campaign also falls within the miscellaneous advertising section of the building 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
Don’t forget old-fashioned Goodwill Advertising. If a builder is expected to benefit in some shape or form 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 contractor or the building business in front of the public. Goodwill advertising includes:
- Promotional activities that
ask people to donate for
- Getting a business sponsor
- Distributing product
- Organizing contests and
offering rewards or prizes.
Unfortunately, labor costs involved in organizing such activities cannot be deducted. On the off chance that the website is being used just for publicizing, web support costs can be deducted as a promoting cost. In the event that the site is utilized for sales and has an e-commerce option, it is a sales expense 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. Also, every builder and contractor should be aware of the IRS’s guidelines (or lack of guidelines) for developing and maintaining a website that is often the key ingredient in online advertising and marketing.
The IRS has yet to issue formal guidance on the treatment of website 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. For example, if 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 operation’s accounting practices, the cost could be deductible as an advertising expense in the year it was completed.
Here’s a look at several specific website-related expenditures:
- Cost for the design of the
website by an outside
contractor hired for this
- Cost for the template if
purchasing the design
- Cost for hosting the site as
well as the domain fee
- Cost for any premium
services (such as add-ons
or plug-ins for the
- Cost for maintenance
If a new blog was created and uses freelance bloggers for its content, be sure to keep records of all related expenses because they can often be tax deductions as well.
If the website was purchased, a builder 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 building business begins 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.
It’s important to remember that every builder and contractor should always consult with a tax professional about what is and is not deductible by the building business. Keep documentation and detailed records of how things were used. RB