Without marketing or advertising, no one will know the existence of your pond design, construction, or maintenance business. Fortunately, a marketing strategy doesn’t have to mean multimillion-dollar TV commercials. After all, there are plenty of ways to market a pond business – and a variety of tax deductions to help make that marketing and advertising more affordable. Include entertainment in the pond operation’s marketing strategy and tax deductions will also underwrite the fun side of promoting your business.
Advertising, as well as marketing, can mean the continued life of a business affected by the economy, competition or other factors outside the control of the operation’s owner or manager. Because there are many aspects to both advertising and marketing, it is not surprising that the expenditures related to these activities fall within several sections of the tax regulations.
All-too-often, one of the first expenses reduced or cut by many troubled pond businesses is the most basic of expenditures -– advertising costs. This is a doubly short-sighted strategy given the necessity of advertising in bad times and the fact that Uncle Sam, in the form of tax deductions, will often pick-up a portion of those advertising expenses.
Advertising expenses encompass everything from expenditures for business cards, catalogs, home demonstrations, design costs, prizes and contests, new product or service launch costs and other promotional activities. Generally, advertising, marketing and other selling expenses are immediately tax deductible as “ordinary and necessary” business expenses – but not always.
All reasonable advertising expenses are tax deductible so long as they bear a reasonable relationship to the pond business. Under our tax rules, deductible expenses may be for the purpose of developing good will as well as gaining immediate sales. Even better, the cost of advertising is deductible when paid or incurred, even though the advertising program extends over several years or is expected to result in benefits extending over a period of years.
Lobbying Expenses: When it comes to promoting the interests of the pond construction or maintenance business, lobbying expenses directed towards influencing federal or state legislation are generally not deductible. However, this prohibition does not generally apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.
The cost of public service or other impartial advertising, such as advertising designed to encourage the public to register to vote, are also deductible. But, no deduction may be claimed for the expense of advertising in political programs, or for admission to political fund-raising or inaugural functions and similar events. This includes admission to a dinner or program if any part of the proceeds of the event directly or indirectly inures to or for the use of a political party or a political candidate.
Web Site Development Costs
Although the IRS has not issued formal guidance on the treatment of Web site development costs, informal, internal IRS guidance suggests that one appropriate approach is to treat these costs like an item of software and depreciate them over three years. It is equally clear 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) and currently deductible advertising expense – without challenge by the IRS.
Mailing lists are an important part of the advertising campaigns of many pond businesses. On one hand, the mailing list is an intangible asset, deductible only if a reasonable life can be determined for it. A tax deduction for the cost of compiling that list is a little trickier.
Consider the situation of a pond contractor that mails catalogs to people on its mailing list as well as to others on lists that it rents. Prospects for the permanent list are from advertising, and added to the company’s mailing list if they make purchases. The business keeps records of its costs in adding to the mailing lists and expenses those costs in the year the catalog to which the expenses relate is distributed.
The Internal Revenue Service has ruled that the company may deduct as an ordinary business expense its costs related to adding names to the mailing list. Keep in mind, however, that this situation involved a catalog that was published semi-annually, while in other cases the IRS ruled on the catalog had a useful life of several years.
Marketing as Advertising
Paid advertising isn’t the only way to spread the word about your pond operation or business. Public relations are marketing strategies that span everything from press releases and networking at a Chamber of Commerce meeting to sponsoring a contest to holding special events.
However, no deduction is allowed for dues paid to any club organized for business, pleasure, recreation, or other social purposes – even if membership is used to promote the pond business. Fortunately, this disallowance does not extend to trade and professional organizations, or public service organizations (e.g., Kiwanis and Rotary clubs).
A pond designer, contractor or maintenance professional is allowed a deduction for business entertainment, so long as there is a direct relationship between the expense and the development or expansion of the business. Remember, however, special limits are imposed on the deduction of business-related entertainment, meals and gift expenses.
First and foremost, no tax deduction is allowed for the cost of entertaining guests at nightclubs, sporting events, theaters, etc., unless that cost is either:
1. Directly related to the active conduct of a trade or business, or
2. For entertainment directly before or after a substantial and bona fide business discussion associated with the conduct of that trade or business.
The business discussion must be the principal aspect of the combined entertainment and business and must represent an active effort by the pond professional to obtain income or other specific business benefit. However, if a meal expense directly precedes or follows a substantial and bona fide business discussion (including a business meeting at a convention or trade show), then it is deductible if it is established that the expense was associated with the active conduct of a trade or business. The pond business must, of course, be able to substantiate the expense.
There are two additional restrictions placed on the deduction of meal expenses: (1) meal expenses generally are not deductible if neither the pond professional nor the operation’s employee is present at the meal, and (2) a deduction will not be allowed for food and beverage to the extent that such expense is lavish or extravagant under the circumstances.
50% Limitation Rule: The amount allowable as a deduction for meal and entertainment expenses is generally limited to 50% of such expenses. The 50% rule is applied only after determining the amount of the otherwise allowable deductions. For instance, the portion of a meal that is lavish or extravagant must first be subtracted from the meal cost before the 50% reduction is applied.
Giving is Often Advertising
Yet another form of advertising is the giving of gifts by a pond business. Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Items clearly of an advertising nature that cost $4 or less and signs, display racks or other promotional materials given for use on business premises are not gifts.
A pond business that provides customers or prospective customers with an item that might be considered either a gift or entertainment will generally benefit from the entertainment write-off, ignoring the $25 limit. Of course, if the operation gives a customer packaged food or beverages that are to be used later, they are considered gifts.
A gift to the wife of a business customer is not treated separately from a gift to the customer himself. Remember, the $25 limitation applies to gifts made “directly or indirectly” to an individual. A gift made to the wife of a business customer of the taxpayer is generally considered as made indirectly to the customer. However, if the customer’s wife has an independent business connection with the taxpayer, a gift to her would not be regarded as an indirect gift to her husband unless it was intended for his eventual use or benefit.
To spur sales, many businesses frequently give away small samples. Under the tax rules, the cost of the samples can be deducted immediately – if the samples are purchased separately from the products being sold, their cost is an ordinary and necessary business expense. However, if the item was included in inventory, it cannot be deducted twice. It will already be part of the cost of goods sold.
The tax rules clearly label the majority of advertising and marketing costs as immediately tax deductible albeit with some restrictions or limits. Obviously, to get the maximum benefits from advertising and marketing expenditures or to reap the cost-cutting deductions, often requires the help of qualified professionals.
Whether help includes advertising or marketing professionals or is limited to a qualified tax professional, the decision of whether to advertise or market the pond design, construction or maintenance operation’s services or products should be a “no brainer,” good times or bad.