Kloubec Koi Farm

Tax Deductions in Digital Marketing

Growing a pond or water-feature business relies on solid communication with both existing and potential customers. Without a solid marketing plan, it is 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 be reasonable and directly related to the business to be tax deductible. Sponsoring a team named the Southwest Pond Builders or listing the business name in a program, for example, are usually deductible expenditures. Unfortunately, many pond professionals all too often lump advertising, promotions, public relations and other sales-support expenses under the “marketing” heading — while neglecting deductible web-marketing expenses altogether.

Understand the Difference

In the eyes of the IRS, advertising generally consists of paid, scripted messages directed at potential customers. Promotion is usually defined as paid exposure for the business. Separating advertising and promotion budgets is the first step to increased tax deductions.

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 business’ services or products, such as supporting legislation or promoting a charity, may or may not be tax deductible.

Specifically, advertising expenses include the cost of media buys, expenses associated with creating ads, agency fees and commissions. Promotional expenses are expenditures made by the business to make its services better known to consumers.

The IRS considers promotional expenses to be tax deductible as business expenses — provided they are ordinary and necessary. Promotional expenses include fees charged by an event producer, signage created for an event, staff time spent creating and attending events and fees paid to consultants, event workers or endorsers.

Web Write-offs

A pond or water features business’ website and internet marketing and advertising expenses are also tax deductible. In fact, many website and marketing services can be deducted in the same year they are incurred. Unfortunately, the cost for some services 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 expenses 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.

Google AdWords used to attract new customers or clients instantly; a simple campaign can be set up in minutes and can display search results within a couple of hours. Pay-Per-Click (PPC) campaigns, as with AdWords and other internet marketing and advertising expenses, are usually classified as a miscellaneous advertising cost on the pond operation’s tax return. Search Engine Optimization (SEO) campaigns 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. Other examples include Facebook and Twitter ad campaigns, display-banner ad campaigns and costs for hiring an agency to conduct any of these campaigns.

Goodwill Advertising

Don’t forget old-fashioned goodwill advertising. If a pond business 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 pond professional or business in front of the public. Goodwill advertising includes promotional activities that ask people to donate for charity, getting or business sponsorship, distributing product samples and organizing contests and offering rewards or prizes.

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

Website Development Costs

Surprisingly, 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, utilizing the Section 179 first-year expensing election and fully deductible.

Website content that is not considered advertising may be currently deductible, or it may be written off over a multi-year period, depending on its useful life. The cost of acquiring a domain name, on the other hand, while still considered a capital asset, is not deductible and cannot be depreciated over a period of time.

Fortunately, website design and content are considered fixed assets and qualify as Section 179 first-year expenses and fully deductible. They also may qualify for bonus depreciation purposes and a 100% write-off. It’s a similar story for depreciable computer software.

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 operation’s accounting practices, the cost could be deductible as an advertising expense in the year it was completed.

Some other specific website-related expenditures include the cost of the design of a website by an outside contractor; the cost of a template if the design was premade; the cost for hosting the site, including the domain fee; the cost of any premium services like add-ons or plug-ins for the site; and the cost of maintenance. If a new business blog 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 pond 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 if the website was built before the business opened its doors. While that immediate deduction for startup costs is reduced dollar for dollar when startup costs exceed $50,000, the balance is recoverable over a 15-year period.

In the off chance the website is being used 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 and considered independently. Of course, designing and maintenance costs for e-commerce websites are deductible.

Naturally, detailed records and receipts for all marketing expenses are strongly recommended. Also, every pond professional should be aware of the IRS’s guidelines (or lack of guidelines) for developing and maintaining a website — often the key ingredient in online advertising and marketing.

Computers and Software

As a rule, software purchased for business use must be depreciated over a 36-month period. When software comes with a computer and its cost is not separately stated, it’s treated as part of the hardware and depreciated over five years.

However, under Section 179, the cost of a whole computer system, including bundled software, can be written off in the first year as long as the total cost is under Section 179’s limit or qualifies for the 100% bonus depreciation write-off.

To qualify, software must meet each of these general specifications:

    The software must be financed (only specific types of leases or loans qualify), or purchased outright.
    The software must be used by the professional in an income-producing activity.
    The software must have a determinable useful life.
    The software must be expected to last more than one year.

Off-the-shelf, unmodified, readily available computer software placed in service during the tax year qualifies for the Section 179 first-year expensing deduction. Again, it’s important to remember to keep documentation and detailed records of how things were used. Above all, every pond professional should always consult with a tax professional to ensure maximum write-offs for all advertising and marketing expenditures.

With 25 years of professional experience in the fields of taxes and finance enable Mr. Battersby to write on unique and topical subjects. Although no reputable professional should ever render specific advice at arm’s length, he does craft unbiased, interesting, informative, and accurate articles. Mr. Battersby currently writes for publications in a variety of fields. His topical columns are syndicated in many publications each week. He also writes columns for trade magazines and has authored four books.

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