Tax Deductible Internet Marketing

By Mark E. Battersby / Published July 2017

 

The operators of most pressure washing businesses use tax deductions and write offs to reduce the impact of taxes on their bottom line. Often overlooked, however, are the deductions for marketing expenses. Few seem aware that advertising, promotional, and marketing expenses are tax deductible.

According to the IRS, advertising and marketing expenses must be reasonable and directly related to the business in order to be tax deductible. That means the cost of advertising a pressure cleaning operation’s services, products, or goods—business cards, Yellow Page ads, and so on—are deductible as current expenses. 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 pressure washing operation. While naming the team the “Southwest Water Jets” or listing the business name in the program is usually evidence the expenditure is deductible, the same is not always true when it comes to Internet promotion.

Vive La Difference

Small pressure cleaning businesses often lump advertising, promotions, public relations, and other sales support expenses under the marketing heading. Others record them separately, especially if the 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/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 business’s 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 pressure cleaning business to make its services better known to potential customers and clients. 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 business to be a 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 pressure cleaning contractor, distributor, or supplier’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. Unfortunatlely, there are a few services where the cost can be recovered only through the long amortization write-off period.

Marketing and Other Expenses

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 set up in minutes and display search results within a couple of hours.
• Pay-per-click (PPC) campaigns. Like the other Internet marketing and advertising expenses, the cost for a PPC campaign also falls within the miscellaneous advertising section of the pressure washing 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 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 contractor or pressure washing-related business in front of the public. Goodwill advertising includes these actions:

• Promotional activities that ask people to donate for charity
• Becoming a business sponsor
• Distributing product samples, 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 in order to record it as advertising expense or a deduction.

• On the off chance that 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 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. Also, everyone should be aware of the IRS’s guidelines (or lack of guidelines) on developing and maintaining a website, which is often the key ingredient in online advertising and marketing.

Website Development Costs

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 considering them as currently deductible advertising expenses.

In reality, the classification of Web design and development services depends 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 that does not require extensive custom programming for informational purposes, it can be capitalized and the expenditures amortized over its “useful life” (usually three years) once put into service. Or, depending on the pressure washing 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 purpose
• Cost for the template if the design is purchased pre-made
• 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 business’s site)
• 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 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 pressure cleaning business opens its doors. 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.

Computers and Computer Software

As a general rule, software purchased for the 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 so long as the total cost is within Section 179’s $500,000 limit.

Software, in order to qualify, must meet all 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 in the business for 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 computer software placed in service during the tax year qualifies for the Section 179 first-year expensing deduction. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified.

Computers purchased to use for advertising or promoting the pressure cleaning operation are also a deductible business expense. Office equipment such as a computer is usually deducted over five years. However, just like other equipment used in the business, the entire cost of a computer may be deductible in a single year.

It’s important to remember that every contractor, equipment dealer, and distributor should always consult with a tax professional about what is and is not deductible by the pressure cleaning business. Keep documentation and detailed records of how things were used.