Advertising Cost Tax Deduction

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Advertising Cost Tax Deduction

Mar 20, 2015 Posted by Sanjiv No Comments

Tax Deductions for Advertising and Promotion Expenses

Numerous expenses need to be incurred when running a business. While some of these things make organizations qualified for exceptional expense deductions and credits, there are also others that just cut into the benefits that the business makes accordingly diminishing its tax liability by bringing down its taxable income. Expenses incurred on advertising and promotions can come under either category.

Nature of Deductions

For people who record their tax savings, every deduction is a different transaction on the tax return, and this diminishes income value on which tax is to be calculated by the estimation of the derivation. The methodology is to some degree diverse for written off amounts on business taxes. Organizations represent their costs, which they then subtract from aggregate income to give out taxable income. Promotion and advertising expenses are deductible because they are a piece of the expense of working together, pretty much like payroll, crude materials, rented business space and property taxes.

Deductable Expense Regulations

Organizations can just deduct the expense of publicizing and marketing when these costs are normal and vital. This implies that publicizing and promotion costs are also reasonable when they have a reasonable relationship to the business and its capacity to achieve clients, deal with its image or give data about its items. Endeavors like nameless sponsorships or gifts are not special because they do not speak about the business to the customer, making them ineligible for deductions.

Qualifying Deductions

Other than anonymous and unnamed endeavors, a business can deduct the majority of its promoting and advertising costs from its taxable income. This incorporates outdoor promotions; expenses for TV, radio and internet showcasing; expenses connected with utilizing publicizing offices or advertising firms; and the expenses of copyrighting promotions, logos and promoting mottos. Other advertising/marketing costs that is deductible incorporates printing business cards with organization logos, printing fliers, holding exceptional occasions for clients, supporting games groups and making gifts that result in mass recognition.

Considerations

The aftereffects of deduction on taxes for promotion and special expenses are that organizations spare cash on taxes when they spend on publicizing. These reserve funds assume a little part in deciding the amount that a business ought to spend on showcasing. Nonetheless, viable showcasing additionally builds deals and supports income, leaving a business with a significantly higher expense obligation later on. Spending less on promoting diminishes the deductibles on taxes, however gives a business more cash (much in the wake of paying its taxes) to use for extending its workforce, creating items and paying down liabilities or debts.

 What can be deducted as Advertising expenses?

Goodwill Advertising

If your business is expected to benefit from a promotional activity, cost of institutional or goodwill advertising may be deducted. This is because the motive of advertising activity is to present your name in front of the public. Goodwill advertising includes:

  • Promotional activities that ask people to donate for charity
  • Getting a business sponsor
  • Distributing product samples, and
  • Organizing contests and offering rewards or prizes

Nonetheless, labor costs involved in organizing such activities cannot be deducted. Actually, you need to pay a certain amount of money to record it as advertising expense.

Giveaway items

Merchandize distributed as part of promotional activities (pens, diary, key chains, caps, t-shirt etc) can also be deducted. However, there is a restricted amount of money for each individual that can be deducted under this category.

 What cannot be included in advertising tax deductions?

There are several expenses incurred in the process of advertising and promotions. While most of them can be deducted, some need to be excluded:

  • You cannot deduct costs that are basically individual, even if they may have some advancement attached to them. Suppose, if your son is getting married and you welcome some of your best clients to the wedding; you can’t deduct the wedding expenses.
  • You cannot deduct expenses of individual leisure activities experienced or performed with business partners. In case you and a client like to go to NASCAR occasions, you can’t deduct these expenses under ‘advertising’.
  • You can deduct the expense of putting a commercial for your business on your auto (business or individual), yet you can’t deduct the expense of driving your auto around the town as a publicizing cost.

 

Points to Make Note of

  •  On the off chance that you utilize your site for publicizing, you may deduct web support costs as a promoting cost. In the event that you utilize your site for sale and have an e-commerce option, then this is an expense for sales and is considered independent. You are eligible for deducting designing and maintenance costs of the website. This would include the monthly charges that you need to pay to the developer and designer.
  • Costs of temporary signs are viewed under costs of advertising. Costs of long term signs (that last for more than a year) are not promoting, yet signs may be depreciated in accounts as long haul resources. Generally, the paper or cardboard signs are seen as temporary signs and come under operating expenses. Signs created on permanent metal or plastic sign have a longer life that cannot be deducted under business operating expense.
  • Costs for help-needed promotions are a deductible expense for businesses, yet they are not viewed as ‘advertising’.

Conclusion

To conclude, the broad categories of advertising expenses can be deducted from tax returns include expenses incurred on activities like:

  • Business cards
  • Leaflets/brochures
  • Advertisements printed in yellow pages at local level
  • Print advertisements (magazines & newspapers)
  • Radio and television advertisement
  • Advertisements on the web
  • Display signs and visuals
  • Billboards
  • Charges and expenses incurred as costs paid to agencies performing public relations and advertising activities, and
  • Designing costs for packaging

When you total the amount that you have spent on the above mentioned advertising fee services, you will be able to reach an amount that can be deducted from your tax return.

Dining, Drinking, Merrymaking—Know When Your Entertainment Expenses are Deductible

May 1, 2017 Posted by Sanjiv No Comments

Group Of Friends Enjoying Night Out At Rooftop Bar

Business isn’t always about the dull stuff. In fact entertainment is a part and parcel of most businesses, and the good news is that most entertainment expenses are actually deductible.

In every business, pleasing customers is a must. Especially if you are in sales or marketing, entertaining customers is an essential part of your job or business. Entertainment expenses are usually paired with meal expenses, and both of them are commonly considered legitimate business expenses.

While it is good to know that there’s a clear rule on entertainment deductions, the problem with many business owners is that they think that just about any theater pass, event or meal with a client or a potential client may already qualify as a valid deduction when in fact, it is not always the case.

But how will you know if your entertainment expenses count as business?

 When Do Entertainment Expenses Count as Pleasure or Business?

 Before we get down to the actual rules, let’s try to understand them the easy way. The rules involve figures and stipulations which may sound a bit off for you, but essentially, their bottom line is simply this: When it comes to entertainment expenses, it is usually not considered a deductible expense if you are having too much pleasure. Take a look these easy-to-understand rules:

  1. Make business your priority. Always get down to business. Remember that any form of entertainment that you do must in one way or another be related to the conduct of your business, or must at least be associated with a discussion pertaining to your business. Simply put, if we have a dinner together but don’t discuss business stuff such as sales projections or tax strategies, and instead talk about our children and family life, then you are not supposed to expect the amount we spend for our meal as deductible entertainment expense.

Same thing goes for throwing parties. You cannot simply rationalize that you throw a party to build camaraderie with your clients. For the party costs to be deductible, you should be able to conduct business at any time in the course of the party. It can either be before, after or during the party and may include product demonstration or a brief talk.

Aside from soirees, here are other forms of entertainment expenses that you should consider:

  • If you are a business owner, meals for your employees during a busy time are entirely deductible. It is better if you track such costs under a separate category such as “crew meals,” so your tax professional will not apply the 50% rule during tax time.
  • Do not deduct repeated meals with your business partner when you take turns in paying.
  • You can write off your hotel expenses when attending a trade show, but you cannot do it all year round and mark it as an entertainment expense again and again. So, do not try to write off the amount you spend for entertainment facilities, including property taxes, mortgage interest, swimming pool rentals, tennis courts or a vacation in a resort.
  • You also cannot write off dues that you pay to athletic clubs or hotel clubs, including those that offer free meals when you take part in business discussions.
  1. Make sure that the environment is conductive for the conduct of business. Before writing off your entertainment expenses after dining somewhere, you have to make sure that the environment is business-conducive enough to qualify for a deduction. There was an instance before when the IRS had to reject the deduction of passes to a baseball game because the noise at the ballpark obviously did not allow for a good business discussion.
  2.  Mind your guest list. In writing off your entertainment expenses, you must also take your guest list into consideration. If your event is organized for employees and their spouses or is open to the general public, you may write off its total cost. On the other hand, if the event is for your clients or potential clients, or those business associates or contractors who conduct business with you, then you are allowed to write off only 50% of the total cost. In case your guest list consists of employees and their spouses and some clients, then part of your entertainment cost may be allocated as a 100% write-off, while the remainder can be a 50% write-off based on the number of guests who attended in every category.
  3.  Do not be too lavish or extravagant. Going overboard is a big no-no for the Internal Revenue Service (IRS). If you want to increases the chances of your entertainment expenses to be written off, always choose to keep your entertainment or meal simple by making sure that its cost is aligned with the budget of your company. That means that if your company is not that big to pay for lavish parties, then do not bring your clients to first-class accommodations or parties and expect the cost to be written off.
  4.  Document everything. If you want to win your fight against the IRS, then you have to build up your defenses. There are cases when people from the IRS would come knocking on doors to ask you to back up your claims for deductions. In the event that they come knocking onto your door, you have to make sure that you are prepared to defend your deductions. You do that by making sure that you keep every little piece of evidence that you can keep to support your deduction claims, such as the invitation that makes clear your business purpose, photos of your guests during a product presentation, or a video clip. You may also want your guests to sign a guest book so you can prove to the IRS the right allocation of your entertainment expenses between company employees, business associates, clients, etc. Most importantly, keep all your receipts. Based on the IRS rule, however, expenses that cost less than $75 do not necessarily require receipts. In such cases, a simple journal entry in your appointment book that includes the names of attendees, amount spent and location is enough.

So, when are entertainment expenses deductible?

Basically, entertainment expenses that can be written off are those used to entertain clients or potential clients, customers, business partners, employees, and if these expenses are proven to be–

  • “ordinary and necessary” and
  • either directly related or associated.

As per the IRS rules on entertainment expenses, it is a must that the expenses are ordinary and necessary before they can be written off. That means that they should be common, accepted and appropriate for the business. Entertainment expenses can be considered necessary even without being required. Also, they should be able to meet at least one of these tests:

  • Direct Test. This test involves proving or showing that there was a business purpose to the entertainment and that its main objective was to gain profit. You also must be able to show that it was held in a business setting and that it involved a discussion of the business. If for instance, you gathered your employees somewhere to present employee awards, the amount spent for that event can be considered as deductible expense. However, if you only went fishing with them and there was no clear connection between the activity and your business, that cannot be considered as deductible expense.
  • Associated Test. In this test, you must be able to show that the entertainment was tied to your business and happened directly before or after a business-related discussion. An example of this would be having a business discussion with your clients in the office and then inviting them to a game after your meeting. That will pass the associated test since it happened directly after the business discussion. However, if you took the clients days later, then that will not pass this test.

The following are examples of expenses that are not subject to the 50% limit, which means that they are fully deductible:

  • Those spent for events that promote goodwill to the community.
  • Those spent for events whose proceeds go straight to a charitable organization, provided that the charitable organization is IRS certified.
  • Those spent for meal or entertainment that is essential to the business.
  • Those spent for meals of employees at the convenience of the employer or for any occasional event.

Entertainment Expenses vs Advertising & Promotion Expenses

 In case the nature of your business involves entertaining the general public to advertise or promote, your entertainment cost can be entirely written off as a business expense. If you own a children’s clothing store and you hire a clown to entertain at a community event, that is considered more of a promotion than entertainment.

So how do you write off your entertainment expenses?

As mentioned, you should be able to pass either the direct or associated test and prove your business purpose before you can deduct your business entertainment expenses. Aside from the purpose of your business, you should also be able to prove the following:

  • The amount of each expense
  • The date/time and location of the entertainment, and
  • Your relationship with the persons you entertained (are they your employees, business associates, clients, etc.?)

What if you fail to present a proof?

In that case, the IRS will not be able to consider it as a deductible expense and take it off your tax return. This is where record keeping comes in.

Recordkeeping

 When it comes to business expenses, you should be meticulous enough to keep all the necessary records to prove that your entertainment expenses can pass either the direct test or the associated test. The IRS usually finds contemporaneous records best. These records should be able to specify the business purpose of the entertainment event. A simple note stating your purpose will suffice. For instance, you can note on the bill from your caterer that the amount paid was used for the annual holiday party of your company.

 How much of your entertainment expenses are deductible?

In most cases, only 50% of business-related entertainment expenses are deductible. Depending on whether the entertainment expenses are reimbursed, this 50% limit is applicable to employees or their employers, as well as to self-employed individuals or their clients. The limit particularly applies to the expenses you have while–

  • Traveling away from home for business.
  • Entertaining clients at a place conducive for business.
  • Attending a business conference or meeting.

If you attend an event not related to your business while traveling for business, the amount you spend for that entertainment will not be deductible. The same rule applies if you attend an entertainment event while looking for a possible business location or while investigating a business. The entertainment expense in that case is not deductible since you haven’t started the business yet.

Remember also that any lavish or extravagant entertainment in any form is not deductible. Say you want to entertain your clients by buying a yacht, the IRS will not allow you to write off the amount you spent for buying that yacht simply because that is too extravagant.

 What if you are self-employed and is therefore neither an employee nor an employer?

 Based on the IRS law, entertainment expenses of self-employed individuals are not subject to the 50% limit if all of the conditions below are met:

  • The entertainment expenses are tied to your job as an independent contractor
  • You are provided an allowance or are reimbursed for the entertainment expenses related to the work that you perform, and
  • You are able to show enough proof or records of such expenses for your client or customer.

In every business, treating clients or employees to a meal or entertainment is a great way to build your business, and since it is a legitimate part of the business, it is subject to tax deductions. Knowing which of your entertainment expenses are fully deductible, not deductible or subject to the 50% limit is a must if you don’t wish to deal with troubles with the IRS.

Four ways to turn home deductions into tax savings

Jul 21, 2013 Posted by Sanjiv No Comments

Owners of homes must know the tax rules fully so that they can use the deductions to the fullest extent possible. A lot of tax savings can be made from the deductions available and it can be of immense help when the actual time arrives to pay the taxes.

Mortgage points

The interest rates in the year 2011 were at all time low, and this encouraged many people buy homes in the US. When mortgage was established, the lender charges the buyer with some mortgage points. Every point that the buyer paid is equivalent of one percentage of the mortgage amount. These points can be claimed for tax deductions in the year in which the tax is actually paid.

These reduced interest rates motivated house owners to refinance the mortgages that already existed. The points paid on a refinance scheme can also be claimed as tax deductions by the buyer. The point to be noted in the refinance scheme is that these points can be deducted all together when a purchase is made.

Real Estate Taxes

A few deductions can be claimed only once, whereas few other deductions are recurring. These are ongoing and can be claimed all through the life of a property. Real estate taxes are good examples of continuous deductions. These taxes are qualified for deductions from the main income tax that the owners pay. The best feature is that, these taxes can be deducted for all the years that the home is owned.

Seller costs

2011 also saw a huge increase in selling of residential properties. The owners opted to sell their present residences to either upgrade or downgrade their primary source of residence. This year was the perfect time to do renovations as interest rates were at a record low and the purchase prices were at an all time bottom. A seller had to incur lots of expenses like the agent’s commission on real estate properties, advertising and marketing fees and fees when a new mortgage is established by the buyer. However, the good news to the seller was that, all of these expenses qualified for the full tax deductions, thereby reducing their burden to a great extent.

Mortgage interest

Mortgage interest is an example of a continuous or ongoing deduction that a home owner can enjoy. In the initial years of owning the home, the mortgage interest is high; hence one can enjoy higher tax deductions. The full interest that is paid for the entire tenure of the property gets qualified for the full tax deductions

These are few examples of making home expenses as effective tax saving tools. One must be fully aware of residential tax properties, especially when one owns residential properties. This is the best way to maximize the benefits of the IRS schemes. This is a way to offset the huge amount invested for buying property. The IRS always suggests using a professional tax advisor to help in matters of the tax savings so that one can get the optimum benefits.

Tax Deductions for Independent Contractor or 1099

May 13, 2012 Posted by Sanjiv No Comments

Starting out a consulting business can be very lucrative. However, it can also result in heavy tax bill you do not organize your income and expense properly.   So, how do you organize your income and expenses?

You can start by opening a different bank account.  Do not mix your business bank account with your personal bank account. All business related income should come to this account and all expenses should be paid from this account.   Your client will send you form 1099-misc at the end of the year.  IRS will also reactive a copy of this 1099.  That being said your total business income should be greater or equal to the amount listed in 1099.  You may get an automated customer generated audit if you report total income less than the amount listed on your 1099.  Keeping a separate bank account will help in calculating total business income and you act as proof in case of audit.

Now you need to deal with your business expenses.   Easiest way to do this is to categories your business expenses.   We recommend you use same or similar categories listed on schedule C.  This will help during tax time.  Now, every time you pay a bill, you simply need to enter that transaction in the correct category.  You can use a simple spread sheet, financial software or you can use shoe-box.  Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into an appropriate categories based upon its tax implication.

What are some of the most popular business expense categories ?

  • Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.
  • Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.
  • Insurance Cost –  Business Insurance Expenses including life, property & casualty, or business insurance
  • Interest Cost – Interest cost of your business loans. You can include fees and other related cost.
  • Office expense – Any supply or equipment you purchase for your business operation.
  • Rent or lease other business property – Cost of operating your business office.
  • Repairs and maintenance – Include all cost related to your business only.
  • Travel – the cost of traveling to a business related event like convention, meeting, or business trip
  • Meals and entertainment – You can include meals and entertainment expenses related to your business.
  • Utilities –electricity, gas, telephone, internet
  • Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

 

Health Insurance expenses:  Premiums paid for your health insurance are tax deductible.   You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from you business.   You can deduct the health insurance cost event if you run into losses but it has to be reported different.  Consult with your CPA to ensure you are reporting the deduction properly.

Still have a question about your business expense?  Leave us a comment or call our office at 510-825-7563