Tax Deductible Internet Marketing

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.

Tax Deductible Internet Marketing

If a business is expected to benefit in some shape or form from a promotional activity, the cost of institutional or goodwill advertising may become a tax deduction. (Photo: iStock)

Growing a shooting sports equipment business today relies on solid communication with potential customers. Without a solid marketing plan, it is very 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.

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 only be reasonable and directly related to a business in order to be tax deductible. Sponsoring a team named “Southwest Tactical” or listing the business name in a program is usually evidence the expenditure is deductible. Unfortunately, in addition to neglecting Web marketing expenses, many retailers all-too-often lump advertising, promotions, public relations and other sales support expenses under the “marketing” heading.

Viva La Difference

Separating the advertising and promotion budgets is the first step when attempting to reduce costs with tax deductions. In the eyes of the IRS, advertising generally consists of paid, scripted messages directed at potential customers or clients. Promotion is usually defined as 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 shooting sports equipment business’s products or services, 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 a tactical retailer to make its firearms, equipment and 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 for the business to sponsor, signage created for an event, staff time creating and attending events and fees paid to consultants, event workers or endorsers. 

Web Marketing, Other Expenses

A shooting sports equipment business’s website, as well as its internet marketing/advertising expenses, are also tax deductible. In fact, many 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 a long amortization write-off period.

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:

  1. Google AdWords used to attract new customers or clients instantly; a simple campaign can be setup in minutes and display search results within a couple of hours.
  2. Pay-per-click (PPC) campaigns. Like AdWords, the cost for a PPC campaign also falls within the miscellaneous advertising section of the shooting sports equipment operation’s tax return.
  3. Facebook ad campaigns.
  4. Twitter ad campaigns.
  5. Display banner ad campaigns.
  6. Costs for hiring an agency to conduct any of these campaigns.
  7. 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.
  8. Link Building.

And, 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 become a tax deduction. This is because the motive of advertising activity is to get the name of the retailer or the business in front of the public.

Goodwill advertising includes:

  1. Promotional activities that ask people to donate for charity.
  2. Obtaining business sponsorship.
  3. Distributing product samples.
  4. Organizing contests and offering rewards or prizes.

Unfortunately, labor costs involved in organizing such activities cannot be deducted. Actually, funds must be paid in order to record the expenditure as advertising expense or a deduction.

On the off chance the website is being used for publicizing the business or its activities, web support costs would be deductible promotional costs. Should the site be utilized for sales and has an e-commerce option, it is a sales expense and considered independently. Of course, designing and maintenance costs for even an e-commerce website are deductible.

Detailed records and receipts for these marketing expenses are strongly recommended. Also, every shooting sports equipment retailer 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. 

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 as 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.

Website content that is not advertising will usually be currently deductible, or written-off over a multi-year period, depending on its useful life. The cost of acquiring a domain name, on the other hand, while 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 are fully deductible. They also may qualify for “bonus depreciation purposes and a 100-percent 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.

Here’s a look at several specific website-related expenditures:

  1. Cost for the design of the website by an outside contractor hired for this purpose.
  2. Cost for the template if purchasing the design pre-made.
  3. Cost for hosting the site as well as the domain fee.
  4. Cost for any premium services (such as add-ons or plug-ins for the shooting sports equipment business’s site).
  5. Cost for maintenance.
  6. 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, the retailer 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 business first 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 recoveraable over a 15-year period.  

Computers, Computer Software

As a general rule, software purchased for use in the shooting sports equipment business 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 $1 million limit.

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 business are also a deductible business expense. Just as with other equipment and property used in the shooting sports equipment business, the entire cost of a computer may be deductible in a single year.

The Bottom Line

By providing the firearms and equipment operation’s website with a steady stream of click-throughs, email marketing is extremely important in converting potential customers and/or clients into paying ones. Best of all, many of the costs associated with web marketing, advertising and promotion are tax deductible.

It’s important to remember to keep documentation and detailed records of how things were used. Above all, every tactical retailer should always consult with a tax professional to ensure maximum write-offs for all advertising and marketing expenditures.  


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