If the IRS had it way, every dollar you spend on marketing would be classified as an investment and subject to amortized deduction versus a lump-sum deduction. The argument does have merit and until the tax laws change, you have a governmental stimulus package of your own.
The difference between an investment and an expense is simple:
1. Investment: your investment grows in value as the results are earned. For example: you purchase equipment for $50,000. You are allowed to deduct the investment of the life of the equipment. Let say 10 years. You get to deduct $5,000 per year from your pre-tax profit, as you earn income from putting the equipment into service. You purchase stock… no deduction for your investment. You seek an increase in the value of the stock purchase and then you pay on your capital gains.
An “investment” is not deductible at the time yu make the investment, but may be depending on the type of investment over time.
2. Expense. The cost to do business is deductible from your pre-tax profit. Income – Expense = Pre-Tax Profit. If you pay rent for your office, then you are allowed to deduct 100% of your rent payment in the taxable year that you made the payment. Payroll is also an expense under the tax code, as any normal and customary expense.
As of this article, “marketing” is deductible as an increase. This is a tax advantage in your favor. If you incur costs for a marketing campaign, you are allow to deduct immediately in the current taxable year…. it reduces your bottom line taxable liability.
But, here’s why the IRS would like to change the marketing expenditure from an expense to a deduction: Marketing as a long-term benefit to the practice. Put a sign on the building and it will remain there for years, yet you may have deducted the cost in the taxable year the cost was incurred. In other words, you wrote it off as an expense and for the next few years it will be at work attracting clients to your business.
The IRS would prefer to amortize the “investment” in the sign over a period of time and only allow you to deduct the annual depreciation of the sign.
Same applies to advertisements. One an ad in the local paper and you will generally deduct the cost in the current taxable year. However, the ad could be continuing to work for you as some people may have torn out the ad and kept it for later reference.
The tax-advantage nature of expensing marketing is powerful. For example, if you are in the federal tax rate of 38%, then your total marketing cost is reduced by 38%…. giving you an instant ROI on your “investment.”
Here is how that works:
If your marketing was $10,000 and you deducted in your current taxable year, then your taxable liability would be reduced by $3,800. And, if you have state or local taxes, your taxable savings would be more. Invest $10,000 into marketing and you get a $3,800 tax savings… pretty cool.
On the other hand, if you didn’t invest in your marketing, your taxable income would be $10,000 higher, and you would need to send Uncle Sam a check for an additional $3,800! That’s a 7,600 SWING!
Marketing is one of the best investment you can make if you desire to grow your business.
Marketing should always be considered an “investment” but accounted as an expense. The best of both worlds. Now, when you invest in marketing, you not only get the tax advantage, but you should increase your revenue with the results of your marketing efforts.
For example: hire a marketing person and the salary is deductible…. 100%. The effort and performance of the marketing person should generate an increase in revenues that exceed the cost of the person. If not, you have the wrong person on your team. Remember, any marketing investment should deliver a return on your investment.
How much? As long as it greater than what you can earn with other investments…. it is a good investment!
Peak your practice when you “invest” in marketing.
