Advertising, Marketing, and Deducting
Without marketing or advertising, no one will know the existence of a car wash operation or business. Fortunately, a marketing strategy doesn’t have to mean multi-million-dollar TV commercials. After all, there are plenty of ways to market a car wash business — and a variety of tax deductions to help make that marketing and advertising more affordable. Include entertainment in the car wash operation’s marketing strategy and tax deductions will also underwrite the fun side of promoting your business.
Advertising, as well as marketing, can mean the continued life of a business affected by the economy, competition, or other factors outside the control of the operation’s owner or manager. Because there are many aspects to both advertising and marketing, it is not surprising that the expenditures related to these activities fall within several sections of the tax regulations.
ADVERTISING EXPENSES
All too often, one of the first expenses reduced or cut by many troubled businesses is the most basic of expenditures — advertising costs. This is a doubly short-sighted strategy given the necessity of advertising in bad times and the fact that Uncle Sam, in the form of tax deductions, will often pick-up a portion of those advertising expenses.
Advertising expenses encompass everything from expenditures for business cards, flyers, circulars, prizes and contests, new service launch costs, and other promotional activities. Generally, advertising, marketing, and other selling expenses are immediately tax deductible as “ordinary and necessary” business expenses — but not always.
All reasonable advertising expenses are tax deductible so long as they bear a reasonable relationship to the car wash business. Under our tax rules, deductible expenses may be for the purpose of developing good will as well as gaining immediate sales. Even better, the cost of advertising is deductible when paid or incurred, even though the advertising program extends over several years or is expected to result in benefits extending over a period of years.
LOBBYING EXPENSES
When it comes to promoting the interests of the car wash business or detailing operation, lobbying expenses directed towards influencing federal or state legislation are generally not deductible. However, this prohibition does not generally apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.
The cost of public service or other impartial advertising, such as advertising designed to encourage the public to register to vote, are also deductible. But, no deduction may be claimed for the expense of advertising in political programs, or for admission to political fund-raising or inaugural functions, and similar events. This includes admission to a dinner or program if any part of the proceeds of the event directly or indirectly inures to or for the use of a political party or a political candidate.
WEBSITE DEVELOPMENT COSTS
Although the IRS has not issued formal guidance on the treatment of website development costs, informal, internal IRS guidance suggests that one appropriate approach is to treat these costs like an item of software and depreciate them over three years. It is clear 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) and currently deductible advertising expense — without challenge from the IRS.
RESEARCH AS A TAX DEDUCTION
Testing the waters before committing to an advertising campaign is always advisable. Unfortunately, only costs of research in the laboratory or for experimental purposes (whether carried on by the car wash operation or on behalf of the business by a third party) are tax-deductible. Market research and normal product testing costs are not research expenditures under the tax rules.
MAILING LISTS
Mailing lists are an important part of the advertising campaigns of many car wash and detailing businesses. On one hand, the mailing list is an intangible asset, deductible only if a reasonable life can be determined for it. A tax deduction for the cost of compiling that list is a little trickier.
Consider the situation of a car wash business that mails to people — and businesses — on its mailing list as well as to others on lists that it rents. Prospects for the permanent list are drawn from advertising, and added to the company’s mailing list when they become customers. The business keeps records of its costs in adding to the mailing lists and expenses those costs in the year the mailing to which the expenses relate is distributed.
The IRS has ruled that the company may deduct as an ordinary business expense its costs related to adding names to the mailing list. Keep in mind, however, that this situation involved a mailing that was undertaken semi-annually, while in other cases the IRS ruled on catalogs with a useful life of several years.
MARKETING AS ADVERTISING
Paid advertising isn’t the only way to spread the word about your car wash business. Public relations are marketing strategies that span everything from press releases and networking at a Chamber of Commerce meeting to sponsoring a contest to holding special events.
However, no deduction is allowed for dues paid to any club organized for business, pleasure, recreation, or other social purposes — even if membership is used to promote the car wash business. Fortunately, this disallowance does not extend to trade or professional organizations, or public service organizations (e.g., Kiwanis and Rotary clubs).
GIVING IS OFTEN ADVERTISING
Yet another form of advertising is the giving of gifts by a car wash operation or business. Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Items clearly of an advertising nature that cost $4 or less and signs, display racks, or other promotional materials given for use on business premises are not gifts.
A car wash or detailing business that provides customers or prospective customers with an item that might be considered either a gift or entertainment will generally benefit from the entertainment write-off, ignoring the $25 limit. Of course, if the operation gives a customer packaged food or beverages that are to be used later, they are considered gifts.
A gift to the wife of a business customer is not treated separately from a gift to the customer himself. Remember, the $25 limitation applies to gifts made “directly or indirectly” to an individual. A gift made to the wife of a business customer of the taxpayer is generally considered as made indirectly to the customer. However, if the customer’s wife has an independent business connection with the taxpayer, a gift to her would not be regarded as in indirect gift to her husband unless it was intended for his eventual use or benefit.
SEEK ADVICE
The tax rules clearly label the majority of advertising and marketing costs as immediately tax deductible albeit with some restrictions or limits. Obviously, to get the maximum benefits from advertising and marketing expenditures or to reap the cost-cutting deductions often requires the help of qualified professionals.
Whether help includes advertising or marketing professionals or is limited to a qualified tax professional, the decision of whether to advertise or market the car wash operation’s services should be a “no brainer,” good times or bad.
Mark E. Battersby is an Ardmore, PA-based freelance writer, specializing in finance and tax issues.
