A Fourth-Quarter Reminder: Marketing Can Build Business and Reduce Taxable Income

As we prepare to enter the fourth quarter, many business owners are taking a closer look at what remains in this year’s budget, and what the company will need to generate growth next year.

Well-planned marketing expenses can do two useful things at once: help generate new business while also reducing taxable income.

We first wrote about this subject in 2018 under the admittedly enthusiastic headline, “Marketing: 100% Tax Deductible.” The basic idea still holds. The IRS continues to identify advertising as a deductible business expense. But, as with almost everything involving the tax code, “100% deductible” comes with an asterisk.

The basic rule

According to the IRS, a deductible business expense generally must be both “ordinary and necessary.” In plain English, it should be common and accepted in your type of business and helpful and appropriate to its operation. It doesn’t have to be indispensable.

For an established business, many everyday marketing expenses generally meet that standard. These may include:

• Marketing strategy, consulting and agency fees

• Advertising, including paid search, social media, print, broadcast and outdoor media

• Copywriting, graphic design, photography, video and other content development

• Public relations, email marketing, social media and marketing automation

• Direct mail, printing, postage and trade-show materials

• Market research

• Website hosting and routine maintenance

The business should be able to show that the expense served a legitimate business purpose and retain invoices, receipts and other supporting records. The IRS may not be impressed by a folder labeled “marketing stuff.”

AI has expanded the marketing investment list

When we wrote about deductible marketing expenses in 2018, artificial intelligence wasn’t a line item in most marketing budgets. Today, companies are investing in AI tools and in the expertise required to use them effectively.

AI does not get its own special category in the tax code. Its treatment generally depends on what the company is buying:

• Software subscriptions. Businesses are using AI-enabled platforms for research, content development, design, automation, advertising and analytics.

• Professional guidance. Companies may need outside help selecting the right tools, identifying worthwhile applications and creating sensible workflows.

• Employee education and training. Business-paid training that helps employees use AI in their existing marketing or sales responsibilities may qualify as an ordinary business expense, depending on the purpose and structure of the program.

• Implementation and integration. This might include organizing company information, cleaning up customer data, connecting AI tools with existing systems and establishing appropriate review and approval processes.

That last category deserves particular attention. A routine software subscription or professional service may be treated as a current business expense. A custom-built AI system, major software implementation or other investment that creates a long-term business asset may receive different tax treatment.

Where the asterisk applies

Marketing conducted before a new business begins operating may be considered a startup cost rather than a routine advertising expense. The IRS allows businesses to elect a limited deduction for qualifying startup costs, while remaining expenses may need to be amortized over time.

Major website development can also require closer examination. Website hosting and routine updates are generally easier to classify as current operating expenses. A new website, extensive redevelopment, custom software or an expensive domain name may create a longer-term asset that must be handled differently.

Timing matters too. Paying for a marketing program during the fourth quarter does not necessarily guarantee a deduction for the current year. Treatment can depend on the company’s accounting method, when the services are delivered and whether the expenditure produces a benefit extending into future years.

This is the point where your tax professional—not your marketing agency—should have the final word.

Put fourth-quarter spending to work

The fourth quarter can be an excellent time to strengthen the company’s marketing foundation, launch a targeted campaign or prepare for a strong start to the new year.

That might mean improving an underperforming website, developing a lead-generation campaign, building a useful content library, cleaning up a CRM or helping the marketing team use AI more effectively. The right investment depends on where the business is going and what is currently getting in the way.

The question isn’t, “How quickly can we spend the remaining budget?” It’s, “What worthwhile marketing work does the business already need—and can we move it forward now?”

Tax deductibility is a welcome benefit, but the business case should come first. Talk with your tax professional about how the expense should be treated. Then make sure the marketing investment has a clear job to do.

If you’re deciding which fourth-quarter marketing investments can contribute to next year’s growth, BroadBased can help you identify the priorities worth funding.

This article provides general educational information and does not constitute tax, accounting or legal advice. Tax treatment depends on the facts and circumstances of each business. Consult a qualified tax professional before making tax-related decisions.