Digital marketing professionals have a lot of opportunities to lower their tax obligations through qualified expense deductions. That is because, as they are performing marketing duties and growing their business, they are incurring necessary business operating expenses. A variety of digital marketing activities are 100% deductible, including: contractor expenses, social media, and software development. This is good news for digital marketing professionals, as well as for their clients., who can deduct their fees. More deductions means less tax, so these points are important.
What You Need to Know
First, let’s take a look at what the IRS says about deductions. According to the IRS, in order to qualify as a deduction the expense must be “ordinary and necessary”. Ordinary, in that is it a common and accepted practice, and necessary because it is helpful and relevant to the business.
For example, buying heavy machinery, (e.g., a tractor) is not ordinary for a digital marketing business. This would likely raise a red (or yellow flag) if reviewed by the IRS. As for the necessary test, it probably isn’t necessary for the business to turn a profit. On the flip side, it would be ordinary to see Facebook spend, client dinners, and purchases from the Apple store, as many digital marketers can be expected to spend heavily in these areas. Whether it is necessary is ultimately a business decision, so be sure to have some kind of a thought process behind what you’re doing.
When it comes to qualifying as a deductible expense it is important to keep in mind that there must be an expense. If the business owner is managing their social media or website themselves, the “cost” of their own time is not deductible. This is because while time is money for most business owners, the IRS does not that as an expense. However, if a business owner pays an employee, contractor, or agency for these services, those are 100% deductible. There needs to be money spent, in order for there to be a deduction.
Also it is important to keep personal and business expenses separate. Digital marketing activities only qualify as a deductible expense if they are expressly business related.
When Can Digital Marketing Expenses Be Non-Deductible
Expenses are non-deductible when they are personal in nature, or as labeled by the IRS, related to a “hobby.” In order for an expense to be deductible it must occur within an income producing business. As defined, that means that the business activity must generate income in 3 of 5 running years, or it risks being labeled as a hobby and the IRS can reverse all the deductions related to that business in prior year tax returns. What does this mean for marketers? For YouTubers who have no revenue, it highlights that deducting expenses related to YouTube are a risk. For an Influencer, it means that after a second consecutive year of showing losses, year three better be profitable. However, there are exceptions to this rule and there are workarounds that an accountant can help you with in the event of a bonafide loss in year 3.
What Are Common Digital Marketing Deductions?
Since many businesses rely on digital marketing to grow their businesses there are a lot of opportunities to reduce their tax liability. Digital marketing activities that qualify as deductible expenses include:
Website Costs and Fees
There are several costs a business in incur while procuring a website. This includes domain registration and hosting fees. As well as the cost associated with development, design, and maintenance. All of which are necessary business expenses.
When it comes to digital marketing, there are a lot of tools that can make things a lot easier and effective. From social media dashboards like Hootsuite, CRM programs like Constant Contact, or upgraded profiles like LinkedIn Pro. These all incur some sort of subscription cost, that can be considered a necessary business expense.
Much like traditional ad placement, online ad placement using Google Adwords or PPC ads are tax deductible. As are sponsored ads on social media sites like Facebook, Twitter, and Instagram. These are all examples of a great way to expand a businesses reach, and also improve ROI. However, the cost associated with running sponsored ads on these sites can add up over time. Fortunately, these costs are associated with growing business, therefore can qualify as a deductible expense.
Content is a driving force in any digital marketing strategy. It is important to procure good quality content that is relevant and consistent. Since good content can take some time to create, many business outsource their content creation. For example, many businesses choose to hire a professional blog writer. This helps create a good stream of quality blog content, which establishes the business as an authority in their industry. It also saves the business time and provides another deductible expense. This can also include the costs associated with professional photography and video creation.
Many digital marketing professionals rely of the skills of other industry professionals. These outsourced professional expenses to for example: web designers or social media managers are 100% tax deductible.
Education and Training
Continued education and training in digital marketing is necessary in order to remain relevant and competitive. Trends change and technology improves, so it is important to stay on top of the latest. The costs associated with attending a training course or digital marketing conference qualify as deductible expenses. This includes course fees, entry fees, and even travel expenses.
Entertaining and Meals
Part of growing business might entail physically meeting with clients. This often involves dining out. There have been some recent changes to entertaining and meal deductions. Under the Tax Cuts and Jobs Act, entertaining expenses are no longer deductible. This means the costs associated with taking a client to an event like a baseball game are no longer deductible. However, if the business owner provides a meal over the course of the game, this could still qualify. The IRS has not expressly set guidelines regarding meals or snacks at events so it is a good idea veer on the side of caution.
Dining clients still qualifies as a deductible expense. It is important to make sure the meals are not too extravagant, an owner of the business was present, and business was discussed. Keeping personal and business meal expenses separate, is really important.
A Few Things to Keep in Mind
Keeping track of digital marketing expenses makes the process of preparing and filing taxes go a lot smoother. There are a lot of programs out there that help keep track of digital marketing expenses. Some good programs that are efficient and effective are QuickBooks Online and Xerox. For newer businesses who are just getting started Wave Accounting is a good choice, and it is free. Another important thing to keep in mind when it comes to digital marketing, is 1099 issuance. If a business retains the service of a non-employee for digital marketing services, and they earn more than $600, a 1099 must be issued.
Think critically about your deductions. If Wish can argue that sponsoring the Lakers is a necessary activity to drive their business, you can apply similar logic to find expenses that are deductible.
Don’t be extraordinary with your expenses. That is, when it comes to your deductions. You want to have a similar financial profile as your industry. The IRS has a computerized system that is checking your expense category to sales ratios, don’t be an outlier either as being too high in a category or too low such that it is to your detriment.
Write down an exhaustive list of your potential write-offs. This will create clarity about what you’re doing right, and what deductions you’re missing out on. And remember, there must be an expense to claim a deduction.
Automate with accounting software. You automate so much in your business, you should in your accounting as well. A good accountant or bookkeeper should be able to create rules in your accounting software to limit unnecessary thinking and duplicate tasks.
Working with a tax professional is a great way to identify all digital marketing costs that qualify as a deductible expense. In addition, a professional can help insure that taxes are prepared accurately and on time, and also help with a comprehensive tax planning strategy. For more information on how digital marketing activities qualify as deductible expenses or other tax tips contact My Tax Hack here.