Deductible Marketing Costs

Income tax deductions can help you cut the cost of marketing your business, reducing the out-of-pocket expenditures you must make in order for your marketing plan to succeed. But not all of the money you spend to market your gift operation will be eligible for an immediate tax write-off under Uncle Sam's tax laws.

So long as they are reasonable in amount and bear a significant relationship to your business, advertising expenses are a legitimate business write-off, deductible in the year the expense was paid or incurred. And advertising expenses include more than direct marketing to drive sales. Any enterprise that creates good will in the community or fosters customer relations can reasonably be justified as tax deductible.

In order to attract and keep customers, you need to offer them an incentive. Using coupons as an introductory offer, free service, or a discount on your normal prices can be just the right thing to encourage consumers to choose gift store. Coupons have many functions, and can help you reach many goals. They might be used to introduce a new product or service, increase repeat business, or simply give you a leg up on the competition.

Coupons can also be offered as a "thank you" to regular customers or a "stop by and try us" message to new shoppers. They can be used to highlight a single item for a one-shot promotion, or in combination with other offers. But the value of the coupon must be substantial enough to make it worthwhile. It's always better to err on the side of giving too big a discount than to appear cheap.

You cannot, of course, deduct a revised selling price for your products or services. Like lost sales, there's no deduction for discounts. However, the cost of printing and promoting your coupon program is a legitimate business expense — and a timely tax deduction.

Here's another idea: Do you offer gift certificates? Many retailers don't, not realizing how this can boost sales. But if properly used, gift certificates are like money in the bank, since customers usually don't redeem them until months later.

The possible tax advantage from the sale of gift certificates depends on the method of accounting used in your operation. A gift and decorative accessories business using the cash method of accounting — where all money received is income when it is received and all expenses are deductible when paid — usually records the sale of gift certificates as income. However, a business using the accrual method of accounting doesn't receive taxable income until all of the events that make the money received —"fixed" as income — have transpired. Therefore, the gift certificates are deductible until redeemed (or expired).

Special events are one of the fastest growing areas of marketing today, with large corporations shelling out millions of dollars each year to host them. While small gift and stationery retailers can't do that, they can use promotional events to reach their market in a way that conventional methods can't. From grand openings to holiday parties and celebrations, marketing your gift operation through special events can be very rewarding — and the cost can be partially offset by immediate tax deductions.

Unfortunately, no matter how spectacular an event is, it can't stand alone. You can advertise or conduct a public relations campaign without a special event, but you need both advertising and public relations to make any event work.

Luckily, gift retailers don't always have to go it alone. You can partner with a complementary business to host an event. Or you can take part as a sponsor of an established charity or public cause. Sporting events, fairs, and festivals are popular and have good track records for helping businesses achieve their marketing goals. Choose an event that is suited to your customers' tastes. Not every event is right for every business. And make sure that the cause is something that you can get behind personally. Sponsorship or co-sponsorship really pays off when you give more than money.

A word of warning: Merely donating money in return for recognition may result in having the expense re-characterized by the IRS as a charitable contribution. For the record, the tax deduction of an incorporated business for a contribution to a charity or charitable organization is limited to only 10 percent of its taxable income for the year in which the deduction was made.

Deductions for business gifts, whether made directly or indirectly, are limited by our tax rules to $25 per recipient per year. Advertising items that cost $4 or less, as well as signs, displays, racks, or promotional materials given for use on business premises are not considered gifts.

But giving prizes or awards as part of your marketing plan might not always be the most thoughtful gift. Under current tax rules, most prizes and awards (other than certain types of fellowship grants or scholarships, as well as limited employee achievement awards) must be included in the recipient's gross income statement. In other words, the business is entitled to a tax deduction, the recipient pays taxes on any prize or award.

Uncle Sam gifts every retailer with tax deductions for marketing plans. Although deductions should not be the engine that drives your plan, their value shouldn't be overlooked when that plan is created. After all, Uncle Sam expects his share of the increased profits your plan will generate. So why shouldn't the government pick up a portion of the expense in the form of deductions?