Advertising, Marketing and Deduction

by Mark E. Battersby

November 01, 2011Without marketing or advertising, how would anyone know about the existence of a professional photographer, studio or business, let alone the services each provides? Fortunately, marketing strategies don't have to mean multimillion-dollar TV commercials. After all, there are plenty of ways for a professional photographer to market him- or herself and their studio or business. There are also a variety of tax deductions to help make that marketing and advertising more affordable.

A marketing budget, especially one that incorporates traditional advertising, can mean the continued life of a business affected by the economy, competition or other factors outside the control of the professional photographer. 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 a troubled business is the most basic of expenditures— advertising costs. This is a doubly shortsighted 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, brochures, catalogs, prizes, 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."

Under our federal tax rules, all reasonable advertising expenses are tax deductible so long as they bear a reasonable relationship to the photographer's business. Deductible expenses may be for the purpose of developing goodwill as well as generating immediate income. Even better, the cost of advertising is deductible when paid or incurred, even though the advertising program may extend over several years or can be expected to result in benefits extending over a period of years.

Lobbying Expenses: When it comes to promoting the interests of the photography studio or business, 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 fundraising 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 benefits a political party or a political candidate.

Web Site Development Costs: Although the IRS has not issued formal guidance on the treatment of Web site 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 equally 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 and a Mailing List 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 professional photographer or on behalf of the taxpayer by a third party) are tax-deductible. Market research and normal product testing costs are not research expenditures under the tax rules.

Mailing lists are an important part of the advertising campaigns of many photographers. 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 commercial photographer where prospects for the studio's permanent list are drawn from advertising. The photographer keeps records of the cost of adding prospects to the mailing lists, and writes-off those costs as expenses in the year the mailing to which the expenses relate is distributed.

The Internal Revenue Service has ruled that a business such as the photographer may deduct as an ordinary business expense the cost of adding names to its mailing list. Keep in mind, however, that this situation involved a catalog that was published semi-annually.

Marketing as Advertising
Paid advertising isn't the only way to spread the word about your photography business. Public relations are marketing strategies that span everything from press releases and networking at a Chamber of Commerce meeting to sponsoring a contest or 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 photographer or his or her business. Fortunately, this disallowance does not extend to trade or professional organizations, or public service organizations (e.g., Kiwanis and Rotary clubs).

Entertainment: A professional photographer is allowed a deduction for business entertainment, so long as there is a direct relationship between the expense and the development or expansion of the business. Remember, however, special limits are imposed on the deduction of business-related entertainment, meals and gift expenses.

There are two notable restrictions placed on the deduction of meal expenses: (1) meal expenses generally are not deductible if neither the photographer nor the photographer's employee is present at the meal, and (2) a deduction will not be allowed for food and beverage to the extent that such expense is lavish or extravagant.

50% Limitation Rule: The amount allowable as a deduction for meal and entertainment expenses is generally limited to 50% of such expenses. The 50% rule is applied only after determining the amount of the otherwise allowable deductions. For instance, the portion of a meal that is lavish or extravagant must first be subtracted from the meal cost before the 50% reduction is applied.

Giving is also Advertising
Another form of advertising is the giving of gifts by a photography professional 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 photographer or studio that provides clients 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.

The tax rules clearly label the majority of advertising and marketing costs as immediately tax deductible albeit with some restrictions or limits. Getting the maximum benefits from advertising and marketing expenditures, or reaping 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 photography operation's services should be a "no brainer," good times or bad.

Mark E. Battersby is a freelance writer, columnist, author and lecturer with offices in suburban Philadelphia, PA.  For over 25 years, Mr. Battersby’s tax and financial features, columns, and Content for the Web have appeared in leading trade and professional magazines and trade journals in more than 100 fields.  He is the author of five books.

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