As a marketing professional, you will incur lots of expenses. Those include software and subscriptions, ad spend, as well as your people spend, that is, your own compensation and that of your employees and contractors. These expenses often times qualify as small business tax deductions.
Small business tax deductions are allowable expenses within your business that the tax authorities allow you to deduct from your taxable income, and lower the amount you owe in taxes. Who doesn’t want to lower their tax bill? Lowering your taxes is important because tax is a cash expense, and lowering your tax bill means you have more cash that can be put into growing your business or into growing your personal savings and retirement accounts. Either way, its money that shouldn’t be left on the table.
5 Small Business Tax Deduction For Marketers
The ability to leverage small business tax deductions for your marketing business is really important. Equally important is knowing how to categorize those expenses within tax categories that make sense. You want to save money on taxes, right? Well, simply put increasing deductions accomplish that. Here are 5 small business tax deductions that you can immediately implement in your business.
#1 Technology Equipment and Supplies
As a marketing professional, your work involves a lot of technical equipment, your running analytics reports and creating campaigns from your computer or mobile device. Investment in new technology for your business is a necessary business expense and can qualify as a deduction.
Generally, this includes computer and hardware costs but can also include iPhones. If you got the latest iPhone because of image quality and you rely on top-notch graphics in your business, then you can consider the full amount deductible. Be mindful that tax rules require that you spread out the costs of equipment over various years (useful life as defined by the tax code). However, there are certain loopholes, such as the Section 179 deduction that allow you to expense it fully in one year. In some cases, it may be beneficial to spread costs out for a big purchase, for example, if you’re already in a loss year and would like to push expenses in the next year, which will be more profitable.
#2 Software and Subscriptions
Software you purchase for your business, qualifies as a deductible expense. And since many programs tend to be cloud based these days, the subscription fees are deductible and should be categorized in your Quickbooks or Xero [hyperlink to our article] as “Recurring Expenses”. We typically like to distinguish between one-time software fees and recurring to help our clients set monthly budgets and forecasts.
#3 Advertising and Marketing
Part of growing your business is marketing your business, as a marketer you know the importance of having a good marketing plan. Maintaining a website, running paid ads, SEO, content marketing, and social media are all marketing expenses that can really add up. Also include costs of meeting prospects, meals related to sales. This will help you understand what your true client acquisition costs are, which are also deductible.
Also separate your marketing spend versus that of your clients. From a tax perspective, these are “flow through costs” meaning that they are deductible to you when you spend ad dollars on their behalf, but are offset by the pre-payment of ad spend or repayment by your clients. This will vary from client to client, but it is important to separate your clients’ ad spend since you can also strategize around when you make those payments, for example at the end of the year for campaigns in January of the following year, to lower tax liability.
#4 Professional Fees
Do you work with other professionals like a financial planner or tax advisor? Outsource your content strategy to a freelancer? Professional fees are a business expense that are deductible.
#5 Collection Expenses
Sometimes it happens, you have a client who doesn’t pay their invoice. This is simply a risk of doing business. You might incur some expenses with trying to collect payment from your client, like outsourcing to a third party collection agency. The fees associated with debt collection are deductible. And in the event that the debt cannot be collected it can be considered a bad debt. In which case it can qualify as a deduction under certain circumstances.
Other Deductions That Can Help Lower Your Tax Bill
Some other deductions that can help lower your tax bill include: the home office deductions, business operating expenses, insurance fees, travel expenses, conference expenses, and continued education expenses. Knowing which deductions are available and planning for them throughout the year is an important part in tax planning and saving on your taxes.
Maximize Your Tax Savings on Your Personal Return
For many business owners, business and personal taxes are intermingled. This is because many business owners have an LLC, S-Corporation, or Sole Proprietor structure.
So, when it comes maximizing your tax savings, it is important to also consider how your net profit from your business impacts your personal taxes. That includes comparing the cost and benefits of taking the standard deduction versus itemizing your deductions. The standard deduction is $12,000 or single filers, $18,000 for head of household filers, and $24,000 or married couples filing jointly. This has basically drastically reduced the number of clients we have who take the standard deduction. But before you commit to taking the standard deduction, you need to know which method gives you the biggest bang for your buck. This is now a strategic planning tool since many itemized filers are continuing to spend money in itemized categories, when the standard deduction is far better. In a sense, we’re seeing clients “waste” away deductions when they don’t need to. Consider your personal deductions as well as your business deductions as it may benefit you to save money on one and invest in the other.
We’ve now covered the most common and necessary tax deductions that we see for marketers. We’ve also covered the importance of the accounting rules around how to treat these deductions. To recap our discussion, we’ve summarized the key points below:
- Technology is a critical piece of any marketing business, and how it is expensed (depreciated over many years versus expensing in one year), is a strategic decision that will impact your taxes.
- Distinguish software costs between one-time charges and monthly recurring. This will help set forecasts and budgets and estimate profits, cash, and tax liability throughout the year.
- Separate your marketing spend from the ad spend for your clients in your accounting software. You can strategize around prepaying some ad costs at the end of the year to increase your deductions and lower your tax liability.
The punchline is this: spending on your business and making those critical investments, lowers your taxes. You can either spend $1,000 and save $330 in taxes (assuming a 33% all-in tax rate), or you can take home the $1,000 and pay the government $330, leaving you with $670. It is up to you what makes more sense, but the general point is that you should be making those trade offs with an advisor. As the saying goes, ‘The more you spend, the more you save.’ However, deductions are beneficial to the extent you have the cash to spend.
There are far more deduction strategies for marketing businesses including tax-deferred accounts such as 401(k)’s, Solo 401(k)’s, and Self Employed IRA’s, as well as tax credits. Tax credits lower the amount you owe in taxes dollar for dollar. For marketing professionals, and important tax credit to be aware of is the R&D tax credit, which helps reduce some of the financial burden of innovating and developing new technology or processes. Since a lot of marketing today requires the use of sophisticated software and programs and customized solution, the time and money spent on developing this can be offset with the R&D tax credit.
Working with a tax advisor throughout the year is the best way to strategize on your taxes. We often tell clients who ask us to do their taxes following the close of the year that the tools available for lowering tax bills significantly decrease after the ink dries (after December 31). Having a good accounting process set up and a tax planning strategy can make a huge difference come tax season. For more information contact the tax professionals at the Tax Hack Accounting Group or subscribe to our newsletter.
We look forward to continue to add value to what you do.