How much more business would you get if you invested an extra 20% (or more) into your marketing? Fortunately, marketing expenses are tax deductible, and as a result, a good CPA can often help you get back more than 20% of your marketing expense. Now, whether you invest that back into marketing, or put it somewhere else is totally up to you.
What Should You Know About Getting a Marketing Expenses Deduction?
Great question! Here are some key considerations to be aware of, or discuss with your CPA:
- Make sure the marketing product and/or service you purchased was a “bonafide” business expense.
- If you’re a sole proprietor, you can estimate how much you would get back in taxes by determining your taxable income. Of course, you can ask your CPA to assist with this, if it makes it easier for you.
- The amount of the marketing expense deduction will depend on which tax bracket you fall into.
Was Your Purchase Bonafide?
Some of the most common bonafide marketing expenses include the following:
- Website & Domain Hosting
- PPC Advertising
- Search Engine Optimization (SEO)
- Business Cards & Collateral Promotional Materials
- Email Marketing
The five items above are key components to many marketing initiatives. For a marketing consultation, or for more information about common marketing tactics and how a marketing company can assist, you may want to reach out to Joshua Lyons Marketing, LLC.
What is Your Taxable Income?
Great! So, you’ve decided your marketing expenses are bonafide and tax deductible. Next, to find out how much you should get back, we need to know what your taxable income is. Here’s how we do that.
First, determine your filing status. This will tell you what your standard deduction should be. Just to be clear, your “standard deduction” doesn’t equal the amount you get back from marketing expenses. This is just one of the steps to take in the calculation.
Second, calculate your adjusted gross income. This would include your W2 income and also your business net income.
Third, subtract your standardized deduction from the adjusted gross income.
Sometimes seeing an example can make tax calculations easier to follow. For the rest of this post, let’s make an example and assume the following statements are true about you:
- You’re married and filing jointly. This means your standardized deduction will be $24,800 (reference the table below).
- Between your W2 income and your business net income, let’s say you have and adjusted gross income of $150,000.
- You deduct $24,800 from your adjusted gross income of $150,000 and end up with a taxable income of $125,200.
The standard deduction chart below will help you figure out how much to deduct from your adjusted gross revenue, so you can calculate your own taxable income:
What is Owed for Your Taxes?
Now that you know what your taxable income is, we need to figure out how much you will owe in taxes. To do this, take a look at the table below and see what your tax rate should be. Using our example, if you were married and filing jointly, and your taxable income is $125,200, then you would fall into the 24% rate. This rate percentage will be key to knowing how much you should get back from your marketing expenses.
Next, calculate how much you will owe in taxes. This is called your “tax liability.” Do this by multiplying your taxable income by your tax rate. Again, you can use the table above to calculate your tax rate. Sticking with the example we’ve already used, the calculation would look like this: $125,200 (taxable income) x 24% (the rate based on your tax bracket). And with that calculation, we know the total amount owed the IRS is $30,048. That’s the amount owed for taxes in this example. You should go ahead and calculate your own tax liability, using the chart above. Or, ask your CPA to do this for you.
How Does Marketing Calculate Into Your Deductions?
Excellent question. Here’s how it works.
- Take your adjusted gross income (example: $150,000) and deduct your marketing spend from that amount. Let’s say you spent $10,000 on marketing. If that’s the case, your new adjusted gross income would be $140,000.
- Next, subtract your standardized deduction from the new adjusted gross income (example: $140,000 – $24,800. This gives you a revised taxable income of $115,200.
- Multiply your new taxable income by the rate in your tax bracket (example: $115,200 x 24%). This will tell you your new amount of taxes owed. In this example, $115,200 x 24% = $27,648 and the amount owed to the IRS would be $27,648.
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How Much is Actually Saved?
When you run the calculations above, using your own filing status, taxable income, tax rate and marketing spend, you can see precisely how much you will end up making back through deductions. Of course, make sure your CPA reviews your calculations with you, to make sure everything is accurate.
With the example we did, you would have owed $30,048 in taxes before taking your marketing expenses into consideration. But, after deducting your marketing spend, and adjusting your gross revenue accordingly, your owed taxes would only be $27,648. That’s a difference in cost (aka: savings) of $2,400! This is an example only. Your numbers should be based on your own calculations and situation.
Closing Thoughts & Recommendations
If you found this blog post helpful, a highly relevant blog post I’d recommend is How to Set Your Marketing Budget. Having a clear marketing budget and strategy will make it much easier for you to consult with your CPA during tax season, and make sure none of your deductions are left on the table. And, if you don’t know what a tax credit is, you can read my blog post here: The Difference Between a Tax Credit and Tax Deduction
As one final recommendation; when it comes time for tax season, be sure the CPA you use is experienced and understands the various deductions available to you. And if you need a CPA in the Pensacola, Florida area, be sure to let me know!
Brian Dela Cruz is the founder of Take Flight Business Solutions LLC, helping small businesses with their accounting, payroll, and taxes. He graduated from the Thunderbird School at Arizona State University with his MBA. He’s a Massachusetts licensed CPA, a Certified Management Accountant, and a Certified Treasury Professional, with 20 years of experience in helping large billion dollar businesses and small businesses with their business finances. Visit his website: www.take-flight-bs.com.