What Qualifies as a Deductible Advertising Expense?

Learn what qualifies as a deductible advertising expense according to the IRS and how businesses can track and classify their spending throughout the year.

What Qualifies as a Deductible Advertising Expense?

When it comes to advertising, the Internal Revenue Service (IRS) stipulates that any deductible business expense must be both ordinary and necessary. An ordinary expense is one that is commonly accepted in a particular line of business. Most companies that can afford to advertise do so, making advertising expenses an ordinary business expense. Advertising costs are a type of financial accounting that covers expenses associated with promoting an industry, entity, brand, product, or service. This includes advertisements in print media and online locations, broadcast time, radio time and direct mail advertising.

These costs are classified as operating expenses and are not part of the cost of goods sold. If a company pays advertising fees in advance, these fees are first recorded as a prepaid expense, which is a current asset. When the related advertising activities occur, these funds are transferred to the advertising expense account, resulting in their recognition as an expense. The Keeper app can help businesses track and classify their spending throughout the year, including eligible ad cancellations. As sales occur, advertising expenses move from the balance sheet (prepaid expenses) to the income statement (SG&A). To qualify as a deduction according to the IRS, the criteria your advertising spend must meet is that it is normal.

Business owners must ensure they spend their advertising budget in the right places where their target audience is likely to include potential buyers of their product or service.

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