What are Ordinary and Necessary Advertising Expenses?

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Businesses can often write off marketing and advertising expenses that keep current clients and attract new ones. However, advertising and marketing costs must be “ordinary and necessary” in order to be deducted.

Not all expenses are allowed to be deducted, as one taxpayer recently discovered in U.S. Tax Court. An ordinary expense is one that’s common and accepted in the industry.

Deductible Advertising Costs

The IRS lists the following advertising costs as generally deductible:

  • Reasonable advertising costs that are pertinent to business operations.
  • An expense for institutional or goodwill advertising to maintain the company’s name in front of the public, if there is a reasonable expectation that business will increase in the future, For instance, the expense of advertising that encourages support for the Red Cross or other charitable organizations is typically deductible.
  • The expense of providing food, entertainment, or recreational facilities to the general public as a way of public relations or building goodwill within the community.

Car Racing is Not an Ordinary and Necessary Advertising Expense

An attorney deducted his car-racing costs under the pretext that they served as marketing for his personal injury law firm. He argued that because his law company sponsored the automobile he raced, his racing expenses, which came to almost $303,000 over six tax years, were deductible as advertising.

According to the IRS, the attorney’s participation in auto racing was not a regular and necessary expense incurred or paid in the course of the attorney’s legal practice. The Tax Court supported the IRS’ position.

Most courts consider the taxpayer’s primary reason for incurring the expense as well as whether there is a “proximate” connection between the expense and the taxpayer’s line of work when determining whether an expense is ordinary and necessary. There was no “proximate” connection between the taxpayer’s car-racing expenses and his or her line of work in this case because they were not customary nor necessary for a law practice. Even though the taxpayer claimed that his primary motivation for incurring the expense was to promote his legal services, neither he nor his racing activities ever resulted in any legal work for him in the state where his primary legal practice was based.

In addition, the car “sat in his garage” when he got back to the neighborhood where his legal office was, the court noted. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

According to the court, this type of “signage” is on the complete opposite spectrum from, say, a billboard or a newspaper advertisement. In fact, each driver’s name was often visible on their racing vehicle. ( TC Memo 2023-18)

Related post: How to Handle Business Website Costs

Maintain Careful Records

Personal or recreational expenses are not eligible for deductions. Nonetheless, you can write off ordinary and necessary marketing and advertising expenses while running a legitimate business. Maintaining detailed documents to support your deductions is essential for protecting them. Please get in touch with us if you have any questions.

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