Did you know that, according to FreshBooks, small businesses pay, on average, 19.8% in taxes? This is depending on the type of business they are. For example, a small business that has only one owner pays an average tax rate of 13.3%.
A small business that has more than one owner, on the other hand, pays an average tax rate of 23.9%, while a small business corporation pays, on average, 26.9%
Considering how many taxes small businesses pay, business owners need to know what their tax deductible business expenses are.
As a small business owner, it can be stressful if you’re spending a portion of your revenue on marketing needed to grow your business. But calm your worries. There are services that you can write off in your tax filings, such as search engine optimization.
In this article, we’ll review why this is the case and how you can file for this tax deductible business expense. Read on to learn more.
Is Marketing a Tax Deductible Business Expense in the United States?
Yes, marketing expenses are generally tax deductible for businesses in the United States. Here are some key things to know about deducting marketing expenses:
- Ordinary and necessary marketing costs to promote a business are deductible. This includes expenses for things like advertising, promotional materials, website development, graphic design, email services, etc.
- The expenses must be directly related to generating business income, not personal expenses.
- Any capitalized marketing asset with a useful lifespan of over a year, like branding, needs to be deducted over time according to IRS depreciation rules.
- The Section 179 deduction allows businesses to fully deduct the purchase price of certain capitalized marketing assets in the first year up to an annual limit.
- Marketing expenses directed towards producing taxable business income can be deducted in the tax year they occur or accrued.
- Proper documentation and receipts are required to claim marketing deductions.
- Allowable deductions reduce taxable income, so business save money by deducting eligible marketing costs.
- There are specific deduction limits for some types like business meals, entertainment, and gifts.
Consult a tax professional to understand the best ways to treat and deduct marketing initiatives for maximum savings. But in general, marketing is considered an ordinary business operating expense by the IRS.
Is SEO also Tax Deductible?
Yes, SEO services and related costs are generally tax deductible business expenses in the United States. Here are some key things to know about deducting SEO marketing expenses:
- Fees paid to an SEO agency or consultant are deductible, as long as their services are intended to promote the business.
- Salary and labor costs for employees doing in-house SEO work may also be deducted.
- Software, tools, education/training, and other assets purchased for SEO activities can likely be deducted or capitalized/depreciated depending on their lifespan.
- Website design changes, content creation, link building, and other optimization tactics done to improve SEO rankings are deductible expenses when directly tied to generating business income.
- As a marketing expense, SEO costs are deductible in the tax year they occur or are accrued.
- Proper documentation and invoices must be maintained to deduct SEO agency fees or related expenses.
- Limits may apply to any SEO-related meals, entertainment, gifts, or travel costs.
Because SEO is a core marketing strategy for many modern businesses, the costs related to improving and managing a website’s organic search presence are eligible business expense deductions. Consult a tax professional to maximize tax savings opportunities.
Why Is SEO Considered a Tax Deductible Business Expense?
Search Engine Optimization is categorized as a necessary business expense since it serves to drive customers to your website. Without a lead funnel like this, your website is at a serious loss — if not, entirely un-discoverable through organic search.
According to the IRS, a business can deduct its business expenses that are necessary and ordinary, including its advertising expenses.
Clearly, SEO fits right into this description.
Advertising Expenses That A Business Can Deduct in Their Tax Filing
Advertising expenses a business can deduct are those that are used for advertising the business to customers. These expenses must be reasonable and ordinary. So these could include advertisements such as those that appear on TV and in newspapers.
With so many businesses doing advertising online now, the costs related to setting up a business website can even count as tax deductible business expense — if it meets certain conditions, which we’ll explain below.
All in all, you can deduct services like pay-per-click advertising, email marketing, and search engine optimization.
It’s important to note, as well, that the IRS also considers costs for advertising when a business is starting as being tax-deductible. So, if you’re starting a new business and SEO is one of your startup costs when marketing your new business, it can count as a tax deductible business expense in this case, too.
Note that when you do this, you have to lump together all your startup costs when you’re figuring tax deductions for your business. The limit for this is $5,000.
A Note on Tax Deductions for Digital Marketing You Can’t Make
Even though there are many digital marketing tax deductions you can make, there are some you can’t. Here’s the list…
1. E-Commerce Websites
When it comes to website costs, these can count only if you use your business website for advertising. If you use it for selling (for example, you have a shopping cart on it), then you can’t count your website costs as tax deductible business expenses.
2. Signage
Temporary signs don’t count as tax deductible business advertising expenses (though they can, as long-term assets, be depreciated).
3. Car Wrapping
First of all, ads that appear on vehicles cannot be fully counted as tax deductible business expenses. You can count the cost of placing the ad there, but not the cost of driving the car around.
4. Employee Recruitment
As for help-wanted ads, these are not advertising business expenses, though they do count as a deductible business expense, and must, therefore, be filed differently.
Filing Advertising Tax Deductible Business Expenses
When it comes to filing advertising expenses on a business’s tax returns, there are three ways to go about it. This depends on if your business is a single-member LLC or sole proprietorship, a multi-member LLC or partnership, or a corporation.
1. Single-Member LLCs or Sole Proprietorships
When it comes to SEO and tax deductions, if you run a business that’s a single-member LLC or sole proprietorship, you need to use the tax form Schedule C. You’ll include this tax form along with your own income tax return when you submit it.
When it comes to where you would include your advertising tax deductible business expenses (which would include costs for SEO), you would include this in Part II of Schedule C, which is where you list your business’s expenses.
Specifically, you’d put this figure on Line 8, the line for Advertising and promotion. Note that you would put in your total costs for advertising and promotion here, not only the costs for SEO.
This way, you can get a deduction both on the money you’ve spent on SEO and any other advertising expenses that are tax deductible.
After you’ve done all this and filled the majority of the lines on the form, you can calculate the net income.
To do this, subtract what appears on Line 28 from Line 7, and put that amount on Line 29. Then, subtract whatever you put down on Line 30. Now, on Line 31, you can put your net loss or profit.
Note that, if Line 31 demonstrates that you’ve had a loss, you need to clarify whether this loss is at risk. You’ll do this on Lines 32b and 32a. In the case of a loss, you might also have to file the tax form Form 461.
2. Multi-Member LLCs or Partnerships
If your business is a multi-member LLC or partnership, you have to use Form 1065: Partnership Income Tax Return. This document is five pages long, and there are many steps you have to take as you fill it out.
First, gather any relevant IRS forms and financial documents. Then, you have to fill out sections A through J of the form, which includes basic information relating to your business.
Next, you’ll complete the first page, which includes information on payment, tax, deductions, and income. It’s on this page that you’ll include your advertising business expenses that are tax deductible.
Put this figure of your total other costs (advertising costs should be included in this figure) on Line 20, where “Other Costs” go.
By the time you finish completing this page, you’ll know how much your business owes in taxes or how much you’ve overpaid.
Other parts of the form you’ll need to fill out include:
- Schedule B on pages 2 and 3
- Schedule K on page 4
- Schedule L on page 5
- Schedule M-1 on page 5
- Schedule M-2 on page 5
Given the complexity of this tax form, it’s a good idea to speak with a tax professional to ensure you fill it out correctly. Additionally, you’ll know whether there’s any additional information you need to include regarding your expenses.
3. Corporations
As for corporations, they have to use Form 1120: Corporate income tax return to file a Corporate Tax Return. If you run an LLC that you’re filing as a corporation, you’ll also use this method for filing your business’s taxes.
The main section of this form is on the first page. Here, you can record your advertising expenses on Line 22.
However, note that there are also attached schedules. These include:
- Schedule C on page 2
- Schedule J on page 3
- Schedule K on pages 4 and 5
- Schedule L on page 6
- Schedule M-1 on page 6
- Schedule M-2 on page 6
For this reason, it’s smart to speak with a tax professional about ensuring you fill out this form and any others correctly, and that you submit the correct documents too.
A Note on Startup Advertising Expenses
As mentioned above, if you’re filing your SEO expenses as advertising expenses that will be part of the lump sum of the startup expenses you file as tax deductions for your business, you’ll be following a different process.
If you choose to do this, speak with a tax professional about how to do this correctly. For now, you can learn more about writing off startup expenses here.
Looking for SEO Services?
Now that you’ve learned about how your SEO costs can count as tax deductible business expenses and how to file them as such, you might have decided to look for SEO services. After all, the cost of paying for these services can count as a deduction!
In this case, look no further than Direction. We provide expert SEO solutions that are curated specifically for your business.
To learn more about how we can help you with SEO or other digital marketing services, schedule a free SEO consultation.
