You need to advertise to promote your business brand, increase customer awareness, and build your reputation. Each time you have an advertising and promotion expense, you need to record it in your small business accounting books.
Although advertising is beneficial to your company, it can get expensive. To offset the high costs, you need to know how to claim advertising and promotion expense deductions.
Advertising and promotion expense
Advertising is an audio or visual that reaches your target audience and explains what your business does.
You might advertise your business through:
- Newspapers, magazines, TV, and radio
- Flyers, brochures, and business cards
- Email marketing, social media, and your website
Many advertising strategies highlight an issue and offer a solution through the company’s products or services. For example, an advertisement for a lawn mowing service could show a person’s cat getting lost in their high grass.
Promotions, on the other hand, can be a little different than advertisements. Promotions include events, activities, sales, or anything that creates awareness for your business.
Unlike an advertisement that shows off your business’s offerings, a promotion tries to get customers in the door by providing something.
Let’s say you put coupons to your business in your local newspaper. These coupons promote your business by giving customers something of value.
How to record an advertising and promotion expense in your books
When you spend money on an advertising and promotion expense, you need to create a general ledger entry. Recording how much you spend on business promotion expenses can help you stay within your annual advertising budget, know where your money is going, and stay compliant with the IRS.
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If you use double-entry accounting, you must record your advertising expense when you receive an invoice. And, you need to make a separate entry when you pay the invoice.
Once you receive your invoice, you need to debit your advertising expense account and credit your accounts payable account. You debit your advertising expense account because it is an increase in your expenses. You credit your accounts payable account because it is a liability.
Your journal entry should look similar to this:
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| X/XX/XXXX | Advertising Expense | Money owed to Magazine ABC for advertisement | 1,000 | |
| Accounts Payable | 1,000 |
When you pay the invoice for your advertising and promotion expense, you will create another journal entry. You need to debit your accounts payable account and credit your cash account. You debit your accounts payable account because you are decreasing your liability. And, you credit your cash account because you are decreasing the amount of money your business has.
Your entry should look like this:
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| X/XX/XXXX | Accounts Payable | Money paid to Magazine ABC for advertisement | 1,000 | |
| Cash | 1,000 |
Are advertising expenses tax deductible?
Usually, you can deduct advertising expenses on your small business tax return. With an advertising tax write off, you lower your tax liability.
Advertising costs are considered miscellaneous expenses if they are ordinary and reasonable. Your advertising expenses must be directly related to your business. For example, you can deduct the cost of printing business cards.
You can deduct promotion costs if they relate to your company, and you expect to gain business from them in the future. For example, you can deduct the cost of sponsoring an event.
The form you use to claim your advertising expense deduction depends on your business entity:
- Sole proprietorships and single-member LLCs: Schedule C (Line 8)
- Partnerships and multi-member LLCs: Form 1065 (Line 20)
- C corporations: Form 1120 (Line 22)
- S corporations: Form 1120S (Line 16)
Make sure to keep accurate records so you can deduct your advertising and promotion expenses. Be sure that your expenses go toward advertising and not another business expense.
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This article has been updated from its original publication date of November 2, 2017.
This is not intended as legal advice; for more information, please click here.