What Types of Advertising/Marketing Expenses Can Small Businesses Deduct?

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In the past advertising for small business owners mostly involved ads for print, television or radio (a catchy jingle was always a good way to go), cold calling (rarely a pleasant experience), sending out flyers or courting potential customers at a conference.  Unfortunately, these types of advertising were problematic in that it is difficult to gage the direct impact of their effectiveness.  Additionally, they were often fairly costly, which can especially difficult for small business owners to afford. 

Over the past few years the avenues for advertising have grown exponentially. Many types of advertising don’t even cost anything, except time. You can buy ads on numerous social media outlets that appeal to your target market or if you want to go the free route, you can set up a social media account, post regularly and build an audience.  Alternatively, you can set up a website which you can then optimize so that google and other search engines display it when someone is looking for your product or service. Email newsletters are also another effective and direct way of reaching potential buyers.    One of the great benefits of these types of advertising is that you are better able to monitor the effectiveness of your chosen strategy.

Types of Deductible Marketing Expenses

In Canada, most types of advertising/marketing costs are deductible in Canada, although Revenue Canada (CRA) has some specific exclusions.

Advertising Expenses

While advertising is often used synonymously with marketing , in an accounting context it often refers specifically to actual ads such as:

• Print publications, newspapers, etc.

• Television commercials

• Google, Facebook, ,Amazon ads, Pinterest, Instagram, Tik Tok, Etsy or any other ads placed on social media

Note: CRA implemented a new rule relating to digital companies (many of whom are advertisers) which requires that they register for GST/HST and/or QST if their sales to Canadians exceed $30,000. Many of these businesses fulfill the criteria for mandatory registration, but it works a bit differently for businesses that do not have a Canadian presence.  In this case you do not have to pay GST/HST or QST on these services as long as you are registered for sales tax and provide your registration numbers to the foreign seller (they will send an email asking you for this information).  It is important that you provide these numbers to avoid paying sales tax as they are not technically deductible on your GST/HST/QST returns. 

Website Costs

Any costs incurred to set up and maintain your website usually fall under marketing/advertising costs as a website is a promotional tool.  Some of these costs include:

• Website hosting and development costs

• Search engine optimization services

• Cost of purchasing domains relating to your business

• Fees for website builders such as Squarespace or Wix

• Email marketing services such as MailChimp or MailerLite for which you pay monthly/annual fees 

Note: often website development costs can be significant.  If these costs are more than a few hundred dollars, they should be capitalized rather than expensed.  This means that you record them as an asset and depreciate them over time.  The CCA class is usually either Class 10 or Class 12. 

Promotional Materials

There are a variety of costs that can be incurred to promote your business including:

• Business cards

• Pens, mugs, t shirts, and other branded items

• Brochures, pamphlets, newsletters that you might hand deliver or mail to prospective customers

• Samples of your product 

Conferences

Although conferences can be a bit pricey, it can be great way to get exposure for your product and establish credibility.  Note that there are specific rules associated with the deductibility of conference expenses. Costs associated with conferences can be:

• Renting a booth/table at a conference or show

• Costs of travel including airfare and hotels to attend the conference for the owner and employees

• Meals that are included in the conference fee must be separated out and can still be deducted, but only at 50% (which applies to most meals and entertainment)

 Creative Services  

Creative marketing services might include:

• Logo design that is outsourced to a third party

• Graphic design and layout of promotional and marketing materials, including on gig platforms like Fiverr and Upwork

• Subscriptions to design software such as Canva or Adobe Photoshop 

Other Deductible Marketing Costs

• Signage for your store or business

• Social media costs such as outsourcing to a social media manager or subscriptions to social media services (although a basic subscription is usually free, you can upgrade to business services)

• Commissions to affiliates which can be the result of an in house program that you develop to incentivize other individuals or businesses to promote and sell your product or service.

• Brand development expenses including payments to brand managers or sponsorships of events that promote your brand

• Salaries to employees in your marketing department

• Commissions and salaries to salespeople who sell your product

• Meals and entertainment expenses.  Note these are subject to specific exclusions.  Generally, 50% of meals and entertainment expenses are deductible and must be incurred to discuss business with a customer or associate

• Gifts for clients are deductible based on certain criteria which is discussed in detail in article of the deductibility of gifts to clients

Accounting for Advertising/Marketing Costs (+ chart of Accounts)

Marketing, advertising, promotions and related expenses are fixed costs and should be reflected in the operating expenses section of your profit and loss (income) statement.

Your chart of accounts should reflect a meaningful breakdown of your marketing and advertising costs.  The detail in your chart of accounts depends on what line items are important to monitor and analyze.  You can use whatever nomenclature gives you the most clarity when reviewing your profit and loss and other expense reports.  You can also have sub accounts for additional detail.  And while detail can be very helpful in analyzing your expenses, you do want to make sure that you don’t have too many accounts as it can become overwhelming.

Other ways to classify accounts can be to use tags or class and location tracking in QuickBooks Online or Tracking categories in Xero.  This is especially useful if you use a different marketing strategy for diverse products and services or geographic locations.  By adding a tag or class, you can track expenses by the classification you have specified and monitor the effectiveness of your strategy.

A typical chart of accounts for marketing/advertising expenses might include the following :

• Advertising

• Meals and entertainment

• Travel

• Salaries

• Conferences

• Promotional materials

Each of these accounts can have sub accounts for categories in which spending might be more significant.

The journal entry for marketing expenses is as follows:

Debit. Marketing or Advertising Expenses (or the specific account as laid out above)

Credit. Accounts Payable or Bank Account

CRA Specific Criteria and Restrictions For advertising Expenses

The restrictions below pertain specifically to print eg. Magazines and newspapers or Broadcast eg. Television advertising 

• Certain restrictions apply to the amount of the expense you can deduct for advertising in a periodical. You can deduct all the expense if your advertising is directed at a Canadian market and the original editorial content in the issue is 80% or more of the issue's total non-advertising content. 

• You can deduct 50% of the expense if your advertising in a periodical is directed at a Canadian market and the original editorial content in the issue is less than 80% of the issue's total non-advertising content. 

• You cannot deduct expenses for advertising directed mainly at a Canadian market when you advertise with a foreign broadcaster.ditorial content in the issue is less than 80% of the issue's total non-advertising content.

• You cannot deduct expenses for advertising directed mainly at a Canadian market when you advertise with a foreign broadcaster.

Source

Marketing has come a long way since the advent of the internet and social media. There are numerous creative ways of gaining exposure for your product and/or service. And while having a budget is always preferable, for small businesses who are in the early stages, there are a number of low (or no) cost ways to get the word out.

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