Entertainment vs. Marketing Expenses
Regardless of whether the business operates as a sole proprietorship or corporation, the Internal Revenue Service allows businesses to deduct legitimate expenses -- those related to conducting a company’s activities. As expenses are deducted from revenue before computing income tax liability, companies benefit from carefully recording expenses. Different categories of expenses have different rules regarding how much is deductible and what conditions apply. Businesses need to distinguish between entertainment and marketing expenses.
Entertainment expenses are those costs paid to entertain an employee or client. The purpose of the activity must be directly related to the business, and business must be conducted during the activity or immediately before or after it. The entertainment cannot be extravagant or lavish, and the expectation of immediate or future benefit to the business must exist, though the expected benefit does not have to be monetary. IRS regulations require that substantial business activities occur, but no mandatory percentage of the time is mandatory. If significant distractions interfere with conducting business, the event is not deductible as an entertainment expense. Therefore, attendance at a play, sporting event or concert is not an entertainment expense in the eyes of the IRS, and the agency also bans events that are primarily social in nature, such as cocktail parties, or that are attended by people unrelated to the business, such as meetings held at resorts or cocktail lounges.
Marketing or advertising expenses are costs related to promoting a business. These include marketing costs that directly promote your business, such as a television ad announcing a year-end clearance sale, and those considered goodwill. Goodwill advertising is typically related to a cause, such as encouraging people to donate to a disaster relief fund or contribute to the United Way. This type of advertising publicizes the company name, along with the cause, and the business must expect to receive some future benefit from the marketing campaign. Businesses cannot deduct expenses related to lobbying, which is the attempt to influence legislation or political campaigns. For example, a business cannot deduct expenses for an ad announcing that it supports a particular candidate or proposition.
One key difference between entertainment and marketing expenses is the amount that's deductible. Businesses can typically deduct only half of their total entertainment expenses. Normally, marketing expenses are deductible in full. Another difference lies in the people involved. An entertainment expense must include a specific person or people. The company can name those included in the entertainment. Marketing expenses are not specific. The business does not know who views the ads or spies the promotional shirts worn by employees or customers.
Both entertainment and marketing expenses must meet the IRS criteria for necessary and ordinary expenses. Ordinary expenses are accepted and common practice in the company’s industry. Necessary expenses are those that benefit or help the company in some manner. Necessary does not imply that the expense is vital, mandatory or indispensable -- just that the company expects to gain some tangible or intangible benefit. Businesses must deduct entertainment and marketing expenses in the proper year. For those operating under the cash method of accounting, the expenses are deductible in the year in which payment occurred. Under the accrual method of accounting, the expenses are deductible in the year in which the event occurred.