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 Without marketing or advertising, no one will know the existence of your nursery. Fortunately, a marketing strategy doesn’t have to mean multimillion-dollar TV commercials. After all, there are plenty of ways to market any business — and a variety of tax deductions to help make that marketing more affordable. If you include entertainment in the nursery’s marketing strategy, tax deductions will also underwrite the fun side of promoting your business.
Because there are many aspects to both advertising and marketing, it is not surprising the expenditures related to these activities fall within several sections of the tax regulations.
Advertising expenses
All too often, one of the first expenses reduced or cut by many nurseries is the most basic of expenditures — advertising costs. This is a doubly short-sighted strategy given the necessity of advertising in bad times and the fact that Uncle Sam, in the form of tax deductions, will often pick up a portion of those advertising expenses.
Advertising expenses encompass everything from expenditures for business cards, catalogs, prizes and contests, new plants, accessories, products or services launch costs and other promotional activities. Generally, advertising, marketing and other selling expenses are immediately tax deductible as “ordinary and necessary” business expenses — but not always.
All reasonable advertising expenses are tax deductible so long as they bear a reasonable relationship to the nursery. Under U.S. tax rules, deductible expenses may be for the purpose of developing good will as well as gaining immediate sales. Even better, the cost of advertising is deductible when paid or incurred, even though the advertising program extends over several years or is expected to result in benefits extending over a period of years.
When it comes to catalogs expected to be used for more than one year, the Tax Court and the IRS require the cost of printing be amortized or written-off equally over the expected life of the catalog. Some courts however, have held to the contrary, taking the view that catalog costs are in the nature of advertising expenses and immediately deductible.
Lobbying expenses
When it comes to promoting the interests of the nursery, lobbying expenses directed toward influencing federal or state legislation are generally not deductible. However, this prohibition does not generally apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are deductible.
Website development costs
The IRS has not issued formal guidance on the treatment of website development costs. However, informal, internal IRS guidance suggests that one appropriate approach is to treat these costs like an item of software and depreciate them over three years.
It is clear that taxpayers who pay large amounts to develop sophisticated sites have been allocating their costs to items such as software development (currently deductible like research and development costs) and currently deductible advertising expense.
Research
Testing the waters before committing to an advertising campaign is always advisable. Unfortunately, only costs of research in the laboratory or for experimental purposes (whether carried on by the nursery or on behalf of the nursery by a third party) are tax-deductible. Market research and normal product testing costs are not research expenditures under the tax rules.
Mailing lists
Mailing lists are an important part of advertising campaigns for many nurseries. On one hand, the mailing list is an intangible asset, deductible only if a reasonable life can be determined for it. A tax deduction for the cost of compiling that list is a little trickier.
Consider the situation of a nursery that mails catalogs to people on its mailing list, as well as to others on lists that it rents. Prospects for the permanent list are from advertising, and added to the company’s mailing list if they make purchases. The business was able to track the expenses connected with adding names to its list and write off those costs in the current year, regardless of when the catalog was distributed.
The IRS has ruled the company may deduct its costs related to adding names to the mailing list as an ordinary business expense. However, this situation involved a catalog that was published semi-annually, while in other cases the IRS ruled the catalog had a useful life of several years.
Marketing as advertising
Paid advertising isn’t the only way to spread the word about your nursery. Public relations are marketing strategies that span everything from press releases and networking at a Chamber of Commerce meeting to sponsoring a contest or hosting special events.
However, no deduction is allowed for dues paid to any club organized for business, pleasure, recreation or other social purposes — even if membership is used to promote the nursery. Fortunately, this disallowance does not extend to professional organizations (e.g., state or national nursery and landscape associations) or public service organizations (e.g., Kiwanis and Rotary clubs).
Entertainment
A nursery operator is allowed a deduction for business entertainment, as long as there is a direct relationship between the expense and the development or expansion of the business. Remember, special limits are imposed on the deduction of business-related entertainment, meals and gift expenses.
No tax deduction is allowed for the cost of entertaining guests at nightclubs, sporting events, theaters, etc., unless that cost is either:
- Directly related to the active conduct of a trade or business, or
- For entertainment directly before or after a substantial and bona fide business discussion associated with the conduct of that trade or business.
The business discussion must be the principal aspect of the combined entertainment and business and must represent an active effort by the nursery operator to obtain income or other specific business benefit. If a meal expense directly precedes or follows a substantial and bona fide business discussion (including a business meeting at a convention or trade show), then it is deductible if it is established that the expense was associated with the active conduct of a trade or business. The operator must be able to substantiate the expense.
There are two additional restrictions placed on the deduction of meal expenses: (1) Meal expenses generally are not deductible if neither the nursery operator nor the nursery’s employee is present at the meal, and (2) a deduction will not be allowed for food and beverage to the extent that such expense is lavish or extravagant under the circumstances.
The amount allowable as a deduction for meal and entertainment expenses is generally limited to 50 percent of such expenses. The 50 percent rule is applied only after determining the amount of the otherwise allowable deductions. For instance, the portion of a meal that is lavish or extravagant must first be subtracted from the meal cost before the 50 percent reduction is applied.
Giving as advertising
Another form of advertising is gift giving. Deductions for business gifts, whether made directly or indirectly, are limited to $25 per recipient per year. Items clearly of an advertising nature that cost $4 or less, and signs, display racks or other promotional materials given for use on business premises are not gifts.
A nursery that provides customers or prospective customers with an item that might be considered either a gift or entertainment will generally benefit from the entertainment write-off, ignoring the $25 limit. Of course, if the operation gives a customer packaged food or beverages that are to be used later, they are considered gifts.
To spur sales, many businesses frequently give away small samples. Under the tax rules, the cost of the samples can be deducted immediately. If the samples are purchased separately from the products being sold, their cost is an ordinary and necessary business expense. If the item was included in inventory, it cannot be deducted twice. It will already be part of the cost of goods sold.
Mark Battersby is a freelance writer in Ardmore, Pa. His tax and financial features have appeared in leading business magazines and trade journals for more than 25 years.
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