Does Your Marketing ROI Consider Taxes?
Running a business requires a great deal of attention to income and expenses to reach the desired bottom-line goal. The successful business owner works to maximize income and minimize expenses while maintaining quality of product or services. There is a difference in expense types, however. You get the benefit of lower expense if you cut some materials, labor, or overhead costs. However, when considering the return on investment of marketing and advertising, cutting costs in those areas can be more harmful than helpful to profitability.
The smart business owner is tracking as best they can the ROI of their marketing and advertising, as they want to spend on campaigns that deliver results. If considering only the actual billed costs of marketing and advertising, you may not be getting a true picture of the ROI. By ignoring the net cost after tax deductibility, you may be underestimating the value of some of your campaigns.
For the sole proprietor or pass-through taxpayer, you can consider the money you save with marketing deductions as the total of income, social security, and Medicare taxes not paid by taking the deductions. Even in the 25% tax bracket, adding self-employment taxes brings the tax load to around 40%. If you are counting hard leads or sales from a campaign to get a cost-per-lead/sale, that number changes considerably if you consider the cost after taxes.
Of course, you should plan your marketing and advertising to generate results and bring in business. But, if you consider a $1,000 spend for an online ad campaign that allows accurate per-click or per-lead measurement, 100 leads mean $10 each for cost. If you find that this is too expensive based on your average sale, you may change your mind if that 40% tax load is considered and the after-tax cost comes down to $6 each. Of course, this method assumes profitability that would generate the tax burden.
Most marketing and advertising costs are not complicated and are easily justifiable to the IRS. They are not tricky, and you may find that in one of these areas you could up your campaign spending or reorient your spending with tax burden considered in results tracking.
Your costs to hire talent to develop, publish, and maintain a business website are deductible. Hosting and maintenance are also deductible. Effective websites require ongoing content generation which is also deductible. Promotion of your site in pay-per-click ad campaigns is deductible as well.
Marketing and Advertising
This category covers a lot of activities including:
- Newspaper, magazines, brochures, and other print advertising.
- Email marketing.
- Logo and graphics design and production.
- Billboard and sign campaigns.
- SEO, Search Engine Optimization, services.
- Consulting to develop these activities.
If you hire someone or a firm to handle your social media presence, the cost is deductible. Facebook ad costs would be deductible as well. Ad campaigns on any social site are the same.
Software and Subscriptions
Specialty software for marketing or services such as Mailchimp for email marketing are deductible expenses. CRM, Customer Relationship Marketing, software, or online applications are deductible as well.
If you sponsor events locally, sports teams, or hand out promotional items, the costs are deductible.
While considering deductibility for cost-centric things like overhead, materials, or labor is valid, they are not income generators like marketing and advertising. Spending more on marketing can increase income, so you may want to consider ROI with taxes as part of your measurement.