Let Uncle Sam help you market your practice
Advertising isn’t a dirty word
Too often, one of the first expenses a veterinary practice cuts is the most basic—advertising. Reducing it is a shortsighted strategy given the necessity of advertising in a bad economy. Plus, Uncle Sam—in the form of tax deductions—may pick up a portion of the expense. Advertising expenses encompass everything from business cards, home demonstrations, prizes and contests, to the cost of launching a new service. Generally, advertising and marketing are immediately tax deductible as “ordinary and necessary” business expenses—but not always.
Under U.S. tax rules, all reasonable advertising expenses are tax deductible as long as they bear a reasonable relationship to the business. Deductible expenses may be for the purpose of developing goodwill as well as garnering immediate income. Even better, the cost of advertising is deductible when paid or incurred, even though the advertising program might extend over several years, or it’s expected to result in benefits extending over a period of years.
When it comes to promoting the interests of the veterinary practice, or publicizing the views of its principals, lobbying expenses directed towards 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
Today, every veterinary practice’s marketing plans usually include the Internet. Unfortunately, the IRS has not issued formal guidance on the treatment of website development costs. 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.
Not surprisingly, taxpayers who pay large amounts of money 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 expenses—without a challenge from the IRS.
Research as a tax deduction
It’s ideal to test the waters before committing to an advertising campaign. Unfortunately, only costs of research in the laboratory or for experimental purposes (whether carried on by the veterinarian or on behalf of his or her practice by a third party) are tax-deductible. Market research and normal product testing costs are not research expenditures under the tax rules.
Mailing lists are an important part of the advertising campaigns of many veterinary practices. On one hand, the mailing list is considered to be 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 practice that mails newsletters and brochures to clients on its mailing list as well as to prospective clients on lists that it rents. Prospects are added to the practice’s mailing list if they use the veterinary practice’s services. The practice keeps records of its costs in adding to the mailing lists and writes off those costs in the year the newsletters or brochures are distributed.
The IRS has ruled that costs related to adding names to a mailing list may be deducted as business expenses. Keep in mind that this ruling involved a semi-annual mail campaign, while in other cases the IRS has ruled similar expenditures in campaigns that extended a year or more could not be immediately written off.
Marketing as advertising
Obviously, paid advertising isn’t the only way to spread the word about your practice. A marketing strategy can span everything from press releases and networking at local chamber of commerce events to sponsoring a team in a local sports league, running contests or hosting special events.
On the downside, no tax deduction is permitted for dues you pay to any club organized for pleasure, recreation or other social purposes—even if membership is used to promote the veterinary practice. This disallowance doesn’t extend to such professional or public service organizations as Kiwanis and Rotary clubs.
A veterinary professional is allowed a deduction for entertainment, so 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. First and foremost, no tax deduction is allowed for the cost of entertaining guests at nightclubs, sporting events and theaters or meals unless that cost is either:
a) Directly related to the active conduct of a trade or business, or
b) For expenses directly before or after a substantial and bona fide business discussion associated with the conduct of that business.
There are also two restrictions placed on deducting meal expenses:
a) Meal expenses generally are not deductible if neither the veterinarian nor the veterinarian’s employee is present at the meal.
b) A deduction isn’t allowed for lavish and extravagant food and drink.
There’s also the 50 percent limitation rule. The amount allowed as a deduction for meal and entertainment is generally limited to 50 percent of the expense. 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 is advertising
When you’re giving a gift, you’re essentially advertising your practice. 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 gifted for use on business premises are not gifts.
A veterinary practice that provides referring professionals, patients or others 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.
Remember, the $25 limitation applies to gifts made “directly or indirectly” to an individual. A gift made to the wife of a referring veterinarian by a primary care veterinary practice is considered an indirect gift to the referring professional. However, if the referring veterinarian’s wife has an independent business connection with the veterinary practice, a gift to her would not be regarded as an indirect gift to her husband unless it was intended for his eventual use or benefit.
Obviously, in order to get the maximum benefits from advertising and marketing expenditures and to reap the cost-cutting deductions, you may need the help of qualified professionals. Whether you consult with advertising or marketing professionals or a qualified tax professional, the decision of whether to advertise or market your practice’s services should be a no-brainer, good times or bad.