We’ve all been in this position (and if you haven’t you soon will be) – you receive a call or visit from a local nonprofit requesting your financial support. Your assistance can take many forms; a banner on the fence of a little league field, an ad in a school play program, a plaque in a new wing of a hospital, a cash donation to Toys for Tots. The power of promotional giving, when properly structured, cannot be questioned. They are a perfect win-win, supporting your community while telling the public you share their concerns and values. Effective promotional donations help to form relationships with prospects while reinforcing those you have with existing clients.
For community-minded real estate agents, the question isn’t whether to support such causes; it’s how to maximize their value by making the support tax-deductible.
When are Promotional Donations Deductible as Advertising? The answer to this question may vary significantly depending on who you ask. Slight variations in the facts and circumstances surrounding a donation can also change the answer you receive (which is why our articles are for informational purposes only and do not constitute tax advice). For my clients, determining when a donation is a deductible advertising expense depends on several factors:
Intention: Promotional donations must rise to the level of a business expense to be deductible. Deductible business expenses are both Ordinary and Necessary for the business. The expenditure must be acceptable in the real estate industry (Ordinary) and be helpful to your business (Necessary). Often, determining whether an outlay is an advertising expense or a charitable donation will boil down to “why” you made the purchase. Was your primary intent to generate business? If yes, can you prove it? If your answer is “yes” to both questions, the investment will likely qualify as an advertising expense.
Benefit Received: To qualify as an advertising expense, the business must receive a direct and substantial benefit for the price paid. The mere recognition of a donation, such as printing the donor's name and logo, is not a significant benefit – it is NOT an advertising expense.
To be considered an advertising expense, the business must receive one or more of the following in exchange for the price paid:
In other words, what your business receives must be a real advertisement – more than the acknowledgment of a sponsorship or donation.
Amount: If you’re sure the purpose of the outlay was to promote business; you must assess whether the amount spent was reasonable in light of what was received. Admittedly, determining a reasonable price is somewhat subjective, but it helps to differentiate your charitable vs. business motivation. For example, if a business-card sized ad that costs $75 in a newspaper reaches 5,000 readers, is it smart business to spend $250 for a charitable program advertisement that reaches 250 attendees? If half of the attendees are savvy real estate investors, the answer may be yes. However, what if most attendees are from out-of-town and have very little chance of becoming clients? How much would you pay for the ad if the organization was not a charity? Your answer to this question may represent the portion of the donation qualifying as advertising.
The point: Merely supporting a charity by purchasing an advertisement does not automatically make it an advertising expense.
Donation Not Advertising: If the donation does not qualify as an advertising expense it may still be deductible as a charitable contribution, which is an itemized deduction on Schedule A. To be deductible on Schedule A, the donation must be made to a qualified 501c(3) organization, a church, or government entity, including public schools and volunteer fire departments.
Note on Charitable Labor: The value of your donated time and effort is not deductible as advertising or as a charitable contribution. If, for example, you give your time wrapping presents for the Salvation Army each Christmas, the value of your time is not deductible, even if you wear your favorite logo-embroidered polo while wrapping those gifts.
Take Away: If you want to deduct your promotional donations, make sure you pay for a substantial business benefit. At a minimum, purchase an advertisement and not recognition of a contribution. There are also several ways to maximize the deductibility and promotional-value of goodwill-advertising, including some promotional campaigns you can create on your own. These are discussed extensively in our Real Estate Agent Tax-Cut Library.
Summary and Invite: We hope this article has helped you understand when promotional donations are deductible as advertising. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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