What Is a Promotion Expense (Including Promotional Items)?

A promotion expense is the cost a company incurs to market their products or services to consumers. Promotion expenses range from giveaways, free samples, or other promotional techniques in order to help boost sales and revenue. Companies are able to write these costs off to the Internal Revenue Service (IRS) as tax-deductible business expenses.

KEY TAKEAWAYS

• A promotional expense is a cost companies incur to market their products or services to consumers.
• Companies routinely engage in promotion expenses in order to boost sales and revenue.
• Promotion expenses are deducted from revenue on the income statement.
• These expenses are tax-deductible and can be written off on a company's tax return.

Understanding Promotion Expenses

Every kind of company runs up business expenses, whether small or large. Business expenses are any costs companies incur as a result of their regular, day-to-day operations. These expenses are deducted from a company's revenue on the income statement. The resulting figure is the entity's taxable net income. Examples of business expenses range from insurance, utilities, interest, employee benefits, accounting fees, and marketing and advertising which includes promotion expenses.

As we mentioned above, companies incur promotion expenses in order to promote or market their goods or services to the general public. Many companies choose to do this by holding giveaways, offering people free samples of their goods, or gifting items displaying the company logo and/or colors. In some cases, an established company may develop a new product and give out existing customers free samples in order to promote it. Promotions may take place through mail outs or in person at stores or other locations. This is done to draw interest into the company's offerings, enticing consumers to make purchases in order to boost sales and, therefore, revenue.

The IRS considers promotion expenses to be tax-deductible as business expenses, provided they are ordinary and necessary. When writing off promotion expenses on their tax returns, companies should take care to ensure that these expenses would not more accurately be classified as advertising expenses or charitable contributions. Companies cannot write off the actual market value of the goods or services given away. Instead, it's tonly he cost of the promotion that may be written off.

 In order to write off promotion expenses, companies may only deduct the costs associated with the promotion of goods and services, not their market value.1

Examples of Promotion Expense

If a tax software company mailed out CDs containing a free version of its federal tax preparation software to thousands of households in the hopes of selling its corresponding state tax preparation software, it could deduct the costs of the CDs and their packaging as promotion expenses.

Similarly, if a lawn-care company offered a free front-yard mowing to every house in a neighborhood in the hopes of earning new customers, it could probably deduct its costs to perform this service as promotional expenses.

Promotion Expenses vs. Advertising Expenses

Many people often confuse promotion expenses and those associated with advertising, thinking them to be one and the same. But distinguishing advertising and promotional expenses is important. The general rule of thumb is that advertising is a form of paid distribution of a controlled marketing message. This can entail expenses related to media ads in print, online, and broadcast, and direct mail. Promotion expenses, on the other hand, are more general and may include generic, non-message things like brand awareness. Costs for promotion and advertising must be categorized correctly and accounted for separately.