Advertising expenses can multiply quickly for a small business if you invest in SEO and SEM services. Fortunately, some of these costs can be deducted from your taxes. The IRS typically allows businesses to deduct ordinary and necessary expenses, and marketing costs are often deductible. Taking advantage of tax deductions can alleviate some financial stress during tax season. It is essential to keep accurate and detailed records of all expenses associated with SEO and SEM services. Invoices, receipts, and contracts should all be kept. Maintaining this is essential to support your relatively modest claims – and is helpful for you to maximize your savings on taxes.
Distinguishing Between SEO vs SEM
When working through your advertising expenses for your small business, understanding the difference between SEO (Search Engine Optimization) and SEM (Search Engine Marketing) will be relevant.
SEO works to improve the visibility of a website in organic search results. SEO includes optimizing content, site structure, and on-page ranking signals to increase a site’s rank for keywords without paying for placement in the search results.
SEM includes various activities and focuses primarily on paid advertising. SEM includes paid advertising (e.g., PPC – pay-per-click ads) and other paid strategies to help improve visibility quickly. SEM and paid advertising support and complement strategies used in SEO and are oriented toward specific keywords and targeted demographics.
Understanding the difference between SEO and SEM can help you manage your advertising budget appropriately for your advertising expenditure and provide better results for your overall online presence.
Accurately Documenting SEO and SEM Expenses
You must keep accurate documentation of the expenses to deduct your SEO and SEM costs. Below is the procedure for doing so:
Create a Clear Folder: Start a folder for all SEO and SEM expenses in digital or physical format. Record each expense with:
A description of its service.
Date of expense.
Dollar amount.
Location of services rendered (if applicable)
Utilize Accounting Programs: Track and categorize expenses when they occur. Attach digital copies of invoices and receipts to each expense when applicable.
Review Your Spending: Review your expenses to evaluate the return on investment related to your SEO and SEM. This exercise is beneficial to your budgeting and planning.
Good recordkeeping of expenses ensures your tax obligations are taken care of, but they also provide insights into the effectiveness of your marketing strategies.
Properly Categorize SEO and SEM Costs
To deduct SEO and SEM costs from your tax return, you must categorize them as advertising expenses. In most cases, this will directly relate to IRS protocol. The IRS indicates that you can deduct costs of goods that promote or produce your business.
SEO Costs: SEO costs represent content creation, website optimization, and keyword research. These expenses can and will help increase your website’s online presence and marketability.
SEM Costs: Representation of SEM costs include (but are not limited to) PPC campaigns and other marketing ads. SEM costs are the expenses incurred for increasing the visibility of your website through pay-per-click programs and previously mentioned advertisements.
Make sure each documented expense clearly labels the incurred cost. This will be appropriate for tax return processing and identifying future marketing investments.
Calculating That Service Total For Deduction
To calculate the total amount deductible for SEO and SEM service:
Collect financial records of additional expenses: All invoices, receipts, or bank statements that directly include costs incurred or payments made. Â
Compile Your Expenses: Combine your expenses directly related to SEO and SEM activities. Utilize accounting software for accuracy.
Review IRS Guidelines: Look to determine if there are any actions/changes to be made, such as amortizing certain expenses over 3 or more years.
By accurately calculating your expenses, you will be able to ensure your return captures all of your deductions accurately and in totality and acts as a logical indicator of your investment in driving your business’s online efforts.
Common Errors in Setting up Advertising Costs for Deductions
Misclassification of Expenses: Verify that your SEO and SEM costs are categorized directly as advertising costs.
Insufficient Documentation: Track and keep supporting documentation for each transaction.
Improper Timing of Expenses: The accompanying expenses could be deducted or amortized immediately.
Failure to Keep Up with New Tools: Stay current so as not to miss tax deduction opportunities for new digital marketing tools, etc.
While admittedly painstaking, keeping appropriate records and tracking all relevant tax laws is paramount to recognizing all potentially deductible points of local advertising expense and avoiding IRS “trouble” later.
Tax Breaks You May Not Have Considered(Opens in a new browser tab)
Consulting a Tax Professional for Difficult Situations Consider meeting with a tax professional if SEO and SEM-related tax-related calculations seem overwhelming. They will unweave any errors in determining the deductibility of the item or the angle you need to take to deduct your expense correctly. The tax professional will allow you to go beyond your deductions to help ensure your income tax reporting is consistent and clear or provide another level of peace of mind, along with any added features they may afford in the area you want to improve your tax returns moving forward. Their knowledge of the IRS tax code may also ensure you don’t inadvertently trigger IRS scrutiny with several items you have not encountered or don’t know about their reporting aspect.
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