IRS Info - Advertising and Promo Costs

One area that the IRS seems to find common ground between racehorses and show horses is the deductibility of advertising costs. Some of my clients have engaged in unconventional advertising, which is perfectly permissible, and in fact can produce results. A taxpayer, for instance, may pay for loudspeaker announcements and printed announcements at shows that announce the name of the taxpayers company or firm, or the sponsorship of a particular race. The costs of such advertising appear on the books and records of the taxpayers company rather than being an expense of the horse activity. As a result, the costs are shifted away from the horse activity, thus helping reduce the costs of the horse activity.

The Tax Court ruled in favor of a restaurant company, which deducted advertising expenses, paid towards exhibiting show horses and dogs; the taxpayer claimed that profits were associated with these advertising costs. [Rodgers Dairy Co. (l950) l4 TC 66.] In that case the taxpayer sought to deduct costs of maintenance, training and transportation of show horses, as well as depreciation of these horses and the costs of two Russian wolfhounds. The horses were exhibited in the name of the restaurant company in 24 shows, primarily within a radius of 30 miles from headquarters, but many of the shows were at remote places unlikely to attract customers. The horses were shown with the same blue and white color scheme that the restaurant used on its storefronts and on trucks. The company’s initials were painted on the equipment vehicles; signs were displayed in front of the stables disclosing that the corporation owned the horses; catalogs in which the corporation was listed as owner of the horses, were distributed at each horse show. The horses won numerous ribbons and cups that were displayed on the walls of the corporate offices. A professional trainer was hired. The owner only rode the horses when the trainer was not available to ride. Some of the horses were sold at substantial profits. Stud fees were collected and attributed to advertising.

However, unless the taxpayer shows a direct connection between the advertising of horses and the promotion of a separate business, the expenses may not be deductible. There should be evidence that the expenses are undertaken primarily for a business and not a social or personal purpose, and that there is approximate, rather than merely a remote or incidental, relationship between the expenditures and the taxpayers business. This is essentially a question of fact. There is no hard and fast rule as to what constitutes a proximate connection between an activity such as sponsorship of horses in horse shows and establishing new customers. More is needed to withstand IRS scrutiny than a showing that the activity affords opportunities to meet people who in turn might want to become clients now or in the future. The fact that the taxpayer has in fact garnered new customers in virtue of the advertising suggests a direct nexus. There is no specific procedure or means for proving a direct nexus, but good record-keeping that shows how new customers were referred is likely to be sufficient.

A taxpayer-owner of a lock and safe company who maintained four Mardi Gras parade horses that participated in about five parades per year, and sought to deduct these expenses as advertising costs, failed to convince the Tax Court, apparently because there was no actual promotion of his name or business in connection with the use of the horses in parades. [Lucien Rolland (l959) TC Memo 59-l6l] The taxpayer testified that his expenditures were made for a business purpose, but the Court was not persuaded, apparently because: (l) The taxpayers business was not benefited merely by entering the horses into the various parades; (2) There was no showing that there was any advertising material used in connection with the parades which would publicize the business; (3) There was no showing that the activities directly advertised the taxpayers business. Rather, the taxpayer claimed that he expected to derive a business benefit through mixing with people and making contacts with customers and prospective customers. While the mere fact of membership in social and other organizations is helpful in providing contacts and obtaining clients—this in itself is not sufficient to justify deduction of expenses in connection therewith as ordinary and necessary business expenses.

Advertising expenses include institutional or good will advertising. This refers to any type of goodwill advertising that keeps the taxpayers name before the public. To be deductible, the expenses must relate to the patronage that the taxpayer expects in the future. Thus, utilizing horses, whether race horses or show horses, can be a bona fide method to publicize ones business, and the taxpayer should take care to document how the activity is reasonably calculated to gain publicity for the company, or to help distinguish the company from its competitors. Merely showing a connection between the taxpayers name or business name, and the sponsorship of horse events, is not, in itself, likely to be enough evidence to support an advertising deduction for horse racing or horse shows.

Promotional activities may also include deductions for entertainment expenses. Sometimes entertainment expenses overlap with advertising and promotional expenses in that a given promotional activity can function both as a means of advertising and as a means of entertaining business clients. As a general rule, entertainment and meal expense are deductible if they are ordinary and necessary expenses incurred in the operation of a business of the taxpayer and are directly related to or associate with business or the production of income. Meal, transportation and entertainment expenses must be proven by clear and accurate records as required under Section 274 of the Code. If done properly, entertaining of prospective customers at weekend trips to the races qualify.

There should be substantiation showing that the expenditure were tied to or motivated by the intent to secure a business advantage.