TABLE OF CONTENTS
At the end of the financial year, it can become a frenzy of sorting which business expenses to claim on your tax return. For small businesses, especially sole traders, marketing expenses can be confusing because they are more complex than other operational expenses. The cost-to-value of marketing isn’t straightforward, so many receipts get left in the too-hard basket.
Instead, let’s change our mindset about marketing expenses and view marketing spend as a long-term investment you can claim as a deduction.
How marketing costs affect your small business
Marketing for many small businesses and sole traders can sometimes be an afterthought. That’s fair enough — getting your business operational and generating income is a good priority.
However, often, budget allocation for marketing looks like this:
Work > Revenue > Expenses > What’s left over (pay myself) > Marketing spend.
This keeps budgets thin and unfocused, which isn’t exactly useful. An effective marketing strategy means setting aside the funds you actually need to do it well, and this requires some long-term financial planning.
What counts as a marketing expense
Marketing expenses should be easy to spot, like invoices from TikTok, print shops, or the ad agency you hired. But some aren’t so obvious. Let’s look at an example list of expenses and pick which ones fall under marketing.
Marketing expenses can be tricky, as a marketing transaction isn’t as straightforward as purchasing coffee beans for a cafe. For instance, the referral thank-you gift to Marty’s wholesaler could count as a valid expense because it cultivates a business relationship with his branded materials — and that’s good marketing.
So when reviewing marketing expenses at EOFY, keep this golden rule in mind. Anything that costs your business money should be considered an expense.
Eligible tax claims for small businesses and sole traders
The ATO has pretty strict rules in place for what counts as an eligible deduction for small businesses and sole traders. Here are the rules to keep in mind when reviewing receipts at EOFY.
Mixed business: Business vs personal deductions
Freelancers and side hustlers sometimes blur the line between business and personal, but the ATO is strict on this one. The business portion of an expense is claimable; the personal stuff isn’t. This rule is straightforward for expenses like a work phone bill, but becomes painful to track if your personal phone is also your business phone.
Keeping things separate is a must, and the best way to do so is with a logbook. This is the approach for travel logs for work cars and should be the same for any item used for personal/business purposes. Keep things fair and reasonable, with explanations when claiming these expenses, as just numbers and a receipt may not pass the pub test.
Capital expenditure vs revenue expense
When running a business, expenses fall into two categories: capital and operating. Capital expenses structurally improve a business, whereas operating expenses keep a business running. Why is this important? Well, the entirety of a capital expense can’t be claimed in a single financial year (unlike operating expenses). Instead, capital expenses are claimed over time.
This creates confusion if you aren’t sure what the difference is between the two, especially for marketing. For example, creating a basic website for a business counts as an enduring asset, meaning the costs associated with creating that website (e.g. hiring a web designer) are considered capital and thus depreciated over time. However, the costs to keep the website running (e.g. domain name subscription) are operational, therefore deductible in the same financial year.
Keep in mind that the ATO doesn’t care what department an expense sits under: just what the expense does for the business.
ATO rules for tax deductions
When it comes to tax deductions, the ATO wants to know two basic things: a working record of the expense, and evidence that you paid for it. So keep receipts, invoices, and bank statements, and provide a brief description of how your business used the expense when lodging your tax return. These help immensely if the ATO asks — because it does.
Your business and marketing expenses
When it comes to marketing expenses, a lot of what you pay for can be claimed. The main takeaway is that you:
- Budget and plan for your marketing spend throughout the year
- Know the difference between capital and operational expenses
- Record and keep evidence for claimable deductions
By following these steps, you should get a better understanding of how to budget your marketing campaigns, run a more efficient business, and identify the expenses you can claim so that you’re ready at EOFY.
One of the best ways to track expenses as they come up is with Reckon One accounting software. This way, you can ditch spreadsheets and keep your finances in check.
