What Is and Isn't Considered a Marketing Expense?

The working definition

Marketing expenses are costs aimed at promoting the business and generating demand. They are typically recorded as operating expenses.

The test is purpose. If the spending exists mainly to get people to notice, consider or buy from you, it is marketing. If it exists to make the product, deliver the service or keep the company running, it is something else.

Marketing costs generally appear as operating expenses on your income statement. Larger asset-like purchases, such as a vehicle or equipment, are treated differently; see comparing operating and capital expenses. Tax treatment can vary, so confirm with your accountant.

What usually counts

Advertising, website and content costs, email and social tools, promotional materials, sponsorships and agency fees usually count as marketing expenses.

See intro to small business marketing and creating a marketing budget.

What usually does not count

Product costs, general overhead, ordinary customer service, owner draws and personal expenses are not marketing expenses.

• Cost of goods sold. Materials and direct labor to produce what you sell.
• General overhead. Rent, utilities and insurance, even if a storefront helps attract customers.
• Routine customer service. Support staff solving problems for existing customers, unless run as a retention program.
• Sales payroll and commissions. Usually tracked as selling expense or payroll, though some companies group them with marketing.
• Personal costs. Not a business expense at all.

Consistency matters more than perfection. Choose a classification and stick with it, so month-to-month comparisons mean something.

Gray areas

Meals with prospects, gifts, memberships, training and discounts can be marketing or something else. How you treat them depends on purpose and tax rules.

Common gray areas:

• Client meals and entertainment. May be partly deductible, with special limits. Check current IRS rules.
• Gifts. Business gifts have per-person deduction limits.
• Memberships and chamber dues. Often marketing if they bring leads.
• Discounts and free samples. Discounts generally reduce revenue, while samples may be marketing or cost of goods. Ask your accountant.
• Social media management by an employee. Part of payroll, but you may allocate to marketing for budgeting.
• Vehicle wraps. Advertising, though the vehicle itself is an asset.

Keep notes on the business purpose of each ambiguous expense. For related categories, see business expense categories.

How much to budget

Many small businesses set marketing as a percentage of revenue, but the right number depends on goals, margins and what has already proven profitable.

There is no universal percentage. A new business that needs awareness may spend more of its revenue than an established one with strong referrals. Start from what you can test and measure rather than a rule of thumb.

A practical way: decide how much a new customer is worth in profit, set the most you would pay to win one, then back into a monthly budget. Our guide to marketing payback math shows how. Revisit the budget each quarter and shift money to channels that return more.

Track results by channel

Record spend and new customers by channel, then calculate cost per customer and payback. This turns marketing from a guess into a decision.

Illustrative example: you spend $1,500 a month on local search ads and $500 on mailers. Ads bring 15 new customers and mailers bring 2. Cost per customer is $100 for ads and $250 for mailers. If each customer brings $400 in profit, ads clearly pay and mailers barely do.

To track:

1. Ask every new customer how they found you.
2. Use unique phone tracking, codes or links where practical.
3. Record spend in a separate account in your bookkeeping.
4. Review monthly and cut what is not working.

See ways to find new customers for channels to test.

When marketing needs funding

If a channel has proven payback and you lack cash to scale it, funding can help. Never borrow to test an unproven idea.

Say a campaign returns $3 of profit for every $1 spent, and you want to triple the budget but cash is tight. Funding the extra spend can be reasonable, as long as customers arrive fast enough to cover the payment. If results are uncertain, run a smaller test first.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Options like working capital and a business line of credit can fund growth spend. We show true cost and payback before you sign, and applying takes minutes with a soft credit pull.