What expense category is Samples and Promotional Materials?

Providing product samples or distributing promotional materials, such as brochures and branded items, is a cornerstone of marketing for many businesses. These costs are a necessary part of attracting customers and building brand awareness.

For tax purposes, these expenses are generally deductible; however, their specific category depends on the nature of the item and its intended use. It could be an advertising expense, a business gift, or part of your cost of goods sold. This guide will clarify how to categorize these costs in accordance with IRS rules to ensure your business remains compliant.

Samples and Promotional Materials Category

There is no single expense category for all samples and promotional materials. The costs must be categorized based on their nature and purpose.

1. Advertising Expense: Most promotional materials, such as brochures, flyers, and low-cost branded items, are considered a deductible Advertising Expense.
2. Business Gifts: If a promotional item is given to a specific individual and does not meet the criteria for an advertising item, it is a Business Gift, which has a strict deduction limit.
3. Cost of Goods Sold: If you give away product samples from your own inventory, their cost is typically accounted for within your Cost of Goods Sold (COGS) calculation.

Important Considerations While Classifying Samples and Promotional Materials

The most critical factor is distinguishing between a promotional item intended for wide distribution (advertising) and one given to a specific individual (gift), as well as how to treat items taken from your inventory.

Advertising vs. Business Gifts

IRS Publication 535 provides a clear test to distinguish between an advertising item and a gift:

• An item is a fully deductible advertising expense if it costs you $4 or less, has your business name permanently imprinted on it, and is one of a number of identical items you widely distribute.
• If an item does not meet all three of these conditions, it is typically considered a business gift. The deduction for business gifts is limited to $25 per person, per year, as detailed in IRS Publication 463.

Product Samples from Inventory

When you give away product samples that you would normally sell to customers, the cost of these samples is accounted for in your Cost of Goods Sold. IRS Publication 334 explains that when you withdraw merchandise for use other than for sale (such as for samples), you must exclude its cost from the total merchandise you purchased for sale. This is typically done by crediting your purchase account for the cost of the withdrawn items. You do not take a separate Samples expense deduction.

Storage of Samples in a Home Office

IRS Publication 535 notes a special exception to the exclusive use rule for a home office deduction. If you use part of your home for the regular storage of inventory or product samples, you may be able to deduct home office expenses even if you don't use that area exclusively for business.

Tax Implications and Recordkeeping

The reporting for these costs depends entirely on their classification.

How to Report the Costs

For a sole proprietor filing a Schedule C (Form 1040):

• Advertising: Costs for qualifying promotional materials are deducted on Line 8, Advertising.
• Business Gifts: The deductible portion (up to $25 per person) is reported under Line 27a, Other expenses.
• Product Samples: The cost is included in the Cost of Goods Sold calculation in Part III of Schedule C.

What Records to Keep

You must have documentary evidence to substantiate your expenses. This includes:

• Invoices for promotional materials or branded items purchased.
• For business gifts, records should include the cost, date, description, and business purpose of the gift, as well as the nature of the business relationship between the giver and the recipient.
• For product samples, accurate inventory records must be maintained to show that the items were removed from inventory for promotional purposes.

How Fyle Can Automate Tracking for Sample and Promotional Expenses

Fyle helps you capture and correctly categorize all your spending on samples and promotional materials, ensuring a complete and compliant record for tax time.

• Capture All Purchases: Instantly capture receipts for promotional items or invoices from marketing vendors.
• Enforce Gift Policies: Fyle’s policy engine can automatically flag gift expenses that exceed the $25 per-person IRS limit.
• Track by Campaign: Code all promotional costs to a specific marketing campaign or event for clear ROI analysis.
• Automate Your Accounting: Sync all categorized expenses to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.