Market research and normal product testing costs are not considered research expenditures under the tax laws.
All too often, one of the first business expenses that veterinary practices cut back in a troubled economy is one of the most basic — advertising.
This is doubly short-sighted, given the importance of advertising in bad times and the fact that Uncle Sam, in the form of tax deductions, often will pick up a portion of those costs.
Advertising, as well as marketing, can help build your client base.
Such expenditures fall under several sections of the tax regulations. They include business cards, catalogs, home demonstrations, package design, prizes and contests, service-launch costs, other promotional activities and much more. Generally, all these are tax-deductible as "ordinary and necessary" costs of doing business.
But not always.
Nor is it always in the best interest of a practice to take all such deductions in the current tax year.
While capital assets, such as equipment or the practice building, are deducted over the long term, and the cost of goods purchased for resale are deducted from gross sales to arrive at gross income, many other expenditures are immediately deductible.
These include management costs, commissions, labor, supplies, incidental repairs, operating costs of vehicles used in the business, business-related travel, insurance premiums (for fire, storm, theft or accidents), rental of business property and advertising.
Consider the situation of Jones Animal Hospital, a fictitious veterinary practice that publishes a catalog, a compilation of services and veterinary products it produces and sells to patients and other veterinarians.
Under tax rules, the expenses of creating, printing and distributing the catalog or promotional brochure would be a capital expense. After all, the publication ordinarily would be expected to benefit the practice for a number of years.
The tax deduction for the expenses of planning, researching, creating, laying out and printing that material would be capital expenditures-deductible over the period it is expected to useful to the practice.
Should the practice design the brochure or catalog in such a way that it clearly would be useful for a specific period, preferably only in the current tax year, the write-off would be immediate.
Suppose, however, that the brochure or mailer that was a capital expenditure for the practice, because its expected useful life exceeded one year, suddenly was outdated, required changes or no longer reflected the practice's services.
The initial expenditure, at least the amount remaining on the books at the time, would become a tax deduction — a loss because the capital asset was abandoned.
For years, businesses claimed the cost of creating and maintaining a Web site as an advertising expense. However, the IRS so far has not issued formal guidelines on this.
Informal, internal IRS guidance suggests it may be appropriate to treat these costs like an item of software and depreciate them over three years.
It is clear, however, that those who pay large amounts to develop sophisticated sites have been allocating their costs to items such as software development (currently deductible much like research and development costs) and currently deductible advertising expenses.
Deductions for business gifts, given directly or indirectly to someone, are limited to $25 per recipient per year. Items clearly of an advertising nature that cost $4 or less and signs, display racks or other promotional materials given for use on business premises are not gifts.
A veterinary practice that gives clients or prospective clients anything that might be considered a form of entertainment generally gets the entertainment write-off, ignoring the $25 limit.
But if the practice gives packaged food or beverages that are to be used later, those are considered gifts.
A gift to an client's spouse is not treated separately from a gift to the client personally.
Remember, the $25 limitation applies to gifts made "directly or indirectly" to an individual.
A gift to a client's spouse therefore is considered given indirectly to the client.
However, if the spouse has an independent business connection with the taxpayer, that gift would not be regarded as in indirect gift to the client unless it was intended for the client's eventual use or benefit.
To increase income, many veterinary practices give away small samples. Under the tax rules, the samples can be deducted immediately if they were purchased separately from the products being sold.
If the item was included in inventory, it cannot be deducted twice. It will already be part of the cost of goods sold.
Right off the bat, it should be noted that advertising in the form of lobbying lawmakers to change the tax laws, or for any legislation, is not tax-deductible.
No longer is the cost of advertising to promote or defeat legislation, or to influence public opinion — perhaps on issues like spay-neuter laws or appointments to animal-welfare or animal-control groups — a deductible business expense. That's true even if such legislation, directly or indirectly, affects a veterinary practice.
However, costs of so-called "good will" advertising to keep the practice's name before the public usually are deductible — provided they are related to patronage the practice might reasonably expect in the future.
A deduction usually is allowed for ads the practice might run to encourage contributions to charities like the Red Cross, purchase of savings bonds or similar causes. However, even though deductible, such advertising might be of little benefit to a troubled practice.
Deduct now or later?
The tax rules clearly label most advertising costs as immediately tax deductible, albeit with some restrictions. Why, then, would any veterinary practice even think about foregoing that immediate write-off? The answer lies with the income of the practice — or lack thereof.
A start-up business, a new-product launch or a veterinary practice affected by the economy, competition or other factors may not generate sufficient income or be in a high enough tax bracket to benefit immediately from the write-off.
Such expenses, if they can be legitimately capitalized or written off in later tax years when taxable income or the tax bracket is higher, might be postponed to reap maximum deductions later.
Making that decision often requires the help of a qualified tax professional.
But the choice of whether to advertise your services is a no-brainer, good times or bad.
Battersby is a tax consultant in Ardmore, Pa.