How the tax code treats advertising and brand-building costs

Advertising is listed among expenses a business may be able to deduct, but the rules separate promotion from lobbying and separate spending in an operating business from spending before one opens.

The rules come from sections 162 and 195 of the Internal Revenue Code, a long-standing Treasury regulation and IRS guidance. This explainer sets out what each says about the cost of getting a company or a founder noticed.

The baseline: ordinary and necessary expenses

Section 162(a) of the Internal Revenue Code allows a deduction for "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Advertising and promotion may be deductible under that provision.

The IRS repeats the test in its small business guide. Publication 334 for tax year 2025 states that a business expense must be both ordinary and necessary. It adds that the personal part of an expense that is partly business and partly personal is generally not deductible.

The same publication lists advertising among the "Other Expenses You Can Deduct." The entry is short and sets no further conditions on it.

Goodwill and institutional advertising

Treasury Regulation 1.162-20(a)(2) covers institutional or "good will" advertising.

The regulation says institutional or goodwill advertising is generally deductible as an ordinary and necessary business expense when it is related to the patronage the taxpayer might reasonably expect in the future. It also covers advertising that keeps the taxpayer's name before the public, and it gives encouraging contributions to organizations such as the Red Cross as an example.

Advertising that presents views on economic, financial, social or other subjects of a general nature is also deductible if it otherwise meets the requirements of the regulations under section 162 and does not involve activities for which the regulation disallows a deduction.

Where promotion ends and lobbying begins

The line between public messaging and lobbying is set by Section 162(e). It denies the Section 162(a) deduction for amounts paid or incurred in connection with four categories: influencing legislation, participating in political campaigns, attempting to influence the general public on elections or legislative matters, and direct communications with covered executive branch officials to influence their actions.

The regulation carries the same boundary. Its opening paragraph says the section governs the deductibility or nondeductibility of expenditures for lobbying, legislation and political campaign purposes, and for "carrying on propaganda (including advertising)" related to them. Publication 334 compresses this into a list of items a business usually cannot deduct, which includes lobbying expenses and political contributions.

There is a narrow exception for in-house spending. The disallowance does not apply to in-house expenditures in a year that do not exceed $2,000. Overhead allocable to lobbying and direct communications is not counted toward that limit. Payments to outside lobbying firms and dues allocable to lobbying are excluded from the in-house category, so they do not benefit from it.

Dues to tax-exempt organizations are covered separately. No deduction is allowed for the portion of dues paid to a tax-exempt organization that notifies the member that the portion is allocable to lobbying or political expenditures.

Spending before the business opens

A founder who builds an audience before launch faces a different rule. Section 195 provides that no deduction is allowed for start-up expenditures unless the taxpayer makes an election.

With the election, up to $5,000 can be deducted in the year the active business begins. That amount is reduced, but not below zero, by the amount by which total start-up expenditures exceed $50,000. At $55,000 or more in start-up costs, the immediate deduction is therefore zero.

Whatever is not deducted up front is deducted in equal monthly amounts over 180 months, starting with the month the business begins. If the business is completely disposed of before the 180 months end, the deferred balance may be deducted to the extent Section 165 allows.

The statute defines the covered costs as amounts paid in investigating or creating an active business, or in a for-profit activity before opening that is meant to become one. The test is that the cost would be deductible if an existing business in the same field had incurred it. Amounts for which a deduction is allowable under Sections 163(a), 164, 174 or 174A are excluded from the definition.

The election must be made by the filing deadline, including extensions, for the year the business begins.

Where the current guidance sits

Readers who look for the old IRS "Business Expenses" publication will not find a current edition. The IRS says Publication 535 was retired in 2022. Its information is located in other instructions and publications available at IRS.gov.

Publication 583, Starting a Business and Keeping Records, covers start-up costs. The IRS page for its January 2021 revision is marked historical and no longer updated. That page says the start-up section would be revised in 2024, and it is listed as last reviewed or updated on 27 June 2026. The statute itself, rather than that revision, sets the $5,000, $50,000 and 180-month figures.

The 2010 figures in Section 195 were different. For tax years beginning in 2010, the thresholds were $10,000 and $60,000, which still appears in the statute.

What the rules mean for a visibility budget

For a company already operating, the sources point to a single test. To be deductible, a promotion expense must be ordinary and necessary for the business, and the regulation expressly treats goodwill-oriented spending as eligible when it relates to the patronage the taxpayer might reasonably expect in the future.

Two categories sit outside that test. Spending connected to lobbying or campaigns is disallowed under Section 162(e), subject to the $2,000 in-house exception. Spending before the business begins is governed by Section 195, which allows a deduction only if the taxpayer makes the election.