× Freshbooks App Logo
FreshBooks
Official App
Free - Google Play
Get it
3 Min. Read

Are Product Samples Tax Deductible? Understanding Tax Deductions

If you’re sending out product samples to your customers, they are classified as promotion expenses and are tax deductible.

A promotion expense is a cost a business incurs to make its products and services better known to its customers. For example, if you’re in the skincare business offering free samples of your newly launched lotion, you can deduct the cost of the samples and packaging as promotion expenses on your small business tax return.

What this article covers:

What Are Product Samples

Product samples represent what you are selling and are given away to potential customers for free with the intention of persuading them to buy the product.

The distribution of free samples for promotional reasons is common especially when businesses are introducing a new product in the market, introducing a feature upgrade or looking for feedback from product users.

Accounting Treatment for Product Samples

Since these samples do not have a sales value, they are not recorded in the accounting records as sales. However, these samples so have a cost and it needs to be treated as a promotional expense in the business accounts.

The journal entry for product samples is to debit promotion expense account and credit the purchases account. For example, if you decide to give away product samples costing $1000 to customers, the accounting records will show the following entry.

Account

Debit

Credit

Promotion expenses

1,000

 

Purchases

 

1,000

Total

1,000

1,000

The debit entry represents the cost of the product samples to the business and includes the storage of the inventory. The credit entry reduces the purchases expense. This, in turn, removes the cost of the samples from the cost of sales account.

When the products are pulled out of the existing inventory, a journal entry has to be made to adjust the inventory account on the general ledger.

Are Product Samples Tax Deductible?

The cost of creating or purchasing product samples can be deducted by businesses as part of their promotion expenses. This also includes the cost of packaging, mailing and distributing samples.

The IRS considers promotion expenses to be tax-deductible as business expenses, provided they are ordinary and necessary. This means that the expenses have to be reasonably related to the promotion of your business.

If your skincare business orders $800 worth of products and incurs a mailing cost of $200 to send and distribute the product samples to its customers, you can deduct the entire $1000 as a part of the promotion expenses.

Product samples have to be evaluated periodically to make sure they are viable for use. You have to write off damaged items and obsolete products as expenses in the current period.

RELATED ARTICLES

Save time Billing and Get Paid 2x Faster with FreshBooks

Try FreshBooks Free