Are Product Samples Tax Deductible? Understanding Tax Deductions
If you’re sending out product samples to your customers, they can likely be classified as an advertising expense, which is a deductible business expense.
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.
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NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
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.
For example, if you decide to give away product samples costing $1000 to customers, the accounting records will show the following entry.
The journal entry for purchasing samples is to debit the pre-paid promotion expense (samples) account and credit the cash account. When you give away the samples, you’ll debit the samples expense account and credit the pre-paid promotion expense account.
|Pre-paid Promotion expenses||1,000|
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.