J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Prizes, Contests, and Other Promotional Activities

Amounts paid for prizes, contests, and other promotional activities may be deducted as advertising expenses if you can show that the expenses have a relationship to your business. The amounts expended must be reasonable; they must not be out of proportion to the amount of business expected to be obtained as a result of the prize, contest, or other promotional activity.

Example

A restaurant owner gives away a car to the holder of a lucky-number ticket. These tickets had been distributed to patrons. The cost of the car was a deductible business expense.

Sponsorships of teams and other events can be deducted as advertising expenses (e.g., sponsorship of a tennis match or golf tournament).

Prizes and other awards given to employees are not treated as advertising costs. They are part of compensation (see Chapter 7).