Pricing & perks
Are customer perks and rewards tax-deductible for my business?
Short answer
Yes — customer perks are typically deductible as advertising or promotional expenses on Schedule C (sole prop) or as Marketing Expense on a corporate return. Talk to your CPA about your specific structure.
Reviewed May 15, 2026
Key points
- Yes, deductible as advertising/promotional expense on Schedule C or corporate return
- Track per-person totals — issue 1099-NEC if any one person gets >$600/year
- Free items: deduct at COGS (materials), not retail value
- Some states (CA, TX, NY, WA) charge sales tax on FMV of free promotional items
- You can't deduct perks given to yourself or immediate family
- Get a CPA's opinion if you're doing this at scale
The full answer
For most US small businesses, perks given to customers in exchange for marketing actions (Instagram posts, reviews, referrals) are deductible as advertising and promotion expense. This includes:
• Free products given as part of a campaign (deducted at COGS) • Discounts (already reduce revenue, so the deduction is automatic) • Cash back paid to customers (deduct as marketing expense; report on 1099-NEC if >$600 to one person in a year) • Gift cards (deduct as marketing expense; same 1099 threshold)
Where to put it on the tax forms: • Sole proprietor / single-member LLC: Schedule C, Line 8 (Advertising) • S-corp / C-corp / multi-member LLC: Marketing / Advertising line item on the corporate return
What trips small businesses up:
1. 1099 reporting threshold. If you pay any single individual more than $600 in cash, gift cards, or cash-equivalent rewards in a tax year, you must issue them a 1099-NEC and report it to the IRS. This applies to influencers and high-volume customer-marketers. Track per-person totals or your bookkeeper will scream in January.
2. Cost of goods sold vs. marketing expense. A free latte you give for an Instagram post — is the cost recorded as reduced COGS (the materials cost) or as marketing expense (the retail value)? Most accountants prefer COGS at materials cost, which is more conservative and easier to defend. The retail value goes nowhere — it never hit your revenue.
3. Sales tax on free items. In some states (notably California, Texas, New York, Washington), you owe sales tax on the FMV of products given away as promotional items, even if no money changed hands. Check your state's rules; this can be a meaningful expense at volume.
4. Self-dealing. You can't give yourself or your immediate family a "customer perk" and deduct it. The IRS calls this out specifically for closely-held businesses.
This is not legal or tax advice — talk to your CPA, especially if you're running high-volume perks, doing influencer payments, or operating in states with promotional sales tax rules.
What to do next
Related questions
Do I have to issue a 1099 for customer rewards?
Only if a single individual receives more than $600 in cash, gift cards, or cash-equivalent rewards from your business in a tax year. Free product or in-store discounts don't trigger it.
What is the average ROI of customer marketing campaigns?
Typical small-business customer marketing campaigns return 4-12x: a $1 perk produces $4-12 in revenue from new customers and repeat visits. Compare to 1.5-3x for paid social ads.