Many online businesses have established advertising and referral deals with an array of third-parties. Many high-traffic websites may contract with Google and other players to bring in revenue through ad impressions and click-throughs. In some situations, bloggers and retailers may enter into affiliate marketing (referral) opportunities where the business receives commissions and other benefits for sales.
While these types of arrangements are typically legitimate and above-board, far too many companies fail to consider the tax impacts of such an arrangement. At a minimum, businesses will need to pay income taxes on compensation received through advertising and referral contracts.
Many people assume that since their audit does not specifically name advertising and referral agreements, this transaction can’t hurt them. On the contrary, IRS auditors are trained to look for additional and related issues as they proceed through an audit. Checking for an online business and related contracts and agreements are one of the key inquiries. In fact, auditors are likely to ask probing questions regarding whether an e-business exists and the scope of its engagements.
The reason this is important is because income received for selling advertisements is taxable income. Likewise, income received in the form of sales commissions is also taxable income. This income is in addition to any taxable income received due to the sale of goods or services.