Could this Mad Plan Harm the Mad Man?

[Blogmeister, Jr.’s Note: Rob Schill, of the firm's Government Relations group, contributed to this article.]

 Congress is thinking about eliminating the tax deduction for advertising expenditures – but is that a good idea?

For ages, federal policy has encouraged advertisers to advertise by making it cost-effective, tax-wise.  But now, some in Congress are reportedly thinking about reversing that longstanding tradition.

The ripple effects of such a reversal on all businesses associated, directly or indirectly, with “advertising” in its broadest terms could be seriously bad news.

Historically, of course, advertising has been treated by the IRS as a deductible business expense. So every dollar spent on advertising could be effectively ignored for tax purposes.  The more money spent on advertising, the less would be subject to taxes.  Why not spend it on promotion rather than pay it to Uncle Sam? 

This has been good news for advertisers and everybody else in the ad biz, including media offering access to audiences, producers, writers, actors, etc., etc.

But it appears that some in Congress have a new approach in mind.  According to a “government alert” from the American Advertising Federation (AAF), there are proposals under consideration in both the House and Senate affecting the ability to expense advertising fees, including a proposal to amortize advertising costs.  The AAF is urging its members to press their legislators to vote against any measure that would limit a business’s ability to deduct the full cost of advertising in the year it is incurred.

The impetus for change now appears to be wrapped up in the ongoing appropriations and debt ceiling issues afflicting Congress (and may extend into a continued tax reform effort thereafter).  According to AdWeek, the House Ways and Means Committee, led by its chairman Rep. David Camp (R-Mich.), has discussed the possibility of repealing the deduction available for advertising expenses.  Dan Jaffe, top lobbyist for the Association of National Advertisers (ANA), has advised that “[w]e’ve been told by House staff that they are seriously looking into some limitations on the deduction.” 

The problem with imposing any such limitations should be obvious.  A change in the tax treatment of ad expenses could potentially add hundreds of millions of dollars to marketers’ tax bills.  That in turn would discourage, rather than encourage, advertising, which could significantly reduce ad budgets.  And that would significantly reduce revenue for ad-supported media and the broad universe of industries (e.g., production, copywriting, acting) symbiotically linked to advertising

A restructuring of the ability to expense advertising fees would affect the media and advertising industries in much the same way that elimination of the mortgage interest deduction would upset the home lending and housing market.  

Some representatives of the broadcast industry have recognized the storm clouds looming and have tried to get ahead of the problem.  In July, New Jersey Broadcasters Association (NJBA) CEO, Paul Rotella, sent a letter to Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, Sen. Orrin Hatch (R-UT) and Senator Bob Menendez (D-NJ) about the issue of advertising deductibility. 

In his letter, Rotella wrote “It is vital to the health of the U.S. economy that advertising costs be retained in the Internal Revenue Code as an ordinary and necessary business expense that businesses deduct pursuant to section 162(a).  The deduction for advertising costs promotes tax fairness because it is central to allowing a business to properly calculate its net income and ultimately the amount of tax it must pay, not unlike the deduction for employee salaries, rent, utilities and the other ongoing costs of a business. In contrast to many tax expenditures, advertising is essential to the growth of our economy. For instance, just in the State of New Jersey, advertising accounts for $187 billion of its $966 billion total economic output and drives sales of products and services that help support 554,407 jobs in the state.” 

Frankly, Rotella could not have said it better, and it would be wise for the advertising, media and marketing industries to follow the leads of the NJBA, the AAF and ANA in reaching out to their legislators and monitoring activities on Capitol Hill.  I know we will be. 

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Harold Hallikainen - October 9, 2013 8:01 PM

I wonder what the rationale is for removing the deductibilty. It truly seems to be a necessary business expense. If look at other disallowed expenses, such as meals with no business purpose, there is a question as to the business necessity of the expense. But advertising results only in benefit to the business, not some an individual (like a meal would).

Amortization is an interesting question. Years of advertising can build brand recognition that runs beyond the period the advertising is run. But, if you build brand recognition in one year, then stop advertising, how much of the initial benefit remains in subsequent years? If amortization makes any sense at all, I suspect the amortization period is too short to make the calculations worth the effort.


Frank Montero - October 11, 2013 2:35 PM

Harold --

Call me cynical but I personally think any talk of eliminating the advertising expense deduction is more form over substance, a gambit intended to get people's attention to show that Congress is trying to do something to balance the budget. Also, most politicians are not big fans of media these days so this targets an industry that (unlike the restaurant business) they are fond of torturing. Still, we aren't taking it lightly because it could have a devastating effect on the media and advertising industries; organizations such as the NAB, the AAAAs, the AAF and state broadcast associations are watching it very closely, as are we. While an interesting and novel solution, I personally think that amortization would be unruly. Imagine amortizing a business meal as you digest it.

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