Amortizing half of costs U.S. businesses spend on advertising would place millions of U.S. jobs and billions in sales at risk
Discussion drafts of tax reform legislation released by the House Ways and Means Committee and the Senate Finance Committee in 2014 would allow U.S. businesses to deduct only half of their advertising costs in the year they purchase the advertising, and would require them to amortize the other half over five or ten years. The Senate Finance Committee Business Income Tax Working Group also listed the advertising amortization proposal as the third highest potential “pay for” to finance tax reform in 2015. Advertising under current law is treated as an ordinary and necessary business expense just like salaries, rent, utilities, and office supplies. Businesses have been able to deduct the full cost of their advertising for the 100 year life of the Federal Corporate Tax Code.
Advertising supports $5.8 trillion of the $36.7 trillion in U.S. economic output and supports 20 million of the 142 million jobs in the United States, according to the world-renowned economic consulting firm IHS Economics and Country Risk.
The proposed increased tax on advertising would eliminate millions of American jobs. IHS estimates that every $1 spent on advertising generates nearly $19 in additional economic output and every million dollars in advertising expenses supports 67 American jobs. Nobel Prize winning economists who have studied the tax treatment of advertising confirm that making advertising more expensive would cause a significant decline in spending on advertising.
The net effect of the drafts is to increase a company’s taxable income for every year in which a business purchases advertising. The portion of ad spending that is not immediately deductible would be treated as income for tax purposes. At first glance, it might appear that advertisers would “catch up” the full value of their deduction in five years, but companies would in fact pay significantly more taxes under these discussion drafts.
Why was this tax on advertising included in the discussion drafts? Advertising Age quoted a Senate Finance Committee aide as saying “there are very few places we can go to find this kind of revenue.” There was no mention that this policy is counter to generally accepted tax and economic policy. Two of the leading economic experts on the role of advertising in the economy – Dr. Kenneth Arrow and Dr. George Stigler – previously have written, “Proposals to change the tax treatment of advertising are not supported by the economic evidence.” Drs. Arrow and Stigler were awarded the Nobel Memorial Prize in Economic Sciences in 1972 and 1982 respectively for their research and writing on the important role of information in the U.S. economy.
IRS has confirmed that the current deduction of advertising costs is the correct treatment. The only thesis for amortizing ad costs is that ads are durable and produce sales beyond the current year. But when INDOPCO Inc. v. Commissioner, 503 U.S. 79 (1992) clouded this issue regarding advertising, the IRS stepped in and issued a Revenue Ruling that confirmed the decision did not affect the ability of businesses to deduct the cost of advertising in the year it is incurred – that remains the law today and nothing has been offered as a rationale to change it. In fact, with the substantially improved ability to track the effect of advertising in the marketplace and to alter advertising quickly in the digital Internet and mobile environment, the life of advertising campaigns have on average become substantially shorter rather than longer, further undermining the claims for amortization.