Advertising Should Remain Short-Term Expense on Books

February 1, 2017

By Erich Decker-Hoppen, director of communications for MASB

Since the inception of our nation — and as recently as 2013 — lawmakers have periodically eyed advertising as a potential source of tax revenues because its long-term effects can make it seem more like an investment than an expense. After studying a wide array of research on the issue, two professors from Loyola Marymount University in Los Angeles have concluded that there is no basis for changing the current treatment of advertising as a short-term expense.

In their white paper, Perspective on Ad Capitalization and Taxation, Michael L. Moore, Ph.D., and David Stewart, Ph.D., examine a wide array of research in economics, marketing, and accounting that has addressed the short- and long-term effects of advertising on sales. Moore is Professor in Residence of Accounting and Stewart holds the President's Chair in Marketing and Law. The paper is sponsored by MASB, the Marketing Accountability Standards Board, for which Stewart serves as chair and Moore as advisor.

"For tax purposes, advertising expenses are generally deductible as ordinary and necessary business expenses in the year in which they were paid or incurred. Expenditures associated with the development or creation of an asset having a useful life beyond the current year generally must be capitalized and recovered over the useful life.
"Over many years, there have been proposals to change this treatment of advertising expenditures through outright elimination of advertising deductions related to certain products or to permit deduction of some advertising expenditures, requiring capitalization of the balance which is amortized over a defined future period. Such changes have great significance to the advertising community."

Current Tax Practice
As far as the IRS is concerned, advertising and marketing expenses are generally deductible on a current basis as ordinary and necessary business expenses. This is because they are recurring in nature, or because the benefit does not extend beyond the tax year.

Treasury regulations provide that the costs of institutional or goodwill advertising "which keep the taxpayer's name before the public" are generally deductible as ordinary and necessary business expenditures as long as they are related to sales anticipated in the near future.

Expenses that must be capitalized are those that go for permanent improvements or betterments that increase the value of a property. These include package design costs, but not coupon insets or refund offers, or costs unrelated to the package design itself, such as a change in ingredients.

For both financial accounting and taxation, current advertising and marketing expenses are generally presumed not to create assets. An asset will be recorded when it can be shown that economic value is created.

Proposals for Change
Moore and Stewart recount a long history of attempts to tax advertising, starting with the 1765 Stamp Act. In the 1950s, Congress debated using the deductibility of advertising costs as an economic stabilizer to restrain increased consumption during periods of high demand and inflation. Most proposals have been designed either to enhance revenue or to achieve social policy goals, such as targeting advertising for tobacco products, alcoholic beverages, violent TV programming, etc.

In 2013, bipartisan Congressional proposals to limit deductions for advertising raised the ire of the Association of National Advertisers and other groups who warned of dire economic consequences.

State governments have also been tempted. The 2013 budget proposed by Gov. John Kasich (R-OH) subjected sales of print, billboard, radio, and TV advertising to a five percent sales tax. Gov. Mark Dayton (D-MN) called for extending the state sales tax to advertising, among other services. Gov. Bobby Jindal (R-LA) considered broadening sales tax to include advertising.

The authors note that "some in Congress appeared to be more concerned with raising revenue to reduce the corporate tax rate to 25 percent than with the dynamic impact the advertising industry has on the economy. Data from the advertising media community show that almost 15 percent of U.S. jobs are connected to advertising and $6 trillion of the U.S. economy is generated by advertising."

Moore and Stewart examined four decades worth of studies, most of which held that while advertising does have some lingering effects, no one really knows how significant they are or how to quantify them.

At this time, not enough evidence of any long-term effect of advertising has been demonstrated to recommend a new tax or financial accounting policy.

The authors and MASB maintain that "advertising expenditures continue to be treated as a current year expense."


Erich Decker-Hoppen is Director of Communications for MASB, the Marketing Accountability Standards Board.


The views and opinions expressed in Marketing Maestros are solely those of the contributor and do not necessarily reflect the official position of the ANA or imply endorsement from the ANA.


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