In the tax reform crosshairs: the advertising deduction

by DLA Piper
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The tax deduction for advertising expenses has clearly become a target for Congressional tax reformers. Under current law, advertising costs are fully deductible as an ordinary business expense.  Both the House and Senate Tax Committee chairmen are considering proposals to limit the deduction for advertising expenses.

Senate Finance Committee Chairman Max Baucus (D-Montana) has released a detailed discussion draft on business tax reform which includes a proposal to limit the advertising deduction to 50 percent, with the balance amortized over 5 years.

According to committee documents, an “advertising expenditure” is defined as any expenditure paid or incurred for the development, creation or placement of advertising, or for any similar activity with respect to advertising. “Advertising” is defined as any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business, service, facility or product.

House Ways and Means Committee Chairman Dave Camp (R-Michigan) is said to have a similar provision in his tax reform plan – which has yet to be released – limiting the deduction to 50 percent, with the balance amortized over 10 years.

Another proposal has been introduced in the House to deny the deduction for advertising directed at children to promote junk food – more specifically, “food of poor nutritional quality.”

According to one advertising industry official, the proposals by the two chairmen of the tax-writing committees are “the most serious assault on the economics of the advertising industry in decades.”

A statement released by the Association of National Advertisers said that the proposal “seriously undermines the deduction for advertising expenses and would have a profound impact on the advertising industry and the economy more broadly.”

The proposed change would “greatly affect sales and employment across all levels and sectors, increase the cost of advertising, and cause a substantial disincentive for companies to spend additional advertising dollars.”

A study by an independent research firm projected that changes in the advertising deduction could reduce advertising-induced sales in the US by more than US$446 billion and place 1.7 million jobs at risk.

Both Baucus and Camp are committed to passing major tax reform legislation, and both have said they hope to act on tax reform in 2014. The advertising deduction and other business deductions are vulnerable because limiting these deductions raises the revenue needed to pay for a lower corporate tax rate.

Although the timetable for tax reform in 2014 is unclear, the detailed legislative proposals released by Baucus and soon-to-be-released by Camp will set the parameters for future tax bills, either as a part of comprehensive tax reform or as separate tax bills considered on an individual basis in the future.  As one analyst noted, these proposals do not die. They are put on the shelf for the next legislative battle, especially if they raise a lot of revenue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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