Earlier this year, Rep. Dave Camp (R-Mich.), introduced a comprehensive tax reform proposal in the U.S. House of Representatives that aims to simplify the U.S. tax code and lower current tax rates for individuals and businesses. Currently, U.S. corporate tax rates are among the highest in the civilized world. While many people, regardless of political affiliation, would welcome a less complex tax code and reduced rates, there is one “reform” in the proposal that should make anyone involved in the marketing and advertising industry blanch. For that matter, the “reform” might make any business owner who advertises their product or service gasp.
As a way to help offset the revenue lost through Camp’s proposed tax rate reductions, his reform plan removes or adjusts many current tax deductions. One such adjustment is that the deduction for business advertising expenses would be amortized over time instead of being claimed for the year the expense occurred. Currently, for every $1 a business spends on advertising, it can deduct $1 as a business expense in that tax year. Camp’s proposal would allow for 50% of the advertising expense to be deducted in the first year with the remaining 50% to be amortized equally over a 10-year period. Putting aside the impact this would have on the bottom line of any business that advertises, the “reform” would open a Pandora’s Box of issues that could be endless.
The rationale for this “reform” is that it takes time to fully recoup any expenditure of advertising dollars through new sales. Therefore, the full amount spent should not be immediately deducted. Most likely, inexperienced staffers who were tasked with finding additional revenue by eliminating or reducing current business deductions inserted this provision in the plan. These staffers have little actual business experience and do not realize how broad advertising expenditures might be.
Details of this provision, which is now commonly being referred to as an “ad tax,” do not specify what constitutes advertising. This has the potential to significantly increase the number of expenses that could qualify as an advertising expense while taking away the full deduction for them. Considering the ever-changing marketing and advertising landscape, and all of the media channels and communication tools that businesses now use, “advertising expenses” could become infinite. Will social media activities need to be amortized? Are salaries related to advertising campaigns fully deductible as an expense? What about a sales lunch? Do content marketing efforts constitute an advertising expenditure?
The questions left open by the proposal’s vagueness, combined with the complexity of the current “advertising” environment, certainly would cause many businesses to change how they allocate advertising expenditures. Not good news for professionals in the advertising and marketing industry.
Hope for those opposed to such a “reform” to current business deductions lies in the fact that with the coming Congressional elections there is little chance that Camp’s proposal will advance during the current Congressional session. Split-party control of the Senate and the House makes advancement of the plan unlikely as well.
However, because of how the Congressional budget process works, Camp’s proposal will stick around, with aspects of it likely being used in future efforts to reform the tax code or balance the federal budget. Camp has said the estimated “savings” that would result from the amortization of business advertising expenditures is $169 billion over a 10-year period. That is a significant amount; it is just a matter of time before another Congressional staffer latches on to this provision during a future budget negotiation as a way to “add” revenue to the federal coffers.
Because any change in how advertising expenditures are allocated would have significant ramifications on the advertising and marketing industry, we must be vigilant in ensuring this “ad tax” is not enacted. Business groups representing the advertising industry have already started the process of educating congressional representatives on the true cost of removing this deduction; we must be sure to educate our colleagues in the industry as well.
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For a full transcript of Camp’s proposal click here: http://waysandmeans.house.gov/uploadedfiles/statutory_text_tax_reform_act_of_2014_discussion_draft__022614.pdf
For other pieces summarizing the issue, see:
Joint Committee on Taxation, “Estimate Revenue Effects of the Tax Reform Act of 2014”- https://www.jct.gov/publications.html?func=startdown&id=4562