Tax reform discussion draft proposals released by former Senate Finance Committee Chairman Max Baucus and House Ways and Means Committee Chairman Dave Camp could, if eventually enacted, significantly change the way businesses can deduct advertising expenses.
Companies currently can claim 100 percent of their advertising costs during the year in which they were incurred. In late November, Baucus, a Democrat from Montana who has since been named ambassador to China, proposed allowing only a 50 percent, in-year deduction. The remaining 50 percent could then be expensed 10 percent annually over the five ensuing years. Earlier this week, Camp, R-Mich., released his proposal that would create a similar 50/50 split with the second portion of the deduction being spread out over 10 years.
U.S. Sens. Pat Toomey and Robert Casey Jr., who both serve on the finance committee, have recently reacted to the Senate’s draft.
“I am also concerned about the Chairman’s proposals to curtail companies’ ability to deduct ordinary and necessary business expenses,” Toomey wrote in a position paper he released in February. “In some instances, such as advertising and research costs, forcing companies to amortize part (or all) of these expenditures is not conducive to economic growth.”
Casey is taking a wait-and-see approach. But he felt American Advertising Federation representatives made some good points when telling him about their opposition to the proposal.
“I have to admit there are some pretty compelling arguments that they’ve made and we need to consider. … It’s still early, but they’ve made some pretty good arguments,” said Casey.
Camp’s advertising plan could increase revenues by $169 billion from 2014-2023, according to a Joint Committee on Taxation estimate.
Because of advertising’s long-term benefits to a business, the expense should be deducted over years, instead of all at once, according to an opinion expressed in the Ways and Means draft.
“In general, the cost of assets that have a useful life beyond the tax year must be recovered over the useful life of the asset,” states the House discussion draft.
“The provision recognizes that a portion of advertising has a useful life beyond the tax year in which the expenses are incurred because a portion of advertising creates long-lived intangible assets, such as brand awareness and customer loyalty, the benefits of which inure to the company for many years after the taxpayer incurs the expense.”
The Association of National Advertisers and Advertising Coalition released a study that claims changing the current 100 percent, in-year deduction allowance would threaten 1.7 million jobs and $456 billion in sales over the next five years. If an amortization plan is enacted, businesses would find themselves perpetually in a position where some of their advertising deduction would be deferred to a later date.
“You’re never really made whole,” said Clark Rector, the advertising federation’s executive vice president for government affairs.
Locally, Bob Layo, president and CEO of the Greater Johnstown/Cambria County Chamber of Commerce, discussed the proposed changes by saying, “It would seem to me there would be less money that would be spent on advertising, and that could certainly impact business.”
The advertising proposals have been introduced into the overall discussion about tax reform.
“Ultimately, the best way to make our business tax system more competitive and to create jobs here at home is to lower our tax rate and to move to a more rational and competitive method for taxing foreign income,” Toomey wrote. “Additionally, we must not forget about the millions of pass-through companies that pay taxes at individual rates. These companies, many of which are small businesses, are a vital part of our economy and must not be adversely impacted by any tax reform overhaul.”
Casey added, “We’ve got a long list of issues we’ve got to try to address in the context of tax reform.”
Dave Sutor is a reporter for The Tribune-Democrat. Follow him on Twitter at twitter.com/Dave_Sutor.