Outrageous Bill in the Works to Tax Marketing and Advertising Expense

by Ronald L. Burgess – Business Consultant

Outrageous Bill in the Works to Tax Marketing and Advertising Expense

Since the introduction of income taxes, the money spent in order to do business was a cost of “doing business” and was not taxable. In other words, it was deducted as expenses before calculating if a business made profit or not.

Now, congress is working on changing this long standing principal (Read Bill, MCG13833 Page 104-107). It proposes to treat a company’s marketing and advertising budget as if these expenses were actually assets, like furniture and not real expenses.

The idea is that a desk or computer will last several years, so only a part of the cost gets “used” each year. It’s an asset that is written off over several years because it is used over several years.

Under the new legislation, marketing and advertising would be treated like a desk! A business couldn’t take the full advertising expense in the year it was charged but would have to depreciate it over six years.

Here is the problem: the benefits of advertising are largely consumed immediately. Advertising, printed material, price cards, catalogs, and coupons are intended to develop business as soon as possible; they simply do not last six years. The new legislation dictates that when a business spends $100,000 on marketing, it can only expense $50,000 the same year. The next year (or certainly the following year) the complete value is gone. Then in the following five years, just $10,000 can be expensed each year. By the time the last $20,000 to $30,000 is expensed, the marketing campaign is long over and forgotten.

This represents an accumulating cash hog.

In six years, with an ad expenditure of $100,000 per year, just $450,000 can be deducted, creating a tax increase on $150,000 over the period. This would eventually even out by year eleven, but the $150,000 tax liability never goes away.

Perhaps the biggest issue, however, is the concept that real expenses to run a businesscannot be deducted in the year they were incurred. In my experience, this is a completely new concept. And like other things that creep, if this expense is not deductible, what else will be removed? Paper? The electric bill? Employees? Sure you say, that’s stretching it, employees?

In fact, the draft bill includes reporting all internal and external costs to produce said advertising or marketing materials. This means that the marketing salaries, the designers, the webmasters, copy writers, secretaries and anyone who contributes as an employee or contractor to a corporate brochure must be measured and reported. Yes, really.

I’m sure you see the mess that this presents. Exactly how much time did the owner or manager spend on the re-write for the new brochure? What about the paper that was used to print all those proofs you went through? How many were there? What percentage of the paper was it compared with correspondence (which is deductible)?

Ah yes, the government’s law of unintended consequences strikes again.

All this is what the impact to every business will mean. But in addition, the marketing and advertising industries will be impaled. Advertising and marketing activities will drop, and many will lose their jobs as a result.

The American Advertising Federation states “Advertising – local, regional and national – generates $5.6 trillion in total economic activity for our country and helps support 22.1 million, or 15% of all jobs in the U.S. economy. The stimulus generated by advertising brings jobs and sales to every state and to every community. Even a modest reduction that limits the amount a business may deduct of total advertising spending could have a devastating impact on jobs and economic activity.”

Some report that every one dollar in advertising generates another twenty dollars. While I have never seen this substantiated by an economist, clearly communicating an offer to a customer does stimulate the economy more than simply putting product in the warehouse and hoping someone will buy it. If this supposition is just 20% correct, then the lack of marketing money in the economy to any degree will surely cost business and jobs.

All business owners and presidents must not sit on the sidelines on this one. This is just the start of government manipulation of which real expenses you can deduct, and it clouds the natural business decision process. We already pay sales taxes on many printed materials. Let’s not have to pay income tax on it, too.

What to do about it?

Read a full account of what to do here, Tax on Advertising? Why you should care! And what you should do about it.

Write to your senator and congressperson, and tell them to completely remove the advertising clause from the draft tax reform legislation by Senator Max Baucus, D-Mont., Chairman of the Senate Finance Committee. Do it now and conviction as if your business depended on it, it does.