The Tax Man Cometh (and He Cometh for Your Stress Balls)
No, no, no, stay with me here.
I understand. Few people like talking or reading about taxes. More people prefer to scream and yell about them instead. And why not? The United States tax code has had a few complaints directed toward it, namely that it’s long, it’s complicated, it’s unfair, and it stifles economic growth. You know, little issues like that.
The last time that the U.S. tax code received an overhaul was 28 years ago, in 1986. I believe I was sporting a hairstyle with mile-high permed bangs that year. However, like hairstyles, laws occasionally need to be revised to reflect the new needs of the people they serve, and just as I eventually rid myself of the poofy bangs (2004 was a great year), Congress eventually put forth new ideas for changing our tax laws.
Members of Congress revealed their most recent efforts at tax reform earlier this year. Building upon what he had worked on with former Senator Max Baucus, Representative Dave Camp, the chairman of the House Ways and Means Committee, submitted a 979-page draft bill as a document intended to simplify the tax code. I’m not making that up.
Like many pieces of legislation, Camp’s bill contained provisions that some people found helpful and others found stinky. The world of business was no exception. In particular, the bill’s proposal to gradually lower the federal corporate tax rate from 35% to 25% met with many a thumbs-up.
Then came the question of what would have to be given up in exchange for that lower rate. The bill had an answer for that, of course—several answers, in fact. And if the bill passes, one of those answers will have a huge effect on the way many companies advertise, including their use of promotional products.
The “Advertising Tax”
Businesses are allowed to deduct certain costs of doing businesses on their taxes. If a business pays rent on an office, the amount of rent paid can be used as a tax deduction. Advertising is another tax deduction, and a pretty important one for most companies. Unlike the cookies I keep in my lunch bag, advertising is considered a typical cost of doing business. As a result, businesses currently are allowed to deduct 100% of their advertising expenses in a given tax year.
Camp’s proposed bill would change that. Starting in 2018, the bill would allow companies to deduct 50% of their advertising expenses in the year those expenses occur—the year that a commercial runs, for example, or the year that a bunch of customized pens are purchased. After that, the remaining 50% could be deducted over the course of 10 years, one-tenth of that remaining 50% taken as a deduction every year.
Ten years to deduct a cookie—I mean, a business expense. It’s a bit like calculating the depreciation on an office computer instead of writing off the whole value of it at once on your taxes. And there is some logic in taking a deduction for advertising over the course of a few years. As accounting professor Baruch Lev pointed out in an article for Fortune, advertising benefits a company over time. Companies come up with marketing campaigns that run for a while, and they see the sales come in over months or even years as a result.
For ten years, though?
The Possible Downsides of Tax Reform (because there’s always a possible downside)
Vincenzo Villamena, managing partner of the specialty accounting firm Online Taxman, expressed some worry about the ten-year advertising deduction spread. And he’s someone who thinks tax reform has promise, saying, “[W]ith the type of wacky international tax structures I’ve seen, this might be a very positive thing which could lead to further reinvestment in the U.S.”
However, Villamena wonders how practical it would be to deduct the cost of advertising over that many years. “Most clients choose to expense in year of purchase to get the tax benefit. Who knows how long you might be in business to realize the full benefit,” he explains, “especially if you are a start-up.”
So just as my friend’s mom thought it might be good to get as much dental work done as possible before she retired, some companies might find it good to enjoy the full tax deduction while they’re still in business. In addition to affecting the chances of doing that, the advertising tax reform could run up against other issues:
- The nature of advertising is changing. You’ve heard the line: more and more, companies are depending on technology and social media to do their advertising, blah, blah, blah. It’s true, however, and because technology and social media change so quickly, companies feel pressure to change their marketing strategies more quickly. In other words, the increasingly shorter shelf life of many ads could make a ten-year deduction even less practical.
- People’s jobs depend on advertising. We’re not talking just about marketing professionals whose jobs might be on the line if companies spend less on advertising. According to a study from IHG Global Insight, U.S. businesses spent $257 billion on advertising in 2012. That $257 billion was responsible for $5.8 trillion in sales of products and services that year. The Association of National Advertisers, which commissioned that study, suggests that the proposed changes to the advertising deduction could affect 1.7 million jobs.
- Tax reform’s benefits might be limited. While a lower federal corporate tax rate could encourage business, it might not do much to build the government’s financial reserves. As author Shawn Tully put it in the article from Fortune mentioned earlier, “companies that advertise a lot would face higher taxes, other corporate categories would benefit from lower levies, and the total tax take would stay about the same.”
And we haven’t even talked about what happens with promotional products yet.
The Fate of Promotional Products
The proposed bill does contain some good news for the little guy, at least. Companies that spend no more than $2 million on advertising in a given year could deduct 100% of the first cool $1 million spent on that year’s taxes.
That would put a limit in the minds of many a marketer, though. To make sure that 100% of advertising expenses could be deducted, they’d want to make sure that they’re not hitting over a million, so to speak. It’s a concern that Essent, a company that makes software for the promotional products industry, has raised. What if promotional products suddenly look like a big, bad investment, especially in the face of, say, pay-per-click advertising?
Essent has reason for raising this concern. Carisa Miklusak, marketing strategist and CEO of tMedia, shared her thoughts on advertising when there’s a limit in mind. “Generally, with a limited budget, it is best to keep advertising focused on value-based messaging and virtual resources,” she said in an e-mail interview. “[T]hose organizations that are aware of past tax laws will certainly be looking at new regulations and taking the impact into their calculations for future promotions.”
When companies face reasons like tax pressures to limit their marketing budgets, how do you make the case for including promotional products in those calculations?
Well, that’s where research comes in, because everyone loves numbers. One comparison actually listed the costs of different forms of advertising per person reached, or per impression, and found that promotional products, specifically pens and calendars, are some of the most cost-effective forms of advertising. Additionally, another study confirmed that a majority of potential customers tend to feel more positively about a company when they receive a promotional product from that company than when they don’t.
The trick is to communicate this information.
For the past five years, the professional group PPAI (Promotional Products Association International) has held an annual Legislative Education and Action Day. During that time, PPAI members travel to Washington, D.C. and meet with congressional representatives to share concerns and insights regarding the promotional products industry.
You can bet that when they visited Congress on April 9-10 this year, they had a few concerns and insights to share.
According to the report, the PPAI reps offered not only their words but also their wares. Many representatives brought with them promotional goods, such as tote bags, to demonstrate the idea that promotional products can be engaging and effective. It didn’t hurt that some of the items they brought were made in the U.S.A., either.
For the most part, the legislators and legislative staffers who met with them confirmed what others already had deduced: the odds of any tax reform happening in 2014, an election year, are what political pundits might declare “teeny tiny.”
These congressional workers also had new warnings for the PPAI delegation, however. If and when a serious conversation about tax reform does happen, the advertising expense deduction—and all of its possible effects on promotional products—will still be on the table.
And it’s good to think about the ways that it can affect business. “Often the driving force of the decision to procure and distribute promotional products is directly related to the expected return—sales and revenue,” Carisa Miklusak noted. “It is often only the savvy company that is aware of the tax implications of such a program.”
So stay with me here as I keep an eye on this topic. It’s an important bit of legislation to keep in mind.
What do you think? Will changes in tax law affect the way you advertise your business? What do you think are the best ways for companies to use their tax-deductible advertising dollars? Let us know in the comments below!