Defining Advertising : A Bridge to Nowhere? Budget legislation would codify the impossible

We can figure out what television advertising costs. You pay a company (hopefully mine) to create a spot. You pay a TV station to run the spot. We add up the invoices, pay them net 30, and we know what our advertising has cost us.

However, as it turns out, your EVP of sales and marketing spent a pretty good chunk of her time ideating about the new campaign and looking at that big customer research project you did. Does the cost of advertising include her prorated time and some part of the research? How much of each? Was the time she spent on the ad campaign more important than the time she spent going on sales calls with her AEs? Do we include the ample time she spent persuading the CEO to use the cool edgy campaign instead of the "Maximum Manilow" theme he had convinced himself you needed?

How about the time spent putting the behind-the-scenes photos from the commercial shoot on the company Facebook page? If you're advertising the advertising, does it still count, especially when it's more reporting than advertising? That might be content marketing. Dang. Is it still advertising when it's got no call to action? Or is an insightful blog on the company page an advertising cost, but when an employee reposts it to his personal LinkedIn page on company time, it isn't?

Were the previous three paragraphs a purely hypothetical exercise designed to stoke the historic rivalry between accountants and creatives? While I'm not above that sort of thing (just kidding - some of my best friends are accountants), the paragraphs do have deeper implications. Pending legislation in the U.S. may require Congress and other governmental bodies to define advertising.

Okay, the bills aren’t strictly for purposes of advertising definition. Nobody decided to pass a law after observing the U.S. falling behind Burundi’s advertising sector due to inefficient standard-making. The bills have to do with national budgets and corporate taxation.

Adweek’s Katy Bachman notes that the House and Senate budget committee chairmen’s budget proposals include allowing only a 50% immediate deduction of advertising expenses, with the other 50% amortized over a five- or ten-year period. ⁽¹⁾ Currently, firms can deduct all ad costs in the year they incurred them, the way they do with most other expenses.

Setting advertising aside as different from other expenses requires defining what constitutes it. The senator’s staff discussion draft provides a general definition as “The term ‘advertising expenditures’ means any expenditure (whether made internally or externally) paid or incurred for the development, creation, or placement of advertising, or for any similar activity with respect to advertising.” ⁽²⁾ It goes on to include some exceptions, like discounts and “any amounts paid to employees and contractors for performing sales functions.” ⁽³⁾ It didn’t clarify much from this blog’s opening salvo, including negatively slanted earned media in the Manilow Fan Club newsletter.

It would eventually be up to committees and staffs and executive branch agencies to do the real detail work. For instance, they may elect to exclude “section 168 property,” as the discussion draft did. If you skim that section of the tax code, as I forced myself to do, you’ll find it uses great detail to define different kinds of property. Good luck with keeping up with advertising terms in the digital age. A section 168 boat dock moves only in a hurricane. Digital definitions ride a daily maelstrom.

Accounting Today’s Michael Cohn cited Senate Finance Committee Chairman Max Baucus as saying, “More must be done to simplify tax rules, lessen the burden on small businesses and jumpstart job growth.” ⁽⁴⁾ Let’s focus on the simplification component.

Regulatory simplification that actually simplifies something frees businesses to shift resources from compliance to productivity.  Baucus seems to recognize that assertion with his statement about lessening burdens.

If employees need to spend an enormous amount of time with new tax-funded ad regulators figuring out how to comply with the latest directive on Snapchat placements (how would you depreciate those??), it figures to diminish companies’ jumpstarting capabilities. Here’s the point : Since determining what constitutes advertising involves a complexity rivaling that of a Steve Vai3-neck guitar solo, any legislation requiring such a task cannot possibly make the tax code less complicated.

Of course, one could really simplify things by eliminating all the section 168s of the code. One would just calculate corporate income by subtracting everything a company spent from everything they took in that year, treating all expenses equally.  Also, if pigs built jet packs, they would be able to fly.

The bill as proposed would add simplicity for one area of the industry : late-night comedians. The jokes about “advertising definition brought to you by the writers who gave you the government shutdown and healthcare.gov?” Those will be easy.

Next post : Is advertising, however it’s defined, a normal business expense? And does the First Amendment have a role in all of this?

Footnotes

⁽¹⁾ Katy Bachman, “Sen. Baucus Goes After Advertising in Tax Reform Draft,” Adweek. adweek.com. http://www.adweek.com/news/advertising-branding/sen-baucus-goes-after-advertising-tax-reform-draft-154051 (accessed November 24, 2013).

⁽²⁾ “Chairman's Staff Discussion Draft on Cost Recovery and Accounting Language,” U.S. Senate. finance.senate.gov. http://www.finance.senate.gov/imo/media/doc/Chairman's%20Staff%20Discussion%20Draft%20on%20Cost%20Recovery%20and%20Accounting%20Language.pdf (accessed November 25, 2013).

⁽³⁾ Ibid.

⁽⁴⁾ Michael Cohn, “Baucus Proposes Changes Tax Accounting Cost Recovery Rules,” Accounting Today. accountingtoday.com/news/Baucus-Proposes-Changes-Tax-Accounting-Cost-Recovery-Rules-68811-1.html (accessed November 25, 2013).