Over the past few weeks we have seen many signs of potential progress in D.C. Those on the Hill remain enthusiastic about tax reform though some argue that much must be done before year end excluding any mention of tax. A challenge has been created for us as we are a significant part of the advertising industry. It is important that we continue to remind those in Congress about our industry and the place it has in this economy.
SMALL IS BEAUTIFUL
Earlier this year, Ways and Means Committee Chairman Dave Camp (R-MI) released a series of proposals for tax reform. Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, has now entered the sweepstakes by releasing drafts of some proposed revisions to the tax code. Putting aside the issue of marginal rates, which is something that will probably not be resolved until the very end of process, we can see some patterns between the proposals, and size of a business will matter.
Both chairmen would permit all small businesses with gross receipts of $10 million or less to use cash basis accounting. Sen. Baucus has taken the proposal one step further and proposed eliminating the inventory accounting requirement for businesses with $10 million or less in gross receipts.
The direct expensing allowance found in Internal Revenue Code Section 179 has been helpful to smaller businesses. In addition to the cash flow benefits, it is also a simplification measure. Under Section 179, a business can write off a certain amount of investment in new equipment and machinery. The business is limited to a cap on total investments. If the cap is exceeded, the business cannot use Section 179 and must instead use depreciation methods. Currently a temporary allowance and cap of $500,000 and $2 million, respectively, are available. These will revert to $25,000 and $200,000, respectively, in 2014.
Both chairmen have proposed a permanent increase in the allowance. Camp’s proposal would permanently increase the amounts for new equipment and property up to $250,000, with the deduction phased out for investments exceeding $800,000 (both amounts are indexed for inflation). Baucus has proposed considerably higher amounts that should cover the needs of most small businesses. After 2014, the maximum amount that may be expensed is increased to $1 million, phasing out for qualifying property exceeding $2 million, with both thresholds indexed for inflation.
Another of Baucus’s proposals is to exempt all businesses such as manufacturers with $10 million or less in gross receipts—not just resellers as is currently the situation—from the uniform capitalization rules of Section 263A.
The draft eliminates Last In, First Out inventory accounting. If the “no inventory accounting” proposal for businesses with $10 million or less in gross receipts is implemented, those businesses would not have to worry about methods of valuation.
The draft eliminates the Research and Development Credit but those expenses, which would have to be capitalized, would also be included in the definition of qualified property eligible for the direct expensing allowance.
The draft changes the depreciation system by creating pools of depreciable assets instead of depreciating each asset separately. The administrative burden would be reduced but some assets will end up in pools that depreciate over a longer period than those individual assets currently depreciate, while other assets will end up in pools with a shorter write-off timeline. Smaller businesses that buy such assets would most likely use the direct expensing allowance to expense everything they acquire in a year in order to avoid figuring out the new system.
As we all know, the timetable for tax reform has slipped into 2014. The challenge with many of these proposals is finding offsetting revenue. How much relief will be provided in tax reform depends on how much relief comes in the form of lower marginal rates. What’s left will be used for these changes.
CONTROVERSIAL REFORM PROVISIONS
Baucus’s tax reform proposal is not without its disappointments. One controversial provision is to limit the current-year deduction for advertising expenses to just half the amount of those expenses. The remaining half would have to be capitalized and amortized ratably over five years. While the direct expensing allowance definition would expand to include the portion of the advertising that has to be capitalized, we take no comfort from that.
Any discussion of a change to the advertising deduction is bad news. Our immediate concern is that once Washington latches on to a concept, the concept tends to take on a life of its own. If we do not react swiftly and firmly to this proposal, we will see it again and again, even if tax reform does not move forward. PPAI is moving swiftly and firmly to make sure Washington understands the depth and breadth of the opposition. Please help us by contacting your legislator to let them know of the industry’s position on the advertising-expense deduction provision. To send a letter to your Member of Congress, click here.