Require Half of Advertising Expenses to Be Amortized Over 5 or 10 Years

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues  
  Require half of advertising expenses to be amortized over 5 years 11.2 16.4 12.5 8.3 4.0 2.4 2.6 2.7 2.8 2.8 52.4 65.8
  Require half of advertising expenses to be amortized over 10 years 11.9 19.2 17.9 16.4 15.0 14.0 12.7 10.9 8.8 6.7 80.4 133.4

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.

Business expenses can generally be categorized as either investments, which create assets whose value persists over a multiyear period, or current expenses, which go toward goods or services whose value dissipates during the first year after they are purchased. They are often treated differently for tax purposes: Current expenses can be deducted from income in the year they are incurred, but some investment costs, such as the cost of constructing buildings, must be deducted over a multiyear period. Advertising is treated by the tax system as a current expense; its costs can therefore be immediately deducted, even in cases where it creates longer-term value.

This option consists of two alternatives. Both would recognize half of advertising expenses as immediately deductible current expenses. The other half would be treated as an investment in brand image and would be amortized over a period of years. Under the first alternative, that period of amortization would be 5 years; under the second alternative, it would be 10 years.