Those Dastardly Deductions
By Bill Shein
June 11, 2010
Here's some boilerplate language from the IRS that Americans and their elected representatives need to discuss: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."
As anyone in business knows, this means that virtually every penny spent on advertising, marketing, and public relations is fully deductible. Every TV commercial. All the newspaper and radio and Web ads. The salaries of marketing staff. And all the money spent on public relations to repair your damaged brand after, say, history's most massive oil spill – including a $50 million "apology" ad campaign.
This is as true for a local clothing shop running small ads in a weekly paper to The Gap spending $100 million to promote the latest back-to-school fashions. Taxpayers provide a subsidy to both businesses by allowing them to fully deduct these expenses from their total revenue, reducing their tax bill.
Incredibly, the tax code also allows companies to write off any punitive damages a court of law orders them to pay. This was true for the $500 million Exxon paid after the Valdez disaster, and will be true for any fines BP will pay for the Gulf spill. The logic is plain: It is considered an "ordinary and necessary" cost of doing business to violate the law and despoil the environment. That's equal parts bizarre and insane.
It's long past time for us to reconsider what's deductible, fully or partially, as a business expense, and everything should be on the table. In particular, we must reconsider whether enormous global corporations and wealthy chain stores should be permitted to deduct 100 percent of the billions they spend to promote their brands and products – often undermining the survival of small, local businesses.
This huge tax break for business, which is an incentive to create ever-larger enterprises, has also led to a society so steeped in marketing messages, so blanketed by advertising, and so overwhelmed with commercial speech that our view of ourselves and the world has been distorted. By design, today's sophisticated marketing messages mold our tastes and desires. They target our core notions of self, body image, social status, and happiness. Ubiquitous commercial messaging stokes our insecurities and creates phony "needs" that can be "satisfied" with a purchase.
While a society drowning in these ads is bad enough, the amount of tax revenue lost to this effort is enormous. Yet even in the midst of today's fiscal challenges, there is no discussion of this issue. Why? In part because what's left of American print and electronic journalism is largely funded by commercial advertising – a dangerous model for an industry charged with holding "the powers that be" accountable.
Do taxes on the increased profits that result from massive amounts of advertising equal or exceed the revenue lost from the advertising deduction? It's impossible to know, but it seems unlikely. Indeed, the largest corporations – the ones who can afford to spend hundreds of millions of dollars on saturation marketing – also spend handsomely on tax advice to avoid paying taxes. And the cost of that tax advice is fully deductible, too.
As part of a broader strategy to take back our society from the far-reaching and damaging tentacles of large commercial interests, we need a new model for what’s considered "ordinary and reasonable" in business. Because it shouldn't be ordinary – and, in fact, it's entirely unreasonable – to subsidize the commercialization of every corner of our society just to help big companies "move product."
The next time you see a TV advertisement that aims to make you feel all warm and fuzzy about a multinational corporation, or uses the latest video effects to excite you about a new car or mobile phone, ask yourself: Is the tax revenue lost to this massively expensive, taxpayer-subsidized exercise in commercial speech better spent on something else?
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To polish his "personal brand," Bill Shein once rented billboards that showed him rescuing a kitten from a tree. Since he's not a business, the expense wasn't deductible.
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Reader Comments (6)
I doubt that Congress will ever amend the tax laws as their gravy train will come to a screeching halt, forcing them to once again turn to the voters for support. No more "junkets" to "investigate" the business activity of foreign firms on the Riviera. No more "meetings" at Vail resorts. No more fat envelopes with large denominations inside. No more midnight visits from exotic female "representatives".
There is only one thing for the little guy to do: start a business of your own. My business does almost nothing all year, yet the tax laws allow me to write off expenses that apply to my business activity and has saved me hundreds of dollars annually. Yet rest assured that if the Congress acts to remove tax breaks to large corporations, I will gladly surrender my own in the interests of the greater good. Any such action will have to lower the taxes I pay on my income from my real-world employment, so I gain anyway!
Taxpayers only "provide a subsidy to both businesses by allowing them to fully deduct these expenses from their total revenue, reducing their tax bill." if you consider that all of a corporation's money actually belongs to the government in the first place.
@Bob - Yeah, you mean like considering that the roads corporations use to transport their products weren't paid for by taxpayers, right? Or that public education didn't create an educated workforce, yes? Or that the public airwaves aren't made available for their advertising campaigns? Or that expensive U.S. military operations don't open/secure shipping lanes and foreign markets? Or basically that tax dollars, over generations, haven't built the infrastructure, civil society, market mechanisms, and other things that corporations couldn't survive without?
Honestly, I've grown pretty weary of the argument that corporations and businesses somehow "own" all the money that they make and that they "do it all themselves." That's frankly nonsense. They enjoy endless benefits the corporate business form is granted by our governments (aka the people). Just like individuals, corporations must share the costs of an open, democratic society that provides necessary structures and services to enable economic activity and other things. Right now the table is tilted so far toward the aggregation of wealth by large enterprises at the expense of individuals and the "common wealth" as to be absurd, and clearly dangerous to our democracy. Massive economic power gained thanks to this system enables these entities to further tilt the table through their growing political influence.
What's been interesting about the reaction to this column in recent days -- in the emails I've received -- is that *everything* is ignored by (negative) commenters except the point that you raise. No commentary about the commercialization of every corner of society. No discussion of the deductibility of punitive damages as a "business expense." And so on. Just the "my money is mine, I made it myself" argument, suggesting that anything and everything is an "ordinary and necessary" expense.
I take it from your comment that you don't believe anyone should pay taxes for anything? That the so-called private sector can and should run our nation, society, planet? Corporations should be free to do what they please? Reminds me of that great recent New Yorker cartoon: A man stands at the front door of his burning house as the firemen rush towards it with their hoses. He says, "No thanks! I'm a libertarian!"
This might be slightly off topic but I remember a time when I was able to deduct credit card interest charges from my annual income tax filings. Then it ceased and I never understood why. However, I am addressing my credit card debts which are overwhelming due to the 29% interest rate that the companies will not bring down. I was considering negotiating a settlement fee and paying them off until I learned that Uncle Sam will benefit from such transactions at MY expense. I found this caveat, "The IRS considers the amount of the debt that has not been satisfied as income. Any amount that exceeds $600 will be report on a 1099, to the IRS, by your creditors. You will be required to pay taxes on this amount." I asked several colleagues and I caught everyone by surprise. No one seemed to be aware of that. When did THIS happen? So the very banks that have been bailed out by taxpayers' money and the federal government are making it impossible to address consumer debt concerns. Does anyone else find this as disturbing as I do?
I couldn.t agree more - but heres another cutie tax break. Why would an individual making 10M$ a year have his entire salary deductible from corporate revenue? If he is that critical to the success of the company, let the company bear the expense. Here's my plan. Any wages or salaries up to 20K should be deductible. Starting at 20K, salaries should be deductible at a rate of , Oh, lets say, 125%, gradually working back to 100% at the lets say, 100K level. Any salaries over 100K could then be allowed a corporate deduction on a graduated scale up to 1M, at which point, the corporation could then foot the bill itself. This is not a salary cap, its merely saying, if this fellow is worth 1M, then, god bless you. by all means pay them, BUT DONT ASK ME TO FOOT THE BILL! This would have the automatic affect of raising the 17K to 19K folks to 20K. Should a company choose to featherbed by loading up on employees for the tax break (over 20K), thats OK, we'll recover it in income taxes, and unemployment will take a hit. The reason there is no tax break for under 20K is to prevent retail and fast food establishments, from creating McJobs. What about our beloved sports stars and highly paid entertainers? If Ophra (et al), suddenly have to work for a reasonable (albeit very high) salary, perhaps this wll translate into lower ad rates, a cocomitant increase in profits (again, with the above plan of controlling ad and PR writeoffs), thus a broader and deeper tax base- perhaps taxes could even be lowered. If the money supply was regulated correctly and interest rates controlled, the affects on inflation would be enormous.(Please note, I am no economist, so the above floors and ceilings are merely for the purposes of illustration, no doubt more equitable benchmarks could be established by a professional)
Bill, I can't believe you aren't a business. You need to incorporate immediately and reap the benefits thereof. How about SheinCo?