ADVERTISING: Tax Loophole

When the Excess Profits Tax was passed last month (TIME, Oct. 14), many a corporation president thought of calling his advertising manager to ask him whether he wanted a bigger piece of the budget. Reason: advertising, by Treasury standards, is a legitimate business expense; why not put the money into advertising rather than hand it over to the Government? During World War I’s excess profits tax, many a luxurious good-will campaign was so prompted.

Last week Advertising & Selling discussed this loophole in the 1940 tax, ran an article by J. K. Lasser, author of Your Income Tax, the annual deduction guide to many a painfully executed Form 1040. Said C. P. A. Lasser: by upping their advertising costs, typical corporations can reduce by 24% to 60% the size of their tax payments next March. Sample: a firm netting $50,000, of which $25,000 is in the “excess” brackets, would (using the “average-earnings” option) owe $14,312 in taxes. By spending an extra $25,000 for advertising, this firm could reduce its tax bill to $4,152 (the normal tax on $25,000 income). Profits, of course, would also be reduced; the tax saving is merely a discount on the cost of the advertising. A. & S. ran tables of taxes on various profits under both the invested-capital and the average-earnings option, let advertisers calculate their possible savings at a glance.

Having done this much for the advertising business, conscientious A. & S. saw “obvious dynamite” in the Lasser piece, imagined “future cries against advertisers evading taxes by nest-feathering.” It therefore showed the piece (before publication) to the Treasury, asked the Treasury whether “more than normal advertising should be regarded as unpatriotic.” Back came the Treasury’s reply. It agreed that abnormal advertising expense was deductible, would not guess as to whether the Government would win (through the additional business created) or lose by it, and concluded: “It is felt here that it is not the province of the Treasury Department to comment on the patriotism involved. . . . You may well wish, however, to point out to your readers that phase of the question.”

Safe as to the letter of the law but thrown on its own resources as to its spirit, linage-minded A. & S. went to press asking for reader opinions, gave its own: “Since money spent for advertising flows through a maze of taxable channels … it might well yield the Government larger revenue than if retained as part of a company’s taxable profits.”