Admit it. You’re not just sitting down to watch Super Bowl XLVIII to see the Seattle Seahawks play the Denver Broncos. It’s also about the wings, the beer, and yes, the commercials.
According to a survey conducted by the Retail Advertising and Marketing Association (RAMA), fewer than 50% of the respondents claim to tune in solely for the big game. More than a quarter (25.8%) admitted that they watch on Super Bowl Sunday primarily for the commercials. With so much in the way of expectations, it’s no wonder that Fox Sports was able to command an average of $4 million for thirty-second ad spots during the game.
In fact, we love our Super Bowl commercials so much that the hype over our favorite ads tends to overshadow the build-up to the actual game. Not everyone watching the game may know the names Russell Wilson, Richard Sherman, and Champ Bailey (though, admittedly, everybody knows who Peyton Manning is) – the players who will be on the field for several hours tonight – but we can all identify the companies we’ll only see for a few minutes total.
Some of the commercials – designed to promote goods and services – were even “advertised” themselves, being touted for weeks in advance. I’ve seen the promo spots for Budweiser’s “Puppy Love” and Cheerios in my Facebook feed all week. And in a nod to our childhood, my friends are already talking up the Toyota ad featuring the Muppets. And speaking of our childhood, dreamy John Stamos (aka “Uncle Jesse”) will join Bob Saget and Dave Coulier in a Full House reunion for Dannon Oikos Greek yogurt (no, Mary Kate and Ashley Olsen won’t be stopping by – they’re too busy managing their fashion empire).
There will also be the predictable movie trailers, including Kevin Costner’s football flick “Draft Day” and Russell Crowe’s “Noah” – and of course, promos for television shows on Fox (please let there be a teaser for the oh-so-excellent “The Mindy Project”).
The exposure is, of course, terrific. Clearly, we’ll all be talking about the good ads tomorrow. Okay, we’ll be talking about the bad ones, too. But is it worth it? Are a few moments on TV worth millions and millions of dollars? Has Anheuser-Busch benefitted from the $145.9 million it’s spent on Super Bowl ads since 2009?
I’m not a marketing guru so I can’t speak to the return on investment. From a tax perspective, however, advertising does offer a break: it’s deductible as a business expense. For most companies, there are few practical limitations on the amount that’s deductible so long as the activities meet the “ordinary and necessary” criteria for business expenses set out in section 162 of the Tax Code. Ordinary is defined as “common and accepted in your trade or business.” Necessary is defined as “helpful and appropriate” for your line of work. An expense does not have to be required to be considered necessary.
There are a few other rules. To take an immediate deduction, the expense must be considered currently beneficial, meaning that the impact on the business must be felt within the year. There is a little wiggle with this rule: you can also generally deduct the costs of ads (including goodwill) when the purpose is to keep your company’s name in front of customers for business that you reasonably hope to gain in the future.
To be deductible, the expense must be directly related to your business – in other words, not personal. Simply putting your logo on a personal item doesn’t qualify as business advertising. That includes advertising by posting your business information on your car. Slapping an ad on the side of your car does not change the use of your car from personal use to business use – the normal rules for business versus personal use of a car still apply.
As always, the cost must be reasonable. There’s no cap on those dollars: it’s all relative. While it might be reasonable for Coca-Cola or Apple to spend $4 million for thirty seconds of ad time, the Internal Revenue Service might not consider that amount reasonable for a mom and pop store. And you have to spend money to take the deduction: you can’t deduct the costs of free exposure (like doing volunteer work) as advertising.
Of course, advertising expenses as deductions are not restricted to the big guys. Sole proprietors can take those expenses, too. The underlying criteria are the same, whether you’re a big guy or a mom and pop. The surrounding circumstances and the forms are the big differences.
While advertising expenses are reported on the corporate form 1120 at line 22, when it comes to your personal income taxes, advertising expenses are deductible on your form 1040 at Schedule C. You’ll see it at line 8.
Television commercials aren’t the only tax-deductible advertising expenses. You can deduct almost anything related to getting your products, goods, or services out to the public. That includes advertisements in magazines and newspapers, on billboards, and on the internet and radio. It also includes your collateral materials like business cards, brochures, and cool promotional items (some restrictions apply). Important to most businesses these days, it also includes your web site: you can deduct the design work, hosting, and other related costs.
You can deduct the costs of showing folks where your business can be found, too. Short-term signs are deductible in full when purchased. If your signage or other promotion is meant to be permanent or last for more than a year, it may not be immediately deductible. You may be required to depreciate the expense over a number of years or include it as a Section 179 expense and deduct it in one year (remember, for 2014, those Section 179 limits have been pushed back to $25,000).
This is, of course, the way the rules stand today. By the next Super Bowl, the rules might be quite different. Congress is considering drastically scaling back the deduction for advertising expenses as part of tax reform talks. House Ways and Means Chair Dave Camp (R-MI) has proposed limiting the advertising deduction to 50% of costs with the requirement to amortize the remaining deduction over 10 years. That’s a huge change.
Reducing the deduction would have significant consequences not just to businesses but to media outlets who count on advertising dollars. It also means that shelling out $4 million for thirty seconds of ad time during the Super Bowl might not be as appealing to those hawking Doritos, Coca-Cola, and Maseratis (yes, there was a Maserati ad this year). And if the Super Bowl wasn’t about ads, it might (gasp) just be about football. And who would watch that?
Enjoy the game.