Section 173 Repeal: What Is the Current Tax Law?
Recent tax law changes eliminated a key election for publishers, replacing flexible expense treatment with a new, mandatory standard for circulation costs.
The publishing industry incurs specific costs to build and maintain its readership, which have historically received unique tax treatment. A specific part of the U.S. tax code, known as Section 173, previously governed how companies could account for these costs on their tax returns. This provision offered a level of flexibility that was particular to the publishing sector. The rules surrounding these expenditures have evolved, and what was once a choice for taxpayers is now a mandate.
Defining Circulation Expenditures
Circulation expenditures refer to the costs a publisher pays or incurs to establish, maintain, or increase the readership of a newspaper, magazine, or other periodical. The definition is specific and carves out a particular category of business expenses unique to the publishing world. It is important to distinguish these from other types of business spending to understand their tax implications.
Qualifying expenditures encompass a range of activities central to a publisher’s circulation department. This includes the salaries of employees who work on subscription campaigns, costs for marketing materials aimed at soliciting new subscribers, and expenses related to printing and distributing copies to grow readership. Essentially, any cost that is directly attributable to the effort of building or holding onto a subscriber base would historically fall under this definition.
Conversely, not all spending by a publisher qualifies. The rules explicitly exclude certain types of major capital investments. For instance, the purchase of land or depreciable property, such as a new printing press or delivery vehicles, does not count as a circulation expenditure. Similarly, the cost of acquiring another publisher’s business, including their existing subscriber list, is not a qualifying expense under this specific rule.
Historical Tax Treatment Options
For tax years beginning before December 31, 2017, publishers had two primary options for handling their circulation expenditures under Section 173. The default method was to deduct the full amount of these expenses in the year they were paid or incurred. This allowed for an immediate reduction in the publisher’s taxable income. This approach treated circulation spending similarly to other ordinary and necessary business expenses.
The second option available to taxpayers was to make a formal election to capitalize these expenditures. Under this choice, instead of an immediate deduction, the publisher would treat the costs as an asset on their balance sheet. These capitalized costs were then amortized, meaning they were deducted in equal portions over a set period. This method was often chosen for significant campaigns aimed at establishing or substantially increasing circulation, as it aligned the expense recognition more closely with the long-term benefit of the new readership.
To utilize the capitalization method, a publisher had to follow a specific procedural step. The election was made by attaching a statement to the federal income tax return for the first taxable year the publisher intended for the election to apply. Once this election was made, it was binding for all subsequent years unless the IRS consented to a change.
Repeal and Current Law
The Tax Cuts and Jobs Act of 2017 (TCJA) brought a change by repealing Section 173. This repeal is effective for all tax years beginning after December 31, 2017. As a result, the flexibility that publishers previously enjoyed in choosing how to treat their circulation expenditures has been eliminated.
With the repeal of Section 173, the tax treatment of these costs is now governed by broader capitalization rules found in the Internal Revenue Code. Section 263 now mandates the treatment for what were formerly known as circulation expenditures. This section of the tax code requires taxpayers to capitalize costs incurred to create or enhance certain intangible assets. The expenses previously defined under Section 173 now fall into this category.
Under the current law, all expenditures paid or incurred to establish, maintain, or increase the circulation of a publication must be capitalized. This change aligns the treatment of circulation costs with that of other similar intangible assets, creating a more uniform approach to capitalization across different industries.