Section 173 Tax Code: What Are the Current Rules?

Internal Revenue Code Section 173 has long provided specific tax treatment for the publishing industry, addressing the unique costs of growing and maintaining the readership of newspapers, magazines, and other periodicals. The rule recognized that expenditures to build a subscriber base are a distinct part of a publisher’s business operations. This section of the tax code offered a particular approach for handling these expenses, setting them apart from other general business costs.

Defining Circulation Expenditures

Circulation expenditures are costs a publisher incurs to establish, maintain, or increase the readership of its publications. These are targeted expenses directly linked to subscriber and newsstand sales efforts, separate from the day-to-day operational costs of running the business. The expense must be paid or incurred by the publisher to qualify.

Examples of qualifying expenditures include the costs of marketing campaigns to attract new subscribers, commissions paid to sales agents for securing subscriptions, and expenses for promotional copies used in a subscriber drive. Any cost directly tied to the effort of expanding or retaining a publication’s audience could be classified as a circulation expenditure.

The tax code is also specific about what does not qualify as a circulation expenditure. The cost of purchasing land or depreciable property, such as printing presses or delivery vehicles, is excluded. Money spent to acquire another publishing business or to purchase a subscriber list from another publisher also does not fall under this definition, as these are treated as capital investments.

The Historical Deduction Choice

For tax years beginning before December 31, 2017, publishers had two options for treating their circulation costs. The most common method was to take an immediate deduction for the full amount of these expenditures in the tax year they were incurred. This allowed a publisher to reduce its taxable income right away.

Alternatively, a publisher could elect to capitalize these expenditures. Capitalizing meant treating the circulation costs as an investment in an intangible asset rather than an immediate expense. The publisher would then amortize, or gradually deduct, these costs over a set period. This option was less common but offered a way to smooth out large expenditures over several years.

Current Tax Treatment of Circulation Costs

The Tax Cuts and Jobs Act of 2017 repealed Section 173 for tax years beginning after December 31, 2017. As a result, the option for publishers to immediately deduct these costs is no longer available. The historical choice between immediate expensing and elective capitalization has been eliminated.

Under the current rules, circulation expenditures must be capitalized. They now fall under general tax provisions that govern the costs of creating or enhancing an intangible asset, such as a subscriber base. This requires publishers to treat these expenses as a long-term investment.

The amortization rules for these capitalized costs have also changed. There is no longer a specific deduction period for circulation expenditures; instead, these costs must be amortized over their estimated useful life. In some cases, a 15-year safe harbor amortization period may apply, but if a useful life cannot be determined, the costs may only be recovered when the business or asset is sold.