IRS: Manufacturer can deduct cost of retail displays

The payments that a manufacturer paid to retailers for constructing display areas for the manufacturer’s products are deductible when paid as advertising or marketing costs, according to a recent advisement by the IRS.

Chief Counsel Advice (CCA) 201405014 concluded that the amount the manufacturer paid to a network of retailers to maintain retail space that conforms to the manufacturer’s design requirements does not have to be capitalized (recorded as a fixed asset and depreciated) and, instead, can be deducted immediately as an expense.

The agreement provides that the retailers must repay the manufacturer if, within 15 years, the retailer no longer conforms to the requirements of the display area, no longer sells and maintains a full line of the manufacturer’s products or no longer provides servicing.

The IRS concluded that the construction costs didn’t produce a significant future benefit to the manufacturer because it did not own the retail space and the payments did not create or enhance a separate and distinct intangible asset.

The retailers were required to sell and maintain a full line of products and to provide servicing on site.

However, the retailers were not required to purchase any specific amount of products during the term of the agreement, and the price of the product was not fixed. The manufacturer did not have the right to provide any specific quantity of products to the retailers.

In the memorandum, the IRS stated that the case could not be used or cited as a precedent, but the CCA provides insight regarding the IRS’s thoughts about these types of arrangements.