The COVID-19 crisis has wreaked havoc on the U.S. economy as evidenced by the S&P 500 Price Index having fallen by 33.9% between February 19 and March 23. As a result, GDP is expected to decline by 3% nationwide in 2020 (as of 4/15/20).
While there is no question that we are living through difficult times, the current economic and political environment presents an ideal opportunity for estate and gift tax planning. The decline in public and private market values and the upcoming Presidential election give rise to a most advantageous moment for media owners to make gifts or set up trusts.
The media industry has been especially hard hit in the current crisis. As of April 21, 2020, the media/entertainment sector had the second highest percentage of issuers affected by ratings actions by S&P (including downgrades, negative outlook revisions, and negative CreditWatch placements) due to COVID-19, oil prices, or both, second only to the automotive industry[1].
The average share price of twelve television and radio public companies covered by BIA[2] fell by nearly 50% between February 19 and March 23. Between March 23 and April 23, seven of the same companies experienced additional stock price declines. In contrast, the S&P 500 had gained back almost half of its decline by April 23.
Television and radio advertisers have cancelled campaigns and pushed back spending. High-value sporting events have been cancelled, with an unknown time horizon as to when and how they will resume. Critical verticals to radio and TV stations, including Restaurants, Entertainment, Travel, Automotive, and Retail are some of the hardest hit businesses.
As of early April 2020 BIA is estimating declines among all U.S. local advertising sectors relative to our earlier 2020 forecast. Before the virus (in February 2020) we estimated the 2020 total local advertising market would reach $156.9 billion across all platforms (which includes political spending in this important election year)[3]. The total has now been revised down to $144.3 billion, an 8.0% decrease from our earlier 2020 projection (and a 3% decline from 2019). As more information comes to light about the trajectory of the virus and the reopening of the states, BIA will continue to revise our local advertising estimates.
2019 total local television advertising (including over-the-air and online sources[4]) is estimated at $17.47 billion. BIA now projects 2020 TV advertising to reach $18.46 billion, for a 5.6% increase over 2019. This growth is about half of the 10.8% increase estimated by BIA in February of this year, prior to COVID-19. Local television over-the-air advertising is bolstered by the considerable amount of political advertising spent in Q1 and anticipated in Q3 and Q4 (for total 2020 TV political advertising revenue of about $3.25 billion).
2019 local radio advertising revenue is estimated at $14.25 billion by BIA. Radio (including over-the-air and online sources), which garners less political advertising, is expected to be hit much harder than TV. 2020 radio advertising revenue is now projected to decline by 10.2%, to $12.8 billion.
Economic turmoil causes the values of broadcasting companies to fall as:
- Existing revenues and cash flows decrease due to a reduction in ad spending, caused by local and national businesses shutting down and sporting events being cancelled;
- Projected revenues and cash flows are lowered as retail sales projections and advertising forecasts are revised downward;
- Discount rates rise due to increased equity volatility, declining GDP, increased unemployment, and falling business and consumer confidence.
The uncertainty of the times can also be measured in the current political environment.
Estate and gift tax exemptions were dramatically increased in 2018 as a result of the Tax Cuts and Jobs Act (TCJA). The current exemption amount for 2020 is $11.58 million per individual ($23.16 million per couple). The individual exemption under the TCJA is set to fall back to about $6 million in 2026.
The upcoming Presidential election could spell a change in leadership in the White House. Joe Biden’s proposals for increasing tax revenue have not addressed estate and gift tax exemptions. However, his plan calls for eliminating the stepped-up basis on a decedent’s transfers of appreciated assets.
The likelihood of federal and state tax increases and/or dismantling the TCJA now looms large as two stimulus packages totaling an unprecedented $2.5 trillion have already been passed and state sales tax revenue has likely dropped sharply.
This is the optimum time to save on gift and estate taxes. The COVID-19 pandemic has reduced the values of many broadcasting companies and tax policies are favorable in 2020. Given the uncertain nature of COVID-19, how long the economic recovery will take, and the upcoming Presidential election and tax policy changes that may follow, the favorable conditions that exist today to transfer assets and reduce your taxable estate could change in the relative near term.
Although we are living through difficult and uncertain times, making the decision to move ahead with estate planning could save individuals and families sizeable sums.
BIA recommends contacting your estate planning attorney and a qualified business valuation professional with a deep knowledge of the broadcasting industry to get the process started. Our valuation team stands ready to assist in any way we can. See our services here and send us an email to have a confidential conversation regarding your situation. More on BIA’s updated U.S. Local Advertising Forecast here.
[1] “COVID-19: Coronavirus- and Oil-Price Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date.” S&P Global Ratings, April 22, 2020. https://www.spglobal.com/ratings/en/research/articles/200318-covid-19-coronavirus-related-public-rating-actions-on-non-financial-corporations-to-date-11393186
[2] Includes Emmis Communications Corp., Saga Communications, Inc., Beasley Broadcast Group, Inc., Entercom Communications Corp., Urban One, Inc., Salem Media Group, Inc., Cumulus Media Inc., Townsquare Media Inc., Gray Television, Inc., Sinclair Broadcast Group, Inc., Nexstar Media Group, Inc., and Entravision Communications Corp.
[3] “Advertising Revenue in the Uncertain COVID-19 Environment: BIA’s Updated Local Ad Forecast April 2020.” BIA Advisory Services.
[4] TV estimates do not include retransmission revenue.
