Rev. Rul. 89-62 held that video cassettes are depreciable
under IRC 167 in accordance with the straight line method or
the income forecast method over the useful life of the
cassette in the taxpayer's business. Where the taxpayer is
able to demonstrate a useful life not in excess of one year,
such video cassettes may be deducted under IRC 162 of the
Internal Revenue Code.
It is generally found that new high demand movies have a
tape life of under one year, while classics have a tape life
of three or more years and other tapes may have a life
somewhere in-between. It is common to find an average useful
life for all tapes to be two years.
Any of the following assets NOT acquired in connection
with the acquisition of a trade or business or a substantial part
of a trade or business.
An interest in a film, sound recording, videotape, book, or
similar property
An interest in a patent or copyright
Intangible property that can not be amortized under the rules
for section 197 intangibles can be depreciated if it has a
determinable useful life. You generally must use the straight line
method over its useful life. For certain intangibles, the
depreciation period is specified in the law and regulations. For
example, the depreciation period for computer software that is not
a section 197 intangible is 36 months.
For more information on depreciating intangible property, see
What Can Be Depreciated in chapter 1 of Publication
946 (PDF).
You
cannot use MACRS to depreciate the following property.
*
Intangible property.
*
Any motion picture film or tape.
*
Any sound recording.
*
Certain real and personal property placed in service before 1987.
The income forecast method recognizes that certain assets
generate uneven flows of income and have unique income producing
potential. To properly apply the income forecast method, taxpayers
must make income projections for each asset subject to the method.
Thus, the usefulness of such assets in the taxpayer's trade or
business is measurable over the income it produces and cannot be
adequately measured by the passage of time alone. Therefore, in
order to avoid distortion, depreciation must follow the `flow of
income.'
Note: Films, television shows, and sound recordings are
subject to section 167 of the Code and may be depreciated in
accordance with the straight line method over the useful life of
the asset in the particular taxpayer's business. Alternatively,
the income forecast method may be used.
The income forecast method generally is limited to the
following types of property:
Motion picture films
Video tapes
Sound recordings
Copyrights
Books
Patents
Expenses which represent the basis of an asset used in or
produced in a trade or business may be recovered using one of
several possible methods. The appropriate recovery system or
period may depend upon the terms of sale or exploitation of the
asset. If all rights to a completed project (film, movie, etc.)
are sold as a package, the recovery of the capitalized costs will
be allowed as part of adjusted basis reducing the amount realized
(or cost of goods reducing gross receipts).
If, as is true in most productions, the project is exploited
over a period of years (released in theaters, TV, video, etc.),
the most appropriate means of recovering costs is through the
income forecast method.
This method requires an estimate of total income to be derived
from the asset over its expected life. The term "income"
as used here refers to the gross receipts less the distribution
expenses. For example, this estimate will include not only
anticipated revenue from theatrical releases, but also TV, cable,
and video, if the arrangements are entered into prior to
depreciating the film down to its salvage value. The "cost of
the film" includes the projected residuals and participations
which will be received.
A forecast of income can be revised at the end of each taxable
period, based on additional information. For this computation,
merchandising receipts are not included. The basic computation for
this method is:
Amortization
is a method of recovering (deducting) certain capital costs over a
fixed period of time. It is similar to the straight line method of
depreciation. Amortization is not the same as
"Depreciation" -- many times property that does not
qualify for "Depreciation" will qualify for
"Amortization". Do not confuse the meaning of
"Amortization" used in this context with an entirely
different meaning of the word as used in "Loan
Amortization".
How To Deduct Amortization
You deduct amortization that begins during the current year by
completing Part VI of Form
4562 (PDF) and attaching it to your current year's return. For
later years, do not report your deduction for amortization on Form
4562 unless you must file the form for another reason. You must
file Form 4562 in any of the following situations:
You deduct amortization that begins this year
You claim depreciation on property placed in service this
year
You claim a section 179 deduction
You claim a deduction for any vehicle reported on a form
other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040)
You claim depreciation on any vehicle or other listed
property (regardless of when it was placed in service)
You claim depreciation on a return for a corporation (other
than an S corporation)
Solutions
are dependent upon facts & circumstances, law and the
objectives. These elements vary from one time to another,
from one circumstance to another and from person or entity to
another
All
in the year of purchase, if you have evidence and proof the tape
will not last longer than one year
What
you must consider in making the choice:
Tax
increase or decrease (The choices relate only to the timing of the
tax cost. Since the video tapes can and should be expensed,
the only choice by management is to consider the "Time
Value" of the tax cost of reduction now, or over a period of
the useful life of the tapes. Generally a current deduction is
better than a deduction in the future. However, the wise
manager will consider other factors in the decision.)
Consistency
Balance
sheet impact (current assets, PPE, various ratios and equity
(earnings)
Future
sale of the store (earnings and value of tapes shown on the balance
sheet)
Future
use for loan applications
Future
use for business plans, venture capital applications, Private
Placement Offerings, etc.
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All
funds, bonds, partnerships, variable insurance products and
other securities are not FDIC insured, not bank insured, and not
guaranteed by any party, and are offered by prospectus only. You
should consult your financial advisor for a prospectus before
investing. Please read the prospectus, which contains more
complete information on risk considerations, management fees,
sales charges, and other expenses, carefully before you invest.The value of the investment does change and the value
will be more or less than your investment.Historical performance is not indicative of futures
results and future results cannot be predicted or guaranteed.
Amortization
is a method of recovering (deducting) certain capital costs over a
fixed period of time. It is similar to the straight line method of
depreciation. Amortization is not the same as
"Depreciation" -- many times property that does not
qualify for "Depreciation" will qualify for
"Amortization". Do not confuse the meaning of
"Amortization" used in this context with an entirely
different meaning of the word as used in "Loan
Amortization".
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