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reducing your costs of operations.
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Please know that your call will be welcomed –
Bob Parrish CPA, P.C.
(941) 387-0926 or 
Video Tape Rental Stores
Video Tape Tax Deduction
What are the tax methods for depreciation on videotapes
purchased for rental?
NOTE: ALL NAMES ARE FICTITIOUS AND ANY
SIMILARITY TO EXISTING ENTITIES OR PERSONS IS ENTIRELY
COINCIDENTAL.
VIDEOTAPES CAN BE DEPRECIATED: Videocassettes
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 videocassettes in the particular taxpayer's business.
Alternatively, the income forecast method may be used.
IT DOES NOT APPEAR THAT VIDEO RENTALS INC IS
EXPENSING OR DEDUCTING THE COST OF RENTAL TAPES, UNTIL THE TAPES
ARE SOLD. SINCE THIS
IS A "RENTAL" BUSINESS THOSE, COSTS CAN BE DEPRECIATED
UNDER §168.
This subject is restricted to the write-off
provision and does not address the amount to use for the
write-off, call Bob Parrish for a limited no-charge discussion of
the basis topic.
FACTS WHICH ARE NOT SHOWN ON THE TYPICAL TAX
RETURN:
ARE THE TAPES PURCHASED FROM THE SUPPLIER
UNDER AN AGREEMENT OF RESALE OR AN AGREEMENT OF RENTAL?
DOES VIDEO RENTALS INC. PAY SALES TAXES WHEN
THE TAPES ARE PURCHASED?
ARE THERE ANY OTHER FACTS, CIRCUMSTANCES,
AGREEMENTS OR REPRESENTATIONS BY VIDEO RENTALS INC. THAT MIGHT
INDICATE THE TAPES ARE TO BE USED FOR RESALE AT THE TIME OF
PURCHASE BY VIDEO RENTALS INC?
Ř
Following is a technical citation, known as a
Revenue ruling. It is
supplied only for proving authority in this matter.
Rev. Rul. 89-62, 1989-1 C.B. 78
ISSUE
What is the proper method of depreciating
videocassettes under the Internal Revenue Code?
FACTS
In 1988 the taxpayer established a
videocassette rental business. A video-cassette consists of a
cartridge mechanism containing a designated length of magnetic
video tape. Videocassettes are used in videocassette recorders or
players. The taxpayer purchases, mass-produced copies of master
versions of movies in the videocassette format and rents them to
the public.
LAW AND ANALYSIS
Section 167(a) of the Code provides that
there shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion and wear and tear (including a
reasonable allowance for obsolescence) of property used in the
trade or business or held for the production of income.
Section 168(a) of the Code provides that,
except as otherwise provided in this section, the depreciation
deduction provided by section 167(a) for any tangible property
shall be determined by using the applicable depreciation method,
recovery period, and convention.
Section 168(f)(3) of the Code provides that
section 168 does not apply to "any motion picture film or
video tape". If videocassettes are encompassed within the
phrase "any motion picture film or video tape", they are
not subject to section 168(a). The language of section 168(f)(3)
is broadly inclusive. Similarly inclusive language was used in
section 168(e)(5) of the Internal Revenue Code of 1954, the
predecessor of section 168(f)(3). There is nothing in the
legislative history of these sections to suggest that they were to
be narrowly applied. H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess.
1009 (1984), 1984-3 (Vol. 2) C.B. 263.
A videocassette is a video tape adapted for
use in a videocassette recorder or player. Accordingly,
videocassettes are among the motion picture films and video tapes
excluded from the scope of section 168.
If property is excluded from section 168 of
the Code, the provisions of section 167 apply in determining the
allowable depreciation deduction with respect to such property.
Section 167(b) of the Code provides that a
reasonable allowance for depreciation shall include an allowance
computed under the straight line method and certain accelerated
methods.
Section 167(c) of the Code provides that the
accelerated methods of depreciation described in section 167(b) do
not apply to any motion picture film, video tape, or sound
recording. This broadly inclusive language encompasses
videocassettes. Accordingly, the taxpayer may depreciate the
videocassettes utilizing the straight line method over their
useful life in the taxpayer's business, but may not utilize the
methods of depreciation described in paragraphs (2), (3), and (4)
of section 167(b).
A taxpayer's videocassettes may be
depreciated in a group account consistent with the rules set forth
in section 1.167(a)(7) of the Income Tax Regulations. In addition,
taxpayers may be able to demonstrate that some of their
videocassettes will not have a useful life in excess of 1 year.
The cost of such videocassettes may be deducted under section 162
of the Code.
The legislative history of section 167(c)
states that the income forecast method of depreciation is
available with respect to motion picture films, video tapes, and
sound recordings. H.R. Rep. No. 426, 99th Cong., 2d Sess. 914-15
(1985), 1986-3 (Vol. 2) C.B. 914-15. For a description of the
income forecast method, see Rev. Rul. 60-358, 1960-2 C.B. 68
(income forecast method applied to films). 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. Taxpayers may
group their videocassettes by videocassette title for purposes of
making the required income projections. Broader groupings of
videocassettes for projection purposes are not permissible under
the income forecast method.
HOLDING
Videocassettes 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 videocassettes in the
particular taxpayer's business. Alternatively, the income forecast
method may be used.
DRAFTING INFORMATION
The principal author of this revenue Ruling
is Mark Pitzer of the Office of Assistant Chief Counsel (Passthroughs
and Special Industries). For further information regarding this
revenue Ruling contact Mark Pitzer on (202) 566-3381 (not a
toll-free call).
Bob Parrish CPA PC, For the firm
Bob Parrish CPA
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