Musician Recording Costs

[S T]

I have a t/p that is a musician and is recording a CD
In Dec 2008 she incurred $ 1,776 of expenses for pre-production and recording of the CD - balance of expenses are paid in 2009.

Under Notice 88-62 there is a safe harbor to deduct these expenses over a 3 year period, of which 50% first year, 25% 2nd year and 25% erd year.

Based on these numerous complaints and concerns, the IRS provided an elective three-year "safe harbor" for certain authors, artists, and taxpayers who were now required to comply with the new UNICAP rules. Under the three-year safe harbor, taxpayers could aggregate and capitalize all of their "qualified creative costs" incurred during each tax year, and then amortize (deduct) 50% of the aggregated costs in the year they're incurred, 25% of the costs the following year, and the remaining 25% in year three.

Question - is the deduction for 1st year $888 or is it only the one month of December

Does anyone know what theAmortization Code Section is?

Thanks

Sandy

[Edsel]

I vote for $888

Sandy based on the unusual ruling which clearly departs from depreciation/amortization principles, I would say if he incurred this much in December he would be entitled to half the amount incurred. Just shooting from the hip - no cites.

[S T]

Hmm

Thanks Edsel,

Wonder if anyone else has a response to this unusual reporting.

I am having to over ride my Amortization Input for deduction

Can anyone give me an Amortization Code Section??

Sandy

[JG EA]

Section 197.

[S T]

Sect 197

Well I thought about that,
however, Sect 197 is for intangibles and under 15 years amortization
This is only for 3 years

Is it because of the "safe harbor" rule?



Thanks

Sandy

[JG EA]

Sorry shouldn't have replied - I don't know anything about this special provision. I just searched around and still don't understand it all. I did find this info in RIA.

Amortization election for expenses for creating or acquiring music.
For any tax year beginning after Dec. 31, 2005 and before Jan. 1, 2011, a taxpayer may elect to amortize over a 5-year period expenses that are both (1) paid or incurred to create or acquire a musical composition (including words), or a copyright to such property, and (2) otherwise properly capitalizable. The 5-year period begins with the month in which the composition or copyright is placed in service. The election doesn't apply to expenses that are Code Sec. 263A(h) qualified creative expenses ( 1660 ), subject to a specified simplified amortization procedure, amortizable section 197 intangibles ( 1980 ) or not otherwise allowable as a deduction. ( Code Sec. 167(g)(8) ) FTC L-10707.19 ; USTR 1674.027 ; Tax Desk 268,017

1660. Uniform capitalization rules.
A taxpayer must (1) include in inventory costs the “allocable costs” (defined below) of “property” (also defined below) that is inventory; ( Code Sec. 263A(a)(1)(A) ) and (2) capitalize the allocable costs of any other property. ( Code Sec. 263A(a)(2)(B) ) The allocable costs are:
... the direct costs of the property ( Code Sec. 263A(a)(2)(A) );
... the indirect costs, to the extent of the property's proper share of that part (or all) of the costs allocable to that property. ( Code Sec. 263A(a)(2)(B) )
Allocable costs include all depreciation deductions for the taxpayer's assets, and interest, but only where the underlying debt was incurred or continued to finance certain produced property, see 1662 . Taxes are allocable indirect costs. ( Code Sec. 263A(a)(2)(B) ) Environmental remediation costs incurred by a manufacturer (e.g., to clean land it contaminated with hazardous waste) must be included in inventory costs under these rules. FTC G-5500.1 ; USTR 263A4 et seq. ; Tax Desk 456,000 et seq.

I'd have to do a lot more research to find out. And I will have to do this research soon for an author.
OK just looked up the Notice. I see what you are talking about. Does it help that the 5 year period began with the Month? Mayber the 3 year period also begins with the Month.

[S T]

Thanks

Well JG - More Info - but I think what you have referenced is "acquiring" not pre-production recording costs for a musician - which has as I understand it a "safe harbor rule" of 3 years.

It is very weird and I have to totally override my Amortization to allow 50% first year and then 25% for each of the next two years.

Still not sure what the Amortization Code Section is

At any rate - I have a relative small deduction for 2008 and then more subsequently and the bulk of the expenses are coming in for 2009 -

So if I am wrong for 2008 - I will amend (gotta get this filed) but hopefully can have all of the right answers for 2009.

You can private email me and I will send you all of the links and info that I have - DTS has been going through one of these as well - so he has been a great resource of accumulating info.

Sandy

[JG EA]

Sandy,
Just found this:

Then Congress reacted to this scenario by repealing unicap for authors, meaning that they struck down the law, made it as if it had never existed in the first place provided that you were an individual. The repeal did not (and still doesn’t) apply to partnerships and corporations. A noteworthy angle of this is that you do not need a written contract to create a partnership. By definition, if you have two or more individuals each contributing to an enterprise and expecting to share equally in the profits, you have a partnership. (See IRS Publication 54I, Partnerships.) Collaboration will often fit that definition, and if you’ve incorporated, then you are still bound by the rules for applying unicap. But where section 263A was repealed for individuals, the safe harbor rules were not repealed at all. This means that you may still, even if you are a partnership or corporation, choose to apply the safe harbor and write off your expenses over a three-year period, beginning with the year that the expenses are incurred, rather than waiting for income to be received.

http://www.forwriters.com/taxes.html

OK I didn't look at it as repealing Unicap for some. Check this out and see what you think.

Also I still think it is Section 197 but just can't use the method under 197,

The term ''amortizable section 197 intangible'' shall not
include any section 197 intangible -
(A) which is not described in subparagraph (D), (E), or (F)
of subsection (d)(1), and
(B) which is created by the taxpayer.

[S T]

Yep

JG -
I think so - it was under the Notice 88-62 and gave the safe harbor rules. My t/p happens to be an individual - so at least I don't have to deal with partnership and corp rules.
Looks like authors, musicians, etc are all categorized under this.

Sandy