depreciating films

[Mark Goldberg]

My client bought 2 silent films to use in his business. From what I have read you have to reduce the cost of the films by their salvage value before depreciating. My first thought is is if the film is 90 years old and cost $30,000 would't the salvage value be $30,000?
Obviously, we want a more taxpayer freindly way to look at this. Any thoughts?

[Chief]

Depreciation of Films

Mark, I remember on the other Board this same topic coming up last year. However, I cannot remember the particulars. I would not hesitate to take that amount to begin depreciation. If the film were physically destroyed then the value would be 0. The value lies not in the physical format but in the content. (Now that's a shaky assumption) Good luck.

[Gene V]

film

I haven't read anything about reducing cost by salvage value, but I did read in Pub. 946 that you cannot use MACRS for motion picture films, you would use either the straight line or income forecast method.

[Mark Goldberg]

S/L or income forecast

S/L or income forecast require the use of salvage value. This is the problem.

[jainen]

Lasser

"Salvage value is the amount you estimate, at the time you acquire an asset, will be realized upon its sale or other disposition after it is no longer useful in your business." (Everyone's 1978 Income Tax Guide, by S. Jay Lasser)

[JON]

Collectable

Remember most of the rules income or S/L were adapted for new ones. Your purchase sounds almost like a collectable, but I think you know how to do it... Good luck.

[Bees Knees]

S/L or income forecast require the use of salvage value. This is the problem.

Not if your business use puts wear and tear on the film. In the past, depreciation for antiques was generally not allowed because the antiques increased in value, not decreased over time. In Simon (2nd Cir. 1995), the court allowed for depreciation of antique bows for violins because the use put wear and tear on them, thus causing them to be used up. If you can argue that the films will decrease in value because you are going to put wear and tear on them, then the salvage value should be less after you are done using them for business.

[Mark Goldberg]

The answer is!

So I guess the answer is, since no one knows what the salvage value of the films will be 10 or 15 or 20 years from now, I guess we just make up our best guess amount and move on.

[jainen]

Disagree

Before you say nobody knows so let's make a guess, how about some more info? Obviously the buyer was able to put a very precise value on the film. Was that for the rights to use the creative work or the physical film itself? In either case a film archivist could appraise it and make a good estimate about future life. The appraisal is a normal business function that insurance will require anyway. This is the client's responsibility, not the preparer's. Personally I never "just make up" anything on a tax return.

[Mark Goldberg]

thanks Jainen

Thanks for your insights. You raised some issues for my client and me to discuss.
I would be careful about saying "never", as in I never make up a number. I rarely make up a number but, never?

[jainen]

making up a number

Sorry, I meant to say I never ADMIT to making up a number.

[Gretel]

Making up numbers

Jainen, I like you saying: I never admit....

Even that is not true. You just did.

Well, I try not to make up numbers but of course it doesn't always work. I also would feel uncomfortable to admit it but try to overcome this. Makes life much easier.

[jainen]

make up numbers

I don't make up numbers. Most of the good ones were made up by astronomers in Alexandria a long time ago. All I do is rearrange them. Clients seem to prefer certain arrangements over others.

[Bees Knees]

HMO accounting method

Clients seem to prefer certain arrangements over others.

Do any of your clients use the HMO accounting method? You ask them about the value of their closing inventory, and they say; "How Much do I Owe?" (HMO)

[jainen]

SALY method

A few, but most use the SALY method--Same As Last Year.