Tax strategies available under income forecast method.

• Author: Castellanos, Anthony R.

The income forecast method (IFM) of computing depreciation expense generally applies to businesses engaged in the production of filmed or recorded entertainment, including motion picture studios, independent film producers, syndicators of television programs or series, and recording companies. A review of the basic principles of the IFM formula and an analysis of the impact of certain refinements to the formula may enable taxpayers to accelerate depreciation deductions.

Rev. Rul. 60-358 (as amplified by Rev. Rul. 64-273) provides the methodology under which the IFM is to be used in depreciating costs incurred in producing or acquiring a television program or motion picture. In general, the depreciation expense for each show or movie in a given tax period is computed by multiplying a film's capitalized cost by a fraction, the numerator of which is the amount of gross income (on a tax basis) generated by the show in such year and the denominator of which is the amount of estimated total gross income to be derived from the show during its useful life:

Current year

Capitalized cost x gross income

Estimated future gross income The IFM allows a taxpayer to deduct depreciation expenses relating to a show's cost, based on the proportion of income generated from the show in the current year over the total anticipated revenue from the show. The Service recognizes that depreciation of these assets should not be determined based on the mere passage of time. Instead, the IRS has acknowledged that the usefulness of these assets depends largely on audience appeal. For example, a successful show will likely have income beyond the initial exhibition (e.g., reruns), while an unsuccessful show may have no prospects for future income, thus more rapidly exhausting its usefulness in the taxpayer's trade or business. Therefore, the objective of the IFM is to match depreciation expenses relating to capitalized film costs with the income generated by such films.

Capitalized costs

In general, capitalized costs include direct material and labor costs associated with producing a film, and certain indirect costs incurred in connection with the production activity, or the cost of acquiring a film's copyright. Certain expenses, such as marketing and advertising costs that are capitalized for financial reporting purposes, are generally not required to be capitalized for tax purposes. Accordingly, taxpayers seeking to accelerate deductions should carefully analyze the...