Discussion:Film Production Company Method of Accouting

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Discussion Forum Index --> Accounting Questions --> Film Production Company Method of Accouting


Sriverany (talk|edits) said:

15 May 2013
I have a questions to anyone who is familiar with this type of industry.

Should a Film Production Company use cash or accrual basis? The company is small in size and in revenues but has produced a 2 films that they have full ownership of and produce commericals/shorts/advertising for 3rd parties and collect income. As of right now the company is on a cash basis. I do not have experience with this type of industry. I would like to have them go into an accrual basis...

For example my logic to wanting them to use Accrual

They have credit cards --- in 2012 they charged about 10k on the cards for expenses related to 2012 (whether they were for projects of just office expenses) - they only were able to pay off $8k... Their accountant old took the $8 as current years expense and will expnse the other $2k when its paid (2013).... Another is the accountants invoice for svc provided to them in 2012 was $30k... they only paid $15k... so only $15k was expensed. If they were on accraul they would have a payable and expense the full amount... Long story short at the end of the year they had Net Income of $27k.... if they would have been able to write off the other expenses they would have had only $10k!!!

I know the income recognition changes as well but i think there is more of an advantage.

Now i have been trying to do research to see what the preferred method of acct is for film production companies and i cannot seem to find much. Are they required, do they have a choice... etc.

Also they 2 films they fully own shouldn't they have them on the balance sheet as assets???

If anyone can guide me to the right place to read more on this and answer some of my questions i would gladly appreiciate it.

Thanks

SC

Podolin (talk|edits) said:

15 May 2013
http://www.nysscpa.org/cpajournal/2001/1000/features/f103201.htm

Mr cheese (talk|edits) said:

20 May 2013
First of all, whether the taxpayer is on the cash or accrual method of accounting, credit card charges should be deducted, not credit card payments. This was discussed before on another thread and is normally one of the first things you learn in a tax law class:

http://www.taxalmanac.org/index.php/Discussion:Deduction_for_credit_card_expenses

Secondly, rights to any films should be recorded as an intangible asset on the balance sheet and amortized.

Whether or not you would like the taxpayer to report using the Cash or Accrual Method of Accounting is up to your own discretion

Podolin (talk|edits) said:

21 May 2013
From Pub 946: Income Forecast Method

You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles.

Motion picture films or video tapes.

Sound recordings.

Copyrights.

Books.

Patents.

Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. For more information, see section 167(g) of the Internal Revenue Code.

Podolin (talk|edits) said:

23 September 2013
There is also Sec 181 as a possible tax election.

H.D. Freifunk (talk|edits) said:

24 September 2013
Also they 2 films they fully own shouldn't they have them on the balance sheet as assets???

You have to learn the industry lingo. It's only income when it's in the can. Most of the directors today will film all but the last foot or two of the movie...and then leave it on the shelf until they need the income. Then they just have to film a couple of feet of the sky or something, then it's in the can and they start making the money and then figure out another way to avoid the taxes. I should mention that you can take the deduction today, and pay the taxes much later on. This is how they got the idea of the Popeye character "Whimpy" in older times.

Anyhow, that's how we do it in Germany.

ZL28 (talk|edits) said:

31 October 2013
Should be careful when it comes to film taxation if you are not familiar with the special rules.

Section 181 is often desirable and is like section 179.

Just because a film pays for/incurs production costs doesn't make them deductible.

If you choose 181 then you get to expenses the film production costs...otherwise you are left with the income forecast method or straight line and that can take a loong time to write off the film costs. There's a special election to make. If you don't make the election in the initial year of principal photography, then someone may have just made a significant error.

Maybe being cash basis is a good thing....they, which means more than 1, were left with 27k in income....after the standard or itemized deductions and exemptions, they may only be left with a very nominal tax.....getting them down to a lower income by being accrual might waste some of the deductions and exemptions...at worst their income is taxed federally at 10%

What if you make them accrual and they earn income but don't receive payment for a while...client may be unhappy with you for changing to accrual b/c now they're paying taxes on their income when they may have not received the cash...or they are paying taxes earlier than if you had chosen to stay with cash basis.

I don't know if i agree with H.D. Most film producers i know live an insanely busy life style...this is a very difficult profession unless you have sufficient funding to hire quite a bit of staff. Most of my film clients don't have sufficient funding so they're wearing many hats...so when they finish a film..they finish it, get it out there, and move onto the next project. It's not unusual at all for producers to get their fee upfront and often receive no money on the back end b/c the film hasn't recouped enough of the costs to pay the investor for their investment plus the 15 or 20% premium... Therefore leaving the production on the shelf "until they need income" is illogical in my experiences.

Podolin (talk|edits) said:

31 October 2013
I don't know if i agree with H.D. Unpossible! H.D. is erudite and always right.

Podolin (talk|edits) said:

31 October 2013
And certainly logical.

Gazoo (talk|edits) said:

2 November 2013
H.D. is one of the German tax professors who thinks his brain can overcome the law. I think he's taking a cavilier attitude since he knows most films flop and he figures the TP can skip town before the .....hits the fan. In fact, this might make a good movie in itself. A filmmaker on the run from the Service.

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