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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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I made a CD. In 2005 I spent about $11000 in productuin ...

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I made a CD. In 2005 I spent about $11000 in productuin costs. In 2006 about $3000 to finish it with art work and press 1000 CD's. My tax person says I can't write off the $11000 in 2005 but must capitalize the costs and only recoup them as I sell or give away CDs at $14 per CD. Is he correct?

Alan
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

It would appear that the expenditures of the type you describe are not covered under the exception provided by the 1988 TAMRA legislation excepting certain "qualifying creative expenses" from the capitalization requirements of IRC Sec. 263A. IRC Sec. 263A requires among other things, the capitalization of creative expenditures incurred in the production of copyrightable material. This appears to be what your tax person is relying on for his interpretaion of the applicable tax law.


However, it would also appear you have the ability to make a "safe harbor" election under IRS Notice 88-62 which allows that expenditures made for "sound recordings" may be deducted over three years.


Specifically, " Under the three-year safe harbor provided herein, taxpayers shall aggregate and capitalize all "qualified creative costs" incurred during each taxable year and shall amortize and deduct 50 percent of such aggregate costs in the year they are incurred, 25 percent of such costs in the year following the year in which they are incurred, and the final 25 percent of such costs in the second year following the year in which they are incurred."


The IRS further provided that this safe harbor is available "only for the qualified creative costs paid or incurred ("incurred") in producing "creative properties" defined as films, sound recordings, video tapes, books...".


I suggest you have your tax person review this notice to see if it applies to your specific situation. If your tax professional refuses to review this notice or otherwise will not apply it or share with you why he will not apply it, I would get a second opinion.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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