Motion Picture Herald (Jan-Mar 1956)

I^epteciathtt in theatre tax calculations Summarizing^ for convenience as the April 15th deadline approaches, provisions of the Federal Income Tax Law now applying to capital expenditures. by CURTIS MEES No OXE likes taxes, but they are a “necessary evil” in our lives, so it behooves us to learn living with them in the easiest manner possible. Which means we must pay strict attention to the rules, not underpaying where w'e are liable — and, equally important, not ot»erpaying where any saving is allowable ! Under the Federal Income Tax Law •which went into effect last year were a number of very important new methods, or revisions of old methods, which offer substantial tax benefits to business. We’ll try to “hit the high spots” of these so that you may decide whether your understanding of these tax changes is adequate for your protection and benefit. Probably one of the most important tax benefits in the current Tax Code comes from a change in the methods of depreciation allowable on Capital expenditures — meaning purchases of major equipment, or modernization improvements, of a longrange nature which increase the life of property and equipment. Because of the fact the change most important to theatremen could only be put into effect with purchases for 1954 and later, it is possible this point has been overlooked. The Declining Balance method of depreciation w’as increased from 150% to 200% of the Straight Line rate. What does this mean to you? Simply that in the case of wide-screen, stereophonic sound, or other installations improving presentation, as well as reseating the house, putting up a new marquee, or building a drive-in theatre (or conventional house, for that matter), you can get your money back much faster in tax depreciation than was formerly possible. In many cases, this tax saving can actually help pay for the equipment itself! HOW DOES IT WORK? In the Straight Line method of depreciation, most commonly used, the same amount is charged off each year. For example, on an expenditure of $10,000 for equipment having an estimated life of 10 years, $1,000 per year would be charged off to depreciation. (To simplify the example, we will not take into account the fact that any salvage value should be first deducted.) With the Declining Balance method, the theory is that more should be charged off in the early life of equipment, with much lesser charges as the equipment deteriorates and maintenance expenses climb (more or less equalizing tax payments). Under the Declining Balance method, the first three years of depreciation charges could recoup almost 50% of the total expenditure ($4,880 to be exact), whereas the Straight Line method would only permit charging off 30%, or $3,000. DEPRECIATION SCHEDULE All exhibitors purchasing new equipment, with a minimum anticipated life of at least four years, might well consider the desirability of utilizing this new tax depreciation method for faster recouping of the investment. Who knows what the equipment situation will be four years or more from now ? So why not take advantage of the opportunity of recapturing as much as possible in the immediate future? Then if equipment becomes obsolete one would be in better position to invest in newer machines, screens, sound systems, etc. Every item of a durable nature should be included in your depreciation schedule, omitting only those materials that are of an expendable nature, such as office supplies and petty items like dollar trash baskets and pencil sharpeners. In a subsequent article we hope to deal more fully with the questoin of an overall inventory of the theatre, but for the moment we will confine our remarks to the simple statement that an adequate inventory should be prepared and maintained in a current status. Aside from tax purposes. this inventory will be of much value to a theatre owner in a variety of ways, such as to gurantee full coverage in all insurance policies and to minimize or trace theft, as well as presenting an up-to-the minute valuation of the properties for appraisal purposes in the event of a sale. Furthermore, unless such an inventory is continually kept, purchase records may become lost and the true value of the initial investment depreciated, or even overlooked. It is in most cases desirable that equipment be depreciated individually rather than in a lot, as the life of each piece is generally far shorter than the average for the entire lot. Thus the price of an exhaust fan in the booth may be recovered in a few years, at the time replacement is necessary, rather than over a great many years, as covered by most booth equipment which might be considered in the same lot. The Federal government recognizes the fact that much of its Bulletin “F” (Internal Revenue Service Publication No. 173) is out of date, but pending the long time necessary for the red-tape to become unwound and a revised bulletin issued, that bulletin may serve as a useful guide. No consideration has been given previously to the relatively newer problems encountered by drive-in operators, for example, and each will have to arrive at his own depreciation tables pending some formal declaration of a new set of standards. It might also be borne in mind that the “Tables of Useful Lives of Depreciable Property” included in the Bulletin “F” are generally a “maximum” and can be subject to considerable shortening where circumstances dictate less useful life. A common sense approach to the prob{Continued on page 34) 14 MOTION PICTURE HERALD, MARCH 3. 1956