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December 5, 2005
Taxing creative works
I am in process of writing a follow up to our white paper on Reporting Intangibles. This second paper is on the monetization of intangibles. In the course of my research, I am delving into the wonderful world of taxation - and getting an education on the difference between financial accounting and tax accounting. Not surprisingly one of those differences concerns their treatment of intangibles. The rules for taxing intangibles are not the same as booking intangibles.
Now one of the rules for taxing intangibles maybe changing. Two different provisions were added to the House and Senate tax legislation (HR 4297 - Sec. 304 and S.2020 - Sec. 567) that would change how the sale of music catalogs are taxed. Under the Senate proposal, a buyer or creator of a musical work would be allowed to amortize the cost of the over 5 years, rather than use the income forecast method of accounting. Under the House bill, sales of music catalogs would be treated as capital gains and taxed at a lower rate.
Interestingly, it only applies to musical works - not all copyrighted works. This may be because songwriters must be paid royalties - and pay taxes - immediately; writers can already spread out payment and taxes over a number of years.
It is estimated that the House provision will cost $25 million over 10 years while the Senate will actually increase tax revenues by $32 million over 10 years.
The House provision will clearly increase the revenues of songwriters. The change would also encourage songwriters to sell their portfolios by lower the rate, according to the Wall Street Journal - "Music to Songwriters' Ears: Lower Taxes".
The Senate provision works differently. Rather than change the tax rate, the Senate bill would allow songwriters to amortize their expenses over 5 years. The provision is also likely to help spur the sale of music catalogs, since the cost of buying the catalog could be amortized over years.
Neither provision is guaranteed to make it into the final bill - if there is a final bill. The House will vote this week on their version; the Senate passed its version last month. After the House vote, the bill will go to a conference to reconcile the two. At that point, either, both or neither of the provisions may remain in the legislation. However, since both the House and Senate have passed something on the issue, something is likely to stay in the final bill. It is just unclear what it will be.
More later.
Posted by Ken Jarboe at December 5, 2005 10:22 AM
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