I Am Not An Accountant…
But I am doing my best to understand this for writers. So this is me, talking to myself, and most of you will just read this and go, “What the hell is he talking about?”
That’s fine. But in essence what I am talking about is in a licensing business, copyright valuation will play a very important part. And I will be talking about this often over the coming year in the Licensing Transition workshop on Teachable.
(Lost half of the writers reading this with the term copyright. (grin))
So bear with my very simplistic, non-accountant way of saying this. Okay? I am not even sure I am trying to make a point. I just want to get this down and figured tonights’ challenge blog would be as good a place as any to talk to myself for a moment.
The Start…
— A writer creates a story. Say a novel. What is created is a form of Intellectual Property called a copyright. I think most of us have that.
— A copyright is an intangible property. A car or house are tangible assets, copyright and other forms of IP are intangible.
— Intangible assets can only appear on a balance sheet of a business if they are acquired. (Yup, weird rule, but as far as I know a real one.)
— Copyright has value, and there are numbers of ways of assessing the value, but still nothing completely settled yet on methods. In essence, this area is a cluster f**k.
Okay, got all that?
You Have A Full “C” Corporation…
— If you understand corporation law, you know that the corporation, even though you own all the stock, is a stand-alone entity. (Pass-through corporations do not work here. Writers, avoid pass-through corporations.)
— You license your novel to your corporation. (You own the stock of the corporation, but you still must do a contract to license the copyright to the corporation at fair value.)
— Now your corporation has acquired the intangible asset (the copyright of your novel). The intangible asset can now be put on the corporation’s balance sheets.
Okay, got that?
Determining Value…
— The company must now determine the intangible asset’s present value and useful life expectancy.
— The value is not the license fee the company paid you. No, copyright is valued in a number of possible ways, including possible things like future movie sales, an extrapolation of regular sales over the life expectancy, and numbers of other factors. This is all world-wide and can you see why licensing is critical to understand right at this point. Possible future licenses are all figured into value.
— For math ease, you licensed the novel to your corporation for a $5,000 fee. The possible value of that novel (depending on methods used) could easily be $250,000 on the corporation books. Maybe higher, but lets stick to that amount. Reasonable over 70 years.
— Remember, this is book value. I will be doing a lot more here over time and in the Licensing Transition workshop on Teachable about copyright valuations.
— Life expectancy is conservatively 70 years in the United States.
Copyright valuation right now is a fluid sport, to say the least.
Why Go Through All That?…
Here is where it gets really fun, and why traditional publishers are holding onto copyrights and never releasing them back to authors.
— Depreciation is used for tangible assets like a house or car. Amortization is the same, used on intangible assets. So your book, once it reaches a balance sheet of a business, can be amortized.
— Here is how it works… Divide the $250,000 (value) by 70 years (useful life). Gets you about $3,500 per year.
— With simple accounting, you basically take that $3,500 off as an expense against operating profit every year. (I understand that was simplistic, but that is the upshot.)
— Your corporation now can take in $3,500 in money tax free. Per year. For 70 years. All because of that one novel.
That’s right, it licensed the book from you for $5,000. With a certain form of copyright valuation, put a future value on the corporation balance sheet for that novel and applied amortization to it for the useful life of the copyright to get a deduction against present income every year.
I am not an accountant, but that is how I am understanding this at the moment.
So when you hear me talk about IP valuation of copyright, this is one reason, among many.
Do you traditionally-published writers know how your Big Five Publisher is valuing your novel on its balance sheets? Of course you don’t. But it sure ain’t what it paid you. This one area alone is why the Big Five are staying in business, even though their sales have gone off a cliff. Their reports to their stockholders still show a growing balance sheet.
And who decides which method to use to value the copyright inside your corporation? More than likely you and your accountant.
And yes, this was simplistic. But it shows a number of things. How critical it is to follow copyright valuation methods as they evolve. And to understand licensing. And corporations. And have a good accountant who also understands this stuff.
Okay, got that out of my system. Now back to regularly scheduled publishing.
Fascinating, Dean. The corporation stuff is currently over my head but gives me something new to learn.
Comment/question I don’t know if you can answer, but…at the end of that 70 years, when the value of the IP has been brought down to zero for tax purposes, does that mean it just has zero tax value for the corporation or are there than tax consequences, taxes being paid going forward? Could they just revert the rights they licenced back to the author’s estate at that stage and have no more tax issues?
Sorry I’m not sure that’s clear. I’m thinking of the house example you use in some workshops and how once the house’s value has been deducted away, it’s full value deducted to zero, there was a potential tax issue to deal with. And selling the house after that would mean paying tax on the full sale price. But, that’s for a tangible asset . If a corporation has only licensed the IP, not bought it outright to own fully, once they’ve amortized all they can, can they revert it and…its full value returns to the author’s estate, while the corporation has no further tax issue?
Am I thinking about this wrongheaded? I’m trying to grasp the implications of this post, which feel very very significant for my future heirs. Thanks.
Isabo, now don’t quote me on this, but copyright amortization schedules can reset in copyright, unlike how you depreciate a house or car. Copyright never reaches zero in the life of the copyright. And remember, at the end of 70 years the copyright would no longer be owned by anyone, but would be in the public domain.
The tax issue on houses that have gone though a depreciation schedule is in the selling. You have reduced your basis down to nothing and then if you sell it, the full price is taxable.
Copyright has some strange amortization rules, my understanding is that you could use a ten year schedule on it, then at the end of the ten year schedule, if done right, just keep going, since the copyright (as this type of property unlike a house) actually never hits zero value.
Thanks for that, Dean. Looks like I have one more pretty cool and interesting topic to add to the list of things I want to learn. 🙂
That’s a fascinating point about the depreciation value of copyright. With their backlists, the big conglomerate publishers have got to be claiming fairly big tax losses every year, and then spreading those back and forwards across their tax years. And ironic given the hoopla raised about Amazon not paying corporate taxes, when they’ve been actually reinvesting their profits in assets and research.
It seems like the only real hook is that small C corps need to be careful about is to make sure that they are somewhat close to “industry standards”, or at least reality, when calculating values that will go on IRS forms. I’d guess that crazy valuations (ie fraudulent) are why IPs can’t be assigned a book value until an outside entity uses cash to establish that.
Industry standards apply to the advances between you and your corporation. Those need to be “arms length” and standard and not inflated. There is NO STANDARD yet when it comes to putting value on IP, especially copyright. Two of the methods that work fine with patent flat fail in copyright, and one that sort of works with trademark does not work at all with copyright either. And because of the extreme long-life of a copyright without threat of losing it now (since 1987 here n the States), this valuation becomes a real wild stab at “who knows?”
I am an accountant, or at least I’m in school studying accounting, and this is a very good explanation of how intangible assets work. And this is why writers need to learn at least a little bit about business and how to value their own work. The Big Five know what your writing is worth; they just won’t tell you. Why let them profit off your work in perpetuity?
Glen, THANK YOU!
Amortization, huh. No wonder the wealthy never pay any taxes! It really comes down to “what expenses can your corporation legally cover?” And those are numerous. There are two ways of being a pauper, the rich way and the ordinary way.
Yup. Not paying taxes does not mean you are broke or poor. You might be, but it also might be because you know rules and can legally follow them.
Great post, Dean. This clarifies for me how a publisher can list a book as a valuable asset that they’ve let go out of print or bought rights for that they aren’t exploiting. It’s nice to know we can do the same for our own work.
Amort.over 15 years, from what I’m reading. The near-zero replication (and distro, overhead reduction etc) costs plus IP dev, along with future direct-purchase margins and income streams for 35+ years are likelier considerations at play. For US based/tax law jurisdiction, anyway. Haven’t looked into Eu/UK (lol Brexit) etc yet.
Sam, flat didn’t understand a word of that. Try the comment or question in English, not accounting jargon.
i am not an accountant (nor attorney) nor studying to be one, and posted on the run.
From a cursory look, intangible prop (eg licensed/acquired copyright) deductions are allowed over max 15 years. The 2017 tax law now prohibits NOL carryover backwards (but allows, currently, forever-carryover forwards/until 2026?) and caps the max at 20%.
I mused that the tax benefits may be a factor, but it may also be bigpubs grabbing IP for lockups at low relative cost as an income stream for them (as per your examples for indies, but over many more titles) for a relatively long time, especially without solid termination/reversion clauses from newbie writers.
Sam, yes, exactly how traditional publishers are thinking and why writers can’t get books back anymore.
*deductions (amortization, since intangible).
I have a question, though: given most tradpubs *license* copyrights from their quarry, can they really amortize the intangible given that they don’t actually *own* the copyright, merely having acquired some licensing rights?
From the IRS regs it seems to apply to acquired-ownership intangibles, not acquired-*license* intangibles. Which might mean the IRS may sooner or later look into tradpubs’ accounting of intangible amortizations and say lolbutno. Thoughts?
Nope, rules are copyright that is acquired, and license if a form of acquiring. No distinction since they “own” the license.
Er, I think I wrote the new max NOL carryover was 20% but I meant capped at 80%.
Perfectly understandable to us. And greatly appreciated…
Stone asked just yesterday the question, “Hey, can’t we license to our writing corporation for tax purposes like we’ve done with our other businesses?”
Apparently, we’re connected with you on a wavelength through the universe.
Thank you, Dean, for unknowingly answering our question: “Yes. Yes, we can.”
And should. Just caution on the payments back to you from the corporation. Those are taxable.
Thank you for this interesting post.
Finally I got an idea about what you mean when you say, no writer has to pay taxes.
My first, quick online research, said this kind of amortization for intangible assets isn’t possible here (Germany). Yet, the contracts from the publishers look as worse as those you and Kris cite as examples for your country. Therefore, I (freely and without any proof) assume they are doing something in that direction as well.
Off to check the tax law in my country more thoroughly.
I used to *love* German publishing contracts. They were fair, and very straightforward. Then, about ten years ago, I started seeing some of them using what seemed like whole chunks of contracts just cut and pasted out of US contracts, and the terms and conditions started getting worse. They didn’t have the straight up rights grabs that you see now (where some publishers will insist/demand rights for other formats and languages), although the French publishers were insisting on those quite early. (“Why would you need the English audiobook rights? Are you actually serious about doing that?”) It smelled off, but I hadn’t guessed at the depreciation value of having those on their books.
I’m sure you’re going to cover this in the Business Master Class, but in this example is your C-corp licensing your novel the same way NY publishers are licensing your novel–all rights for the life of the copyright, all for that (industry standard) $5,000 licensing fee?
Annie, not sure of your question. There are a lot of ways of doing it but you must license to your own corporation. If you write inside your own corporation, then the copyright is not acquired. Better to hold the copyright personally and license to the corporation. (Taking the money in payment would be a taxable event, so caution there. The company can owe it to you as long as you put it on a note at the end of every year.)
I meant my question to relate to what rights the writer in your example licensed to the writer’s corporation, but I should never try to speak business first thing in the morning. *g*
If the valuation (for the license held by the corporation) includes things like future movie rights, the corporation would have to have a license to market those future movie rights, otherwise those rights remain with the author. So the IP valuation for the corporation would only be based on whatever license the corporation holds for the IP for whatever period the corporation holds the license. In your example it sounded to me like the writer continued to own copyright to the IP but licensed the corporation with all sorts of rights to the IP–print, audio, ebook, movie, gaming, etc.
Is that right? And should that be what a smart indie writer who’s writing inside their own corporation be doing?
Yes, it is you corporation, why would you hold rights back from it? And if something gets licensed, you want the money to go intoo the corporation.
You don’t write inside your corporation, you license copyright to it.
In Australia( I learnt accounting a long time ago) the “life” of the acquired IP is the end term in the contract. US could be different. So an IP acquired contract term could hold the licence for 5 years only, before the IP reverts to the author. Another IP could be acquired from the writer for the life of the writer plus 50 years (Australia) or 70 years (US). This longer “life” term is better for the big publishers, so they can deduct (amortise) their self calculated, over- valued IP expense over a longer period. Less tax to the tax man for doing nothing.
I have often wondered why the Australian Tax Office has not demanded an authority sets the value for each IP based on the contract payment, not what the acquired business hopes the contracted IP will earn over the contract.
I look forward to your next blog on amortising IPs.
Yes, my understanding is that the “life” is the term of the contract. But in traditional publishing contracts now it says “the life of the copyright” expressly.
The valuation of IP reminds me of Agatha Christie’s struggles with Inland Revenue. She had numerous problems that I won’t go into here, but late in her life, her advisers were negotiating with IR over the value of her copyrights and the death duties she would have to pay.
IR took the position that each of her novels should be valued according to the value of her biggest seller and taxed accordingly. They did this to George Bernard Shaw, resulting in a tax bill of 524,000 pounds against an estate of 700,000 pounds. Payable immediately, please.
This meant, applied to Christie’s estate, would have resulted in a tax bill of 20 million pounds.
Christie formed a company, Agatha Christie Ltd., of which she was the sole employee and paid a salary, and later the Christie Copyrights Trust was created to hold the copyrights and keep her heirs from paying exorbitant death duties.
Bill, yes, estate planning is critical in this new world of copyright valuation. Critical.
You didn’t lose me with what you discussed in this post. It makes complete sense. The part I’m working on learning is how to get the money from the corporation (owned by me) to the writer (me) while limiting tax liability. The basic concept I have. What I’m working on are exact examples I can apply to myself. I’m slowly putting together a list of these that I am able to use. (Yes, on business stuff I’m a make-a-list kind of person. :P) I’m always looking for more, though, and am hoping to pick up some good ideas and hints at the upcoming Master Class.
J.A., you are thinking like a working person who is paid. How many bills would you have if your corporation paid for your home, the upkeep and utilities, your car, upkeep on your car, and a lot of your food and expenses? All before taxes. In other words, you are on the board of your corporation, you can determine what is in the best interest of the corporation to do to take care of its principle board member and producer of product. All legal. Just need to do it correctly.
So stop thinking like you need to be “paid” and think like a corporation and you are on the board.
We are on the same page, Dean. I remember and noted down examples such as “It’s in the best interest of the corporation to have an RV to travel to the office in the other state” and then the office equipment ideas. A working vehicle while having the clunker that just sits that is the personal vehicle. And do on. Those are the types of example I’m talking about. Getting creative on those options, all while staying legal (of course).
Thinking along the lines of the rights grabs, and the demands big publishers are making for all rights, including world English, all foreign languages, and audio rights, I suppose part of this is because they are listing all of these elements as separate items/values on their books?
I’d thought they had just really wanted to get their hands on the audio rights because those were hot, but now I can imagine them listing all those out on their depreciation forms. And that would (maybe?) explain why the big conglomerates keep holding on to publishers, because they are applying those paper depreciation losses to their other businesses? (I’m not sure if they can actually get away with that kind of accounting.)
Totally would depend on how the corporation is set up. And every country has slightly different practices and the big publishers are all owned outside the US, but the companies themselves are mostly US based and incorporated. So who knows. Impossible to even track just all the imprints.
Has anybody experience on setting this up outside of the US for European writers?
It’s a shame that people don’t talk about this but are willing to sell “book doctoring” and other scams.
This was a really interesting post. I had thought about regular business deductions, but hadn’t considered the deducing the value of the IP. But in your example, where does the corporation get the $5000 to pay for the license?
Jon, you have some learning on business and corporations to do. (grin)
The contract between you and the corporation specifies an amount. Say $5,000 for a standard genre novel. So corporation owes you the author $5,000. That is an accounts payable. (If you get paid that from the company, you owe taxes on it, so you don’t want to do that.)
So at the end of the year, legally with paperwork in a board meeting (meaning you have a meeting with yourself if you are the only board member) you put the accounts receivable on a “on demand note” and you sign it for yourself and for the corporation. The company then owes you the money and you can get it when you want. (On demand.) Shareholder debt is another way of looking at it.
Now, I am not a lawyer or an accountant, so get professional advice on how to do this. Just extreme caution on moving the money from the corporation to your personal because that is a taxable event. If you need money from the corporation, better to be an employee and get the taxes taken out automatically but if you are doing it right, you wouldn’t even need to do that.
I do have some learning to do! Thanks Dean for the helpful response.
Hi Dean,
there is an additional aspect here, that has not been mentioned yet.
Actually two, even.
1. Trying to get a credit as an artist/author vs. trying to get a credit as a c-corporation.
2. Trying to find relevant partnerships for long term business projects as an author/artist vs. trying the same as a c-corporation.
An individual is a total bottleneck when it comes to business outside of providing his/her personal brand. After all, s/he could be gone tomorrow and chaos would ensue. Not a sound basis for bigger, long term business.
It’s actually valid outside of writing as well.
Oprah is only valued that much because she has this separate company licensing everything “Oprah” (you cannot license “yourself” directly, you can only sell your time). If I’m not completely mistaken, Oprah’s licensing company has only one main employee and that’s an attorney friend of hers (it’s separate to all of her other media brands and corporations). This attorney also owns part of the company, so it is in his best interest to act in the company’s best interest. Both get rich together.
This is simplified. I have this from some entrepreneur acquaintances who were discussing these kinds of business constructions for entertainers & artists in a business meeting. I have not researched Oprah myself but I’m sure most of this information would be openly available. It’s nothing illegal. It’s just clever and sound business. Oprah was used as an example because everyone knows her.