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.
— 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?
— 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.