Play Meter

Table 2
Total Income TilXC8 rOl.d on an Amusement Machine Given
Normal Decreasing Reve nues and a 20\ Tax Rate
Year
I
2
3
•
5
R venues "
$)000
2000
1000
1000
1000
-
Tablf:l ]
Slraight-l..lnc Method
Dcpn'clatlon
Expenses
• Net Income x Tax Rate -
$ 2(
26 4
26 '
26 4
264
$2736
1736
736
736
736
SiJ20
Income Taxes Poalponed b)' he Decllnlnq
Balance' Met.hod va. the Slralqht-Ltne Method
Taxes
Paid
. 20
• $ 547
) 47
. 20
. 20
14 7
. 20
14 7
x
.20
147
Taxes Paid
Year
Year
I
2
3
~
5
Revenues ·
$3000
2000
1000
1000
1000
-
Expenses
$ 440
352
26 .
176
88
S1TIO
Year
1
2
3
4
S
•
147
141
x
S1TIO
- These are hypothe ieal dccrcaslng rcvcnu
T.~"':c.
Pnld
In the example , the advantage of
the accelerated methods is that the
operator has the use of an additional
$69 in year 1 and an additional $20
in year 2 . These amounts may not
appear Significant, but remember
th ese figures are for one machine .
The amount per machine will , of
course , vary depending upon your
income per machine and your tax
bracket .
Another important point is that the
money you are freeing for invest-
ment or working capital is interest
fre e money! A hard deal to beat. So
while an accelerated depreciation
method does not save you tax
dollars , the postponement of the
payment of the taxes is the equiva-
lent to an interest free government
loan paid back in increasing install-
ments during the last half of the
machine's life .
Chart 1 plots the taxes paid by the
straight ·line method and the de-
clining-balance method shOWing the
postponement area and the repay-
ment area . The tax numbers plotted
in Chart 1 come from Table 3 .
To answer the dilemma of which
accelerated depreciation method to
use, one must first ask the question :
What objectiues am I trying to
ach ieue with depreciation? Are you
trying to keep book values fairly close
to market values? Or are you trying
to minimize income taxes , legally , of·
Intereal (ree dollars releoaes by the declininc;
bolance deproc.l.at.1on method lhrouqh tox postponmenl.
.-
S-
Taxes
Paid
$ 4 78
327
l-
2-
156
17.
200
1-
mn
for an l)musement game .
To al taxes paid under ny of the three methods would be qual
regardloss of the rQvenue figurcs or ta x r a tes u8cd.
5.
Stroiqht-Line Method Va. lhe Decl intnq Bahnce
Ii thod.
9
Proof of inflation can be found in the
price you paid last year for ·a pinball
machine as compared with the price
you pay this year .
As shown in Table 3 under an
accelerated depreciation method ,
taxes postponed in years I -and 2 are
paid back by the negative postpone-
ment (or payment) in years 3 , 4 , and
-:r-
!!ill
Tl'IxCa Piud In each Yellc or the Machinea LiCe by the;>
ron
•
•
-S)
Ch.Ul I
. 2 0 · $ 5 12
.20
329
. 20
14 7
. 20
165
.20
182
DeCllnin<;-Balancc Method
DepreC.1atlon
Revenues - -
Expenses
• Net Income x Tax Rat
$3000
$ 608
$2392
x
.20
2000
365
16JS
x
.20
1000
219
781
. 20
1000
128
812
. 20
-0-
1000
1000
. 20
PLAY METER , February, 1979
114
200
nJn
Tax 8 Paid
.
- -21 2.
$ ••
IS.
'"
mn
Taxes roalponed by
the Declining UlIl"ncc
Method
$478
327
3<1
Taxes
Net Income x Tax Rate. Paid
$2560
1648
736
824
912
InC'olftt.' li'lxeS by
Declinlng 0411 nee
$$47
sum-of-the-YCllrS-Dig.Ll8 Method
OCprCCla ion
I ncoin\' t"')Ct" by
SlrlU9hl-Llne
Ll fa in Years
Str . .1Iqht-l1nc MClhod
- - - Ooc11ninq-OaICinco Method
course?
Table 4 shows the sum -of·the-
years digits method versus the
declining balance method. The tax
postponement by the declinlng-
balance method is not as great. as it
was when compared with the
straight-line method . However , it can
be a considerable sum of money if
the operator is depreciating a large
number of machines . If your ob-
jective is to maximize tax postpone-
ment the declining-balance method is
the method to employ because It
accomplishes that goal.
If your objective is to maintain
book values close to market values ,
the answer is not so simple . One
would need to study the real
decrease in market values of games
over an extended period of time to
the book values rendered by the two
accelerated depreciation methods to
see which method accomplished that
objective .
The tax advantages of using an
accelerated depreciation method
cannot be disputed . The advantage
lies in the postponement of income
taxes to a future period at no
expense to the operator . Missing the
advantages of an accelerated de-
preciation method would be like an
operator having a new pinball
machine with one broken flipper.
Just as it is worth the effort to fix the
broken flipper it is worth the effort to
compute depreciation by the sum -of-
the-years digits method or the
declining-balance method that is , of
course , if you want to maximize
profits .
Charles C. Ross, the owner of The
Magic Coin in San Marcos , Texas , is
an instructor of Accounting and
Finance at Southwest Texas State
Uniuersity .
Table 4
Ta x e s Postponed by th e Declining -Balance Method
v s . the Sum-of-the-y ears Di g its Method
Ye a r
Sum-o f -the -
Ye a r s Di g its
Declining-
Balance
Taxes Postponed
By the Declining-
Balance Method
1
$ 512
$ 478
$ 34
2
329
327
2
3
147
156
-9
4
16 5
174
-9
5
182
174
-18
$1 33 5
$1335
-0-
7