14
STAR*TECH JOURNAL/DECEMBER 1982
As "tax time" rapidly approaches, it's time to take stock of just what 1982's effect was on
the Amusement Operator's location(s). The following article may help you siphon through
the "Tax-Tank" so that you can see the bottom line more clearly.
TAX TIPS FOR COIN-OP
AMUSEMENT OPERA TORS
DEPRECIATING EQUIPMENT- NEW OR USED
The names of various electronic
components comprise this issue's word
puzzle. Find and encircle these words
that appear below. They run vertically,
horizontally, diagonally and sometimes
backwards.
ELECTRONIC COMPONENTS
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Find these hidden words in the above puzzle:
LED
TRANSISTOR
CRYSTAL
DIODE
REGULATOR VARISTOR
SCR
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RESISTOR
CAPACITOR
Here is the answer key
to November's puzzle:
Integrated Circuit Functions
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By Mark E. Battersby
The 1981 tax reform legislation created a
completely new system for writing off the cost
of equipment used in your coin-op amusement
business. An integral part of that new system
were fast depreciation methods that were
scheduled to become even faster in 1984 and
1985. Unfortunately, the so-called "Tax Equity
and Fiscal Responsibility Act of 1982" has
repealed those scheduled increases - but
don't cry over lost write-offs just yet.
To demonstrate just how liberal the present
rules for writing off equipment acquisitions
actually are, let's take a look at last year's tax
law and then bring in the limited changes
included in August's tax law.
The Accelerated Cost Recovery System
(ACRS) created in August of 1981, requires
that most depreciable property be written off
over certain specific lives using a specific
depreciation method. This system replaced the
old class life ADR Asset Depreciation Range
system and governs the writeoff of both new
and used equipment.
As most operators are already aware, each
type of property or equipment acquired for use
in your coin-op amusement business is assigned
to a specific "category". Cars and light trucks,
for instance, fall within the 3-year property
category and, accordingly, are assigned a three-
year life for tax purposes. Most other equip-
ment and fixtures are classified as 5-year
property while the 15-year property category is
mainly composed of buildings.
Since, in most cases, these ACRS lives are
appreciably shorter than the old "Guideline"
lives, the property is written off faster, pro-
ducing larger depreciation deductions on the
annual income tax return. Fortunately, however,
the benefits of ACRS don't stop there.
The Internal Revenue Service norm is now
the 150 percent declining-balance method of
depreciation, enabling everyone to write off
their equipment or property over a shorter life,
without regard for salvage value at a rate 150
percent as fast as the straight-line writeoff.
Because our lawmakers felt that the ACRS
writeoffs were sufficiently liberal, the 1981 tax
law closed several loopholes that had formerly
been used to legally increase the depreciation
deduction. For example, in the past many
operators who owned their buildings would
depreciate the cost of the building over the
twenty-five or thirty years demanded by our
tax law - while, at the same time, writing off
some of the building's components over the
shorter life spans for such things as air condi-
tioning systems, doors, electrical wiring,
plumbing, driveways and parking lots, etc.
Last year's tax law "reform" flatly elimi-
nated the depreciation of a building's components.
Now both the building and its components
enjoy a fifteen year life for tax purposes.
Where a coin-op amusement operator
makes what the tax law terms "a substantial
improvement" to a building, it is treated as a
separate building rather than as one or more
components. In other words, the business is
permitted to use the regular ACRS deduction
or, if they wish, they can elect the straight-line
ACRS deduction for the improvement over the
regular recovery period regardless of the ACRS
method that is used for the rest of the building.
Under the rules, an improvement is a
"substantial" improvement if(l) the amounts
added to capital account with respect to the
building over a two-year period are at least 25
percent of the adjusted basis of the building and
(2) the improvement is made at least three
years after the building was placed in service.
Further increasing the tax benefits resulting
from acquiring equipment - but not land or
buildings - was the 10 percent investment tax
credit. For every $10 spent on either used or
new equipment or fixtures, you could reduce
your annual tax bill by $1.
The only ceiling on just how much invest-
ment tax credit could be claimed in any one
year was set by the firm's tax bill for the year
or, if tax liability exceeded $25,000, the tax
credit applied against the first $25,000 of tax
liability plus 90 percent of tax liability exceed-
ing $25,000. Naturally, any unused credit
could be carried back three years and forward
15 years.
Finally, a unique writeoffbecame available
for the first time in 1982 that permits every
amusement game operator to choose an
immediate deduction of up to $5,000 in equip-
ment acquired during the tax year. Naturally, if
a direct writeoff of $5,000 worth of equipment
is decided upon, the same property cannot be
depreciated. Nor can the investment tax credit
be claimed.
Obviously every tax law has its share of
unpleasant provisions of which "recapture" is
one of the unfortunate realities of the 1981 Act.
A gain on the sale or other disposition of
ACRS property is now taxed as ordinary
income property to the extent of ACRS deduc-
tions claimed on the property. Thus, suppose
JohnDoeacquiresanassetonJune l, 1979for
$10,000. For the years 1979-1981 he deducts
a total of$2,500 for depreciation. Ifhe sells the