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TAX QUIZ: Is Artwork an Asset or Cost of Goods?
IMR, Sept. 16, 1996
When you invoice a client for a printing job, how do you categorize artwork and design? The answer may cost you if the IRS randomly selects your company for an audit.
For Ted O'Roke, CFC, CEO of Independent Business Group in Hayward, Calif., the answer meant $27,000 in extra taxes after the IRS examined his firm's 1993 records.
The auditor claimed that Independent Business Group owed more taxes because, O'Roke says, "all art and graphic design charges should have been classified as assets-not cost of goods-with a depreciable life of 18 months. I talked to our bank, and the bank doesn't consider them assets. How they came up with 18 months' depreciation I don't know."
In the past, O'Roke says, his company lumped art and design charges into printing items on invoices. "Now we must separate it out," he says. "We're putting a notice on our invoices that tells the customer that all art charges involved in this order mean that the art belongs to them-not us. This will allow us to treat graphics charges as cost of goods."
A final note: O'Roke says the IRS auditor wanted to see the DMIA membership directory and copied several pages, supposedly because he was researching the issue of categorizing art and graphic charges as assets and wanted to speak to other distributors.