Tax consequences of the membership model?

 
I am not a tax or legal professional, but it occurs to me that the new model may raise some issues.
 
For the amateur using Sonar, the tax implications of the new membership model are probably not much different from ownership, being basically the sales or use tax applicable to the purchase of most goods for personal use, usually calculated on and due, albeit not always collected, at the time of payment.
 
Although 500.00 is a small deduction for many taxpayers, the small studio business or an institution planning to purchase a significant number of memberships should consult a tax advisor regarding tax treatment of the membership model. It may well be more advantageous, or less so, than the ownership model and may require adjustment in how the tax forms are filled out.
The old ownership model clearly transferred ownership of a depreciable business property (currently 36 months life) on the date of the payment, and made it depreciable starting on the date it was placed in service. As a "perpetual" license to off-the-shelf software it could usually be claimed as a section 179 deduction in the year of purchase, subject to recapture if the business use ended prior to the end of the three year depreciation period.
 
There are several plausible ways to characterize the membership model. On the one hand, it looks like a simple purchase if the payment for the full one year is done as a lump sum, with tax consequences and timing of events the same as in the ownership model. If the payments are spread across two tax years by monthly payments for 12 months, it would appear to be an installment sale, which may be eligible for section 179 treatment in the year it was placed in service.

On the other hand, payment month by month also has the appearance of a rental of software, especially if the intent is to do so for less than the full 12 months and thus not transfer a lasting ownership. Tax treatment as a rental deduction for business property might be available or required, generally on the amount paid in the tax year for cash accounting.

There is a distinction in tax consequences between a lease with option to purchase contract (sometimes called rent to buy) and an installment sale, and distinguishing between the two is not always straightforward. Usually the rent with option to buy classifies payments as rent until the option to buy is exercised. Does the granting of a new permanent license on the twelfth payment constitute an exercise of an option? The fact that the "purchase" here is automatic and does not require an additonal balloon payment or separate type of transaction to conclude, and that the payment/rent is not substantially higher than paid by someone not intending to continue for 12 full months tends to favor the installment purchase interpretation. The fact that nothing of lasting value (no equity) is obtained by the first 11 payments may not be dispositive, since loss of use may be the outcome of a failed installment sale as well as by ending a month to month rental.
 
You might argue that all or a portion of the payments are for the purpose of maintaining support with tax implications like a maintenance contract, or the purchase of an extended warranty. Although your only intention in paying for membership might be to provide you with ongoing support and repairs, the fact that such benefit is not separately invoiced or effectively separated from the other benefits could be sufficient for the IRS to deny this interpretation.
 
Truly zany interpretations, like deducting the payments as rent and then trying to depreciate the full value of the perpetual license, effectively getting a double deduction for the same expense, would pretty obviously not fly, but there may be more than one way to look at membership that the tax man would countenance. Or not.
 
State and non-USA tax rules are not being addressed in these musings. Nothing here is intended as tax advice.

Another issue raised in this thread: http://forum.cakewalk.com/FindPost/3148129
 
suggests that the difference in the cost of a monthly payment plan  minus the lump sum payment cost can be looked at as financing by Cakewalk. That would imply that the difference would be a deductible interest cost of a business loan. It looks much more like a discount offered for early payment vs. full payment over the allowed time. This is not money that can be used for anything you want, like a true loan.  It is a price adjustment, and the higher cost is reflected in a higher deduction based on the higher purchase price ultimately paid.

"Expenses necessary in order to incur income." There are several ways to treat that. A true tax professional knows there are several ways to handle deductions, all of which are legally valid. The IRS understands that people will choose the one that is most advantageous for them.