Production Costs & the Income Forecast Method -- In the early years, film and television producers used a variety of different methods to depreciate movies and television shows. Some producers used a "cost recovery" method of reporting their income and expenses. Under this method, no taxable income is reported until the income from the films exceeds the cost of producing the film. Others used straight line or accelerated methods of depreciation. In 1960 the IRS declared that these methods of depreciation were not acceptable for film and television and resulted in a "distortion of income" because the deductions do not follow the "flow of income." (It may be argued that the same could be said to the depreciation of real estate and many other things.) IRS Revenue Ruling 60-358 declared that the appropriate method for calculating depreciation for "television films and similar property" was the "income forecast method." This was expanded by Rev. Rul. 64-273 to theatrical motion pictures.

However, these pronouncements did not resolve all issues. Prior to 1996, production companies estimated the "useful life" of movies without much guidance and often came up with estimates between 3-6 years. The production companies had an incentive to choose shorter periods so that they could depreciate the costs of the motion pictures faster. In 1996 an amendment to Section 167 of the Internal Revenue Code established that movies and television programs had to be depreciated over 10 years starting the year after the property was placed in service.