How can you write-off equipment?

[Bergen]

I've recently bought several hundred dollars of recording equipment and was wondering what the minimum requirements are to be able to write it off on this year's taxes. I have a site on mp3.com that features cd's for sale. Is this enough? Do I need to sell a minimum number? I guess I have no clue. Is there something I could do for under $100 to make it appear my music is sort of a business and write off the equipment. Any thoughts or shared experiences would be appreciated.

Thank you.

 

[The Green Hornet]

Yo Bergen: [not Edgar I hope]

If I were you, I'd go to a good CPA and spend a few dollars and get the information you seek.

Last time I heard, one could have a business and write it off as a loss for five years. After that, no no no -- says the IRS.

Funny you should ask this as I just got back from consulting with my CPA -- well worth the $$$ to be SURE.

Green Hornet

 

[StevenLindsey]

Very good advice from the Hornet. Anyone can set up a business and take Net Operating Losses. However, you have to have legitimate expenses and an ongoing operation. There are restrictions on everything you do. Some start-up costs have to be amortized. You have a certain amount of depreciation for newly purchased equipment that you can write off in the year purchased ( around $20,000 now, I think ), but if you sell any of it in the future, you may have to recapture the depreciation and add it back to income. Any personal use of equipment has to be allocated out of the expense taken. What you're talking about is a good Audit Trigger. And if you are audited, the IRS has great leeway in deciding whether your expenses and business are legitimate. If they determine that your business is not legitimate, not only will you have to pay the back taxes with penalty and interest, they can charge you with fraud. If you don't really have any income.....? How much time are you spending on the "business?" I personally doubt that you would save enough from the maneuver to make it worth raising the eyebrows of the IRS. Especially after you pay the consulting fee for your CPA that you'd better see. Good luck!

 

[mikeh]

Actually the IRS rules indicate you must show a profit during 2 out of 5 years. Naturally, if there is no profit after 5 years you risk having the deductions denied (if you are audited).

There is a fine line between a hobby (which can not be deducted) and a business (which can be deducted). In an audit you would have to prove your intent was to make a profit. The IRS would look at how you maintained your business records. Things they look for are is there a business checking account, how do you invoice, how much time is spent on the business, etc. etc.

In addition you can choose to expense (take the entire write off in one year) vs. depreciate (take the write off over several years) both of which are subject to specific guidelines. If you sell or trade equipment you must then include that basis in the cost of the new equipment, or record the sale as "income"

Naturally, you need to use the long form - so if you don't already use the long form you ned to decide if the write off is worth the hassle

You indicate you have several hundred dollars of gear - I doubt that it would be worth your efforts for "hundreds of dollars" possibly if you have "thousands of dollars" it would be worth the effort.

As was previously indicated, once you start to claim business expenses for something that the IRS often looks at as a hobby, you significantly increase chances of an audit.

Unless you have a good mind for math and are very sure of your ability to read and interpret the tax laws you would be better off paying an accountant for advice - and that will likely eat up the limited tax savings that the equipment write off would give you.

 

[NYMorningstar]

Who was it, Einstein that said the hardest thing for him to figure out were the tax laws? Well whoever it was is truly correct. I feel your pain though as you have a website that is selling cd's or whatever and you feel worried that you need to declare the income but also would like to offset the expenses with tax deductions. Hornet had some really good advice about finding a CPA to answer your questions. You can also get this advice from friends or family members that major in Business administration or that are attorneys. It's best not to put up a smoke screen for the IRS because they always tend to blow away the smoke and nail you.

I notice that most musicians tend to work under the table so to speak because there just isn't enough profit to claim to function as a business. The IRS does not seem interested in the small potatoes. However, if you were to grow to a point where you start seeing some real money, like mikeh says "thousands of dollars", then you may want to legitimize and file a DBA. At that point you may also want to consult with the Small Business Administration and the Labor Department who will help you out in establishing your business. They also make available to you loans if you have a solid platform and business plan. The loans start at about $50,000 so you have to be thinking big to qualify.

At any rate, good luck in your venture and welcome to the best BBS this side of Mars.

 

[Stephen Giles]

I'm in England so MERRY CHRISTMAS (remember!) and a happy new year. In the UK one can claim a first year tax allowance of 100% for computer equipment used in a business. Perhaps the US has a similar facility.