The purpose of this article is to explain what depreciation is and how it can benefit the working musician. Generally speaking, if you purchase a musical instrument and it is used in an income- producing activity, you can use it to reduce your taxable income.
The key is that the instrument be used in a business or an income-producing activity. In actuality, the deductibility is dependent upon the attempt to make money. So if you have a business as a musician, the cost of the instruments can be written off, as long as you legitimately try to make a profit, even if you have a loss. Playing music solely as a hobby is not an attempt to make money and therefore expenses like buying instruments are not deductible.
The IRS also states that unless you make a profit in three out of five years, your activity is presumed a hobby. However, that presumption can be rebutted by showing your “serious attempt” to make a profit. An example might be if you are engaged in cutting-edge, avant-garde music and trying to develop an audience. In that case, you may not show a profit.
So let’s assume that you are a working musician. The cost of the purchase of a musical instrument will then be deductible, and this will be true whether you are self-employed (filing a Schedule C) or are an employee (with one or many W-2 forms).
The method of deducting the cost of the musical instrument is called depreciation. Depreciation is the method of deducting expenses that have a useful life of more than one year. The IRS has a “useful life table” for many assets. This table ascribes seven years as the useful life of musical instruments.
The result of this is that the IRS allows you to deduct the cost of buying an instrument all at once or over seven years. The key for musicians is to figure out which will result in the lowest payment of taxes.
For example, let’s say you spend $15,000 on an instrument. The question is how you should deduct the cost.
The IRS allows you to write off the entire amount of the purchase (up to $500,000) in the year of the purchase under IRS Code Section 179.
Or, you can allocate an amount to be written off and depreciate the balance. (One detail: the Section 179 deduction cannot be greater than an individual’s Aggregate Taxable Income, a technical definition that does not concern most people.)
So how should you do it? If you are starting out and expect to have low income for the first years of your career, it may be wasteful to deduct it all in the first year. So that means you deduct it over seven years.
Now you have a choice. You can deduct it evenly over seven years (called straight line depreciation), or use an alternative method of depreciation (called MACRS), which permits the deductibility to take place over seven years at various declining rates.
How do you make this decision? Each situation is unique and must be determined by the musician’s individual situation.
A complication may arise when one purchases an antique instrument. The Tax Court has said that although an antique instrument (such as a violin bow made by Francois Tourte) may appreciate in value, an antique instrument is deductible because it suffers wear and tear in its use. The IRS has not officially accepted the Tax Court ruling but for now it is the law.
Please note that you cannot deduct the cost of a musical instrument unless you are actually using it in your work as a musician. If you buy an antique violin, for instance, as a collector’s item that you simply hang on your wall, you can’t deduct it. You must actually be using it as a musician.
It should also be noted that, in addition to musical instruments, a musician can deduct sound equipment, computers and other devices used in music making.
For self-employed musicians, using depreciation can lower the social security and Medicare taxes that you are required to pay on your own behalf. The self-employment tax rate is 15.3 percent of net profits (subject to a lowering at high incomes), which is payable in addition to income taxes.
However, for musicians who have a steady employer and are paid on W-2s, the depreciation deduction taken as an itemized deduction does not reduce the income subject to these social security and Medicare taxes.
The situation where the musician has both self-employed and W-2 income presents a situation to make a reasonable allocation between the two items.
Although depreciation is an arcane topic and likely to make one’s eyes glaze over, its proper application can result in very real tax savings
Martin Ozer is a long-time tax advertiser in Allegro and is available to work with musicians for all of their tax questions. Make an appointment with him by calling (212) 245-4870.