Do you depreciate or section 179 your equipment?

[HenriettaAtkin]

Hello,

Yes, I do my own taxes (through Turbo Tax)! Have done all sections but Schedule C.

I bought a lot of equipment and gear for my home studio this year. Usually I take a 5-year depreciation for equipment, but I hear that this year it can be written off as a one-time expense.

I think it would be beneficial for me to take the one-time expense. Just want others to chime in.

I know that you are not giving me legal advice, and I won't hold you accountable!

[Len911]

The one time expense would probably be more beneficial to you, unless of course you bought a $100,000 console, and only had an income of $25,000, though there are probably safeguards and limits to prevent you from doing that.

Mainly it would depend on your tax bracket, or how it affects your tax bracket.
http://www.bankrate.com/finance/taxes/tax-brackets.aspx
Looks like the current rate is 10%-39.6%
So if it drops your income or crosses the threshold from say the 15% down to 10%, you're deduction is worth 5% less, however your income tax liability also drops 5%.
If you stretch it out over 5 years, it's less likely to affect your bracket or tax rate.

And of course you have to consider the standard deduction, the lower bracket you are in. If the standard deduction is $5,000, and the only deduction you had was $5,000 you spent on recording equipment, there's no need to itemize. Zero difference.

If in a 10% bracket the savings from $5,000 would be $500.
If in the nearly 40% bracket, the savings is almost $2,000!

Of course rarely is there any simple situation, I mean the 40% rate would also be subject to the standard deduction of course, so if they only had the $5,000 itemization, they would leave $2,000 on the table vs. the $500 of the 10%.

[Len911]

Can't you run it both ways in turbo tax?

I understand, who wants to do taxes twice if you don't have to,lol!

[Paulie]

I've used TurboTax since the early 90s... it's awesome. (back then it was MacInTax)

I took mine all at once. Helped me out this year, that's for sure. Also easier to manage.

Guess your next cue title will be "Procrastination?"

[andygabrys]

Not a lawyer or a CPA but I play them on TV:

"Section 179 (nicknamed the Hummer deduction)":

Is best if you have HUGE expenses during the year, and expect to have huge expenses next year, and the year after, and the year after. Like say you made $100k, but spent $50k on a new studio shed. And in the year after will spend $50 k on a new Mac, and some preamps and so on.

So big expenditures, but not something that is more than your total income per year.

"Regular Depreciation":

Best if the expenditure you made is very large, but is likely to be the only time in the next 5 or 10 years you expect to spend that much. And you expect your income to stay constant or increase over the next few years.

Taking same $100k income and $50K expense - If you write off the entire expense this year you will have a much smaller taxable income and owe less tax. But the year after you will have almost no deductions for expenses and your taxable income will be twice as big.

But if you depreciate those expenditures over a number of years, the taxable income will be more constant year to year.

The example is easier to see if you make $100k and spend $250k on a totally new kitted out studio building. Then you are going to have to carry over expenses to next year anyways, so you may as well depreciate the studio. Different kinds of expenditures have different depreciation schedules as well.

No right or wrong - it just depends on how you want to plan ahead.

Btw - with exception of studio buildings, computers, hardware processing, expensive instruments, studio monitors, Etc all the rest of your expenses will be taken at 100% in the year they are incurred. So putting them on your depreciation schedule probably makes things more complicated than they need to be. The expenditures have to re relatively tangible - I don't think you can depreciate lunch meetings lol.

I would reserve depreciation for BIG expenditures - and what I wrote above is one way to figure it out. What Len911 write also makes sense.

[Len911]

Be careful though about getting too gung ho about real estate like land and buildings. It used to be that real estate wasn't considered to depreciate, though rent and interest could be expensed or deducted. Though I'm sure if you incurred an actual loss from the sale, it would be deducted on some sort of loss form.

Then there's the hobby or business thing...

Payroll taxes, state taxes

[HenriettaAtkin]

Thanks Andy, Len and Paulie,

I just e-filed both federal and state.

Turbo Tax actually walked me through it, so I took some cheaper (headphones etc.) equipment as an expense, and more expensive stuff (speakers, weighted keyboard etc.) under Section 179.

And -- *humph*! -- Paulie! Procrastinator, indeed!

Schedule C takes me forever. What I do is spend about two weeks going through every receipt, carefully tallying it with credit card statements and checks, then I write it out long-form. Mileage for all my many church gigs (8 different churches this year!) is especially tedious, so I do a little bit each night.

[andygabrys]

Schedule C takes me forever. What I do is spend about two weeks going through every receipt, carefully tallying it with credit card statements and checks, then I write it out long-form. Mileage for all my many church gigs (8 different churches this year!) is especially tedious, so I do a little bit each night.

yes -that's basically what I do. In my case I download all my business account bank / PayPal / Square info to .CSV files and it all gets dumped into a giant spreadsheet and everything gets sorted out appropriately.

Counting for mileage used to be a super PITA too but I use an iPhone App called Milebug which allows you to make entries as you drive, keeping record of mileage (and it has a GPS function too to help out) and then you can download that as a CSV file as well.

then it all gets dumped into TurboTax which has worked well enough for me.

congrats on getting them filed!

[andygabrys]

Be careful though about getting too gung ho about real estate like land and buildings. It used to be that real estate wasn't considered to depreciate, though rent and interest could be expensed or deducted. Though I'm sure if you incurred an actual loss from the sale, it would be deducted on some sort of loss form.

Then there's the hobby or business thing...

Payroll taxes, state taxes

That's a good point.

[HenriettaAtkin]

Andy,

Thanks for the Milebug tip. I will get one pronto! Never heard of .CSV files, but will google them.

Len, I never bring any real estate into Schedule C, not even a home office deduction (can't anyway, because it's in my bedroom). I hear the IRS gets really picky about it, and I just don't want the hassle.