"The hardest thing in the world to understand is the income tax."
Depreciation for String Players
Author: Brad Howland
First Posted: October, 2000
What do you do if your instrument actually goes up in value? Should you claim depreciation on it? This is a tricky situation for many musicians.
String musicians should look at their instruments as a source of retirement funds. Eventually, you are going to retire from teaching and playing, and must consider the tax implications of selling your instruments at that time.
String instruments are expensive, so if you depreciate the instruments now-or claim the section 179 deduction–you will have incredible tax savings. However, at some later date when you sell at a profit, you will have to pay back all those tax savings (this is known as "recapture"). You will also have long-term capital gains to pay, regardless of whether you depreciate now or not.
Claiming depreciation makes sense only if you take the current tax savings and scrupulously invest in a secure investment, such as savings bonds. The money will be there to cover the recapture when you eventually sell, and interest earned on the investment can help pay for the capital gain.
To do this technique, you need to work closely with your tax preparer or financial advisor, work out exactly how much of your tax savings comes from depreciation, and save it!
Long-term capital gains and recapture are calculated on Form 4797. The part of the profit that is recaptured and taxed at your regular tax rate is carried over to line 14 of Form 1040. The capital gain portion is taken to line 12 of Schedule D, and is taxed up to the maximum rate of 28%.
This information is provided without warranty of any kind. All readers wishing to take advantage of the information offered here should consult a qualified income tax preparer. In no event will Brad Howland, Howland Tax Services, or this website be liable for any damages, including lost profits, arising out of the information offered on this website.