Depreciation for U.S. Musicians
Author: Brad Howland
First Posted: February, 2001
Depreciation in the US is a complicated topic, and every year I receive many requests from people wanting to know how to claim their property. Unfortunately, it isn't possible to condense hundreds of pages of information into a simple web page. However, I will offer some tips!
- Depreciation can be claimed on instruments, sheet music, scores, arrangements, transcriptions, office furniture, recordings, automobiles, and computers to the extent that they are used for business purposes.
- If you are doing your own tax return, you need IRS Publication 946, How To Depreciate Property. It is available on line at Forms And Publications - IRS.
- Consider taking the Section 179 Deduction. You can’t use this deduction to create a business loss, but in most cases it is a simple way to write off your property all in one year.
- If you take the Section 179 Deduction, you must file Form 4562. There are also other situations in which you have to file this form, spelled out in the instructions for Schedule C, 1040.
- Most property is depreciated under MACRS (Modified Accelerated Recovery System). MACRS actually consists of two systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Your property will probably fall under GDS.
- Use Pub. 946 to choose a property class and recovery period. Most equipment used by musicians is 5 or 7-year property.
- Under GDS, there are several different methods to determine the rate of depreciation over time. You will most likely use the 200% declining balance rate, but can elect to use another method.
- If you are placing your property in service during the year, you must apply either the Half-Year, Mid-Month, or Mid-Quarter Conventions. You can use the percentage tables in Pub. 946 to figure out your annual deduction. Keep records for next year.
- There are special rules for "Listed Property," such as passenger vehicles, computers, and cellular phones. Be sure to read the section in Pub. 946.
- If you are claiming depreciation on a property and dispose of it before the recovery period is over, you have to record the disposition and possibly recapture some depreciation as ordinary income.
- Some instruments actually go up in value over time. In this case see my article Depreciation for String Players for thoughts on how to treat this situation.
- Consider buying a good software program. It makes it much easier to keep track of depreciation over time. Also, if you find the whole thing confusing, consider hiring a professional tax preparer. Believe me, it may not be worth the time and aggravation it takes to figure out how to do this!