Tax question: deduct computer expense

[J. Dan]

Probably a question for a CPA, but I figure enough of you guys deal with this that you'd know. If I use my computer mostly for the band - web design, flyers, sound editing, emails, video, etc. - then can I do a sched 179 deduction for all hardware and band related software, or do I have to account for personal usage? Is there anything I need to watch for to avoid any red flags for an audit?

[GDP]

In order to deduct Sec 179 expenses, the business use must be over 50%...otherwise use regular depreciation. Off-the-shelf software is eligible but not custom software....computer is deductible (bus portion).

 

Your 179 deduction is limited to the business income (before deducting the depreciation).

 

Avoid doing what Charlie Rangle did and you should be fine!!

[HammondDave]

I agree... except... When you do a partial deduction then you need to prove what that percentage is with logs, etc. You are better off claiming a 100% deduction and using another computer for your personal use....

 

Also.. don't forget to deduct any other expenses related to the computer. Software, internet connection, etc., are all deductable.

[MoodyBluesKeys]

What Dave just said. Vehicles are the same way - one for the job and one for personal - no logs to keep. My DAW doesn't have any of the usual stuff like Office - just music stuff.

[Mr. B.]

I was always told by my acountant when I had my pc repair/install company that I had to use the pc or laptop exclusively for work only! If I used any of them for personal use at all I could not deduct for taxes. Now, that was back ten years ago in 1999 before I had to start seriously thinking about selling my business. Tax deductions change every year, mine did. I deducted just about everything as long as it was used for the business. When I was a pro touring keyboard player in the 70's, and 80's everything was deducted, we kept every and I mean every receipt for any and everything. Big hassle when your in your early 20's and even 30's but so very much worth it if you happen to get audited. We never did, had a great acountant and music attorney, they were paid very well by a dozen different bands. We paid out taxes every quarter which is the easiest way. I did the same with my computer repair business, never any problems.

I very strongly suggest that you find a well written book on taxes that is written for the common man, buy it and read it so you'll know whats going on. You will learn so much. Or, if you have a couple extra bucks take a business course at a college or junior college. Towards the end of the course taxes are gone into enough so you know more than most. I've always wanted to know exactly what I was getting into to a point. Sometimes two different acountants can/will give a bit different answers and I never liked that so I am always very clear with people. If you don't want to hear an honest answer do not ask me the question as I am very blunt and to the point.

[GDP]

Computers and autos are considered "listed property" by the IRS. This means they are suspected of being used personally when claimed for business use.

 

If you use a reasonable percentage (bus vs pers) for these items you are safe. It's when you claim 100% of these items that you raise red flags......In other words, there is no need for separate bus & personal computers (or autos) as long as you use reasonable percentages that you can reasonably substantiate.

 

Mileage logs are appropriate for autos and should be kept but they are not required.

[J. Dan]

So I could claim the computer as 70% business and 50% personal, and deduct 100% of any business related software. But I don't have to show any evidence of my business vs personal usage?

[Chris Link]

So I could claim the computer as 70% business and 50% personal, and deduct 100% of any business related software. But I don't have to show any evidence of my business vs personal usage?

 

Must be a really fast computer to get 120% out of it.

 

[GDP]

You can claim those percentages except the 2 numbers should add up to 100%.....in your case 70 plus 50 equals 120....you'r audited!!

 

There are ways you can determine the "realistic" percentages, these can be based on time spent on your endeavors, square footage of the home set aside for business use, etc.

 

You should determine your allocations based on your reality and be able to explain it if asked. The IRS is most interested in those cases where 100% is claimed on listed property.

 

After all, if the IRS challenged your percentages, what would they claim? How would they know? They can't, that's why they will accept reasonable allocations that are not obvious deceptions.

[J. Dan]

Lol - that was obviously a typo - should have been 30. I'm typing on an iPad... Not used to it.

[HammondDave]

One other thing... Make sure you deduct all travel expenses too. For food and tips, you can take the IRS daily rate (or M+IE rate). It changes from city to city and country to country. There is a website with details for the IRS per diem rates. The reason to do this is that you can just multiply the M+IE rate times the number of days you are out of town in that city, then divide by 50%. That way you don't need any meal receipts, AND it usually works out to a better deduction. Your lodging, gas, etc. get's 100% deduction.

 

Also, be sure to save all your boarding passes. Believe it or not, you need these to prove you were out of your home city. Credit card receipts are not enough. (Like you would loan your credit card to someone so they could go to that city and charge a bunch of stuff to prove you were out of town...LOL)

 

AND>>> Depreciate everything... your musical equipment.. etc. If you have a studio in your house, you can depreciate that percentage of your house. Plus if you have home insurance, utilities, etc, that same percentage can be written off too. Just make sure your studio (or home office) has NOTHING personal in it that does not relate to your business.

 

While you are at it, open up a Keogh and pay into your pension. You can deduct that from your taxable income too.

 

Get TurboTax Home and Business and allow it to guide you. I have been doing my taxes for years... I have two salaried jobs and three self-employed businesses. I also have a lot of foreign income. I have not been audited in 25 years (knock on wood). And when they did audit me, they ended up paying ME!

 

FINALLY! Don't even try to cheat. We are all Americans and should pay our fair share of taxes... But you should take all deductions that are legally yours.

[Chris Link]

Lol - that was obviously a typo - should have been 30. I'm typing on an iPad... Not used to it.

 

That iPad is 100% music business-related no doubt.

 

Just remember, you get penalties and interest for "creative" deductions, but jail for not declaring income, if it's a big enough number.

 

Unless you're Charlie Rangel, of course.

[J. Dan]

I don't cheat, I claim all income, and I do mileage deductions, home "office" deductions, etc. I've just never claimed any computer hardware of software, and I'm building a new one, so I was wondering.

 

Oh, and as far as depreciation, since I do sched 179 on everything, I don't depreciate because you can't - sched 179 means you take the entire deduction in the year you buy it. The alternative is to depreciate it.

 

Thanks guys!

 

 

EDIT: Oh, and the iPad was free, so I can't very well deduct that. I got it from my day job as a reward for working hard on a project at our sales meeting. In fact, only the winning team was supposed to get them, but everybody worked so hard that they decided at the last minute (literally) to give us all iPads. Came out to a couple hundred of them! I'm fortunate to have a good day job!!!

[Steve Force]

AND>>> Depreciate everything... your musical equipment.. etc. If you have a studio in your house, you can depreciate that percentage of your house. Plus if you have home insurance, utilities, etc, that same percentage can be written off too. Just make sure your studio (or home office) has NOTHING personal in it that does not relate to your business.

 

 

All good advice. But think twice about deducting house depreciation--this might have tax consequences down the road.

 

[HammondDave]

AND>>>

 

 

All good advice. But think twice about deducting house depreciation--this might have tax consequences down the road.

 

 

True... You may have to "reclaim" that depreciation once you stop using that part of your home for business... But hopefully that is when you retire and are in a lower tax bracket. The way social security and other pensions are headed, expect to be in a MUCH lower tax bracket.

 

Which really pisses me off.. Because as "independent contractors" we pay full social security taxes (AKA "self employment tax"). For the government to even consider lowering social security is a crime (IMHO). They are basically robbing you of all the money that you and your employer have contributed to your retirement over the years.

 

The day the government pays me back all the money contributed for me for SS, with interest, is the day I agree to end social security. But I digress....

[GDP]

Depreciation of part of your home usually ends up to be a very small amount. But over the years it can add up.....but don't do it unless there is a tax benefit. In other words, if the business is generating a loss, it won't help so there is really no need for it.

 

The only time the depreciation will be recaptured as capital gain is when you sell the home, quiting your business won't trigger it. Remember this, if you start depreciation and it does not benefit you, you will have to recapture it as income whether it helped you or not!

 

The capital gains have their own tax rates....it won't matter what tax bracket you are in as cap gain rates will apply to the depreciation recapture when you sell the home.

 

If this stuff is relevant to you.....go talk to a CPA. An accountant may not know taxes well, an EA (enrolled agent)knows taxes but is generally very mechanical and will err on the side of the IRS. A CPA knows business and tax, can help your whole family situation with a strategy, and will be an advocate for you, not the IRS. CPA's will also speak for you if the IRS gets involved.

[MikeT156]

Personally, I would buy a separate "floater" insurance policy for my musical equipment. Home owner policies are not the best way to cover equipment you use to earn money. Also, if you have a floater policy on your gear, there would be no question what its for if you get audited by the IRS.

 

The company that advertises in KB Mag gives a discount to subscribers and it covers your equipment under ALL circumstances. Its probably more expensive than coverage on a homeowners policy, but there is never any question about it being covered no matter what.

 

 

Mike T.

[J. Dan]

Personally, I would buy a separate "floater" insurance policy for my musical equipment. Home owner policies are not the best way to cover equipment you use to earn money. Also, if you have a floater policy on your gear, there would be no question what its for if you get audited by the IRS.

 

I've thought about this. About 8 yrs about my house was partially burglarized and my live rig stolen. Homeowners covered it (partially). But regarding the question of what is and is not under the policy.... grey area. I mean I practice on stuff I don't gig with. I sample gear I don't directly take out. What's the line? I would want to insure it all if I went that route.

[MikeT156]

I'd insure what you really can't afford to lose. Most of the time insurance companies charge by the $1000 of insured property so you pay less if you insure what your would need replaced. If you practice on a old acoustic piano that you could replace for a couple hundred bucks, then I would probably pass on insuring it.

 

 

Mike T.

[JeffLearman]

AND>>>

 

 

All good advice. But think twice about deducting house depreciation--this might have tax consequences down the road.

 

 

True... You may have to "reclaim" that depreciation once you stop using that part of your home for business... But hopefully that is when you retire and are in a lower tax bracket. The way social security and other pensions are headed, expect to be in a MUCH lower tax bracket.

 

Which really pisses me off.. Because as "independent contractors" we pay full social security taxes (AKA "self employment tax"). For the government to even consider lowering social security is a crime (IMHO). They are basically robbing you of all the money that you and your employer have contributed to your retirement over the years.

 

The day the government pays me back all the money contributed for me for SS, with interest, is the day I agree to end social security. But I digress....

It's more complicated than that, too. I don't know what the details are today, but there were a number of years where you could sell your home without paying capital gains. If you'd ever taken a business deduction on part of it, you either lose that or it gets horridly complicated, because the cap gains exemption is for "home" and not "business".

 

The capital gains have their own tax rates....it won't matter what tax bracket you are in as cap gain rates will apply to the depreciation recapture when you sell the home

... not if some congressmen get their way. That's how it's always been, but might not always be.

[JeffLearman]

Here's another thing to think about. Someone I know was audited recently. The auditor actually let it slip that he had to find *something* to increase the tax due, and the audit would go on until he found something.

 

So, it might be a good idea to make a simple mistake that isn't too costly, in case of an audit.

 

Personally, I'm conservative as hell. I want to be able to sit on a high horse and show how much more taxes I could have avoided. But I guess practically, that's not very effective. Fortunately, my chances for an audit are very low.

 

Most audits are for self-employed, since the vast majority of underpaid taxes is for SE and sole proprietorships, according to a comprehensive survey the IRS did back in the early 2000's. They estimate that they get about 40% of what's due in that case.

 

Underreported personal income used to be high until they started payroll deductions. Exemptions were overreported until they required social security numbers for dependents, after which the number of dependents was cut in HALF. (Proof: lots of tax cheaters!)

[JeffLearman]

I'd insure what you really can't afford to lose.

Good advice.

 

In general, the insurance industry doesn't profit by charging more for the policy than they pay out in claims. Instead, they try to set rates to balance claims, and profit by investing the money in the meantime.

 

But, if their math is right, the odds are you'll pay as much as you get back ... and unless you're unlucky enough to make big claims, you'll pay more. That is, if you're more careful than the average, expect to subsidize the rest.

 

So, it's best to use insurance to cover losses that you otherwise couldn't recover from. Choose the largest deductions you can stomach.

 

If I'd insured my gear all these decades, I'd be way behind. But, it's not my livelihood either, so I can affort to go uncovered, and limp for a while if my gear all vanishes.

 

But, here's a better plan for pros: instead of buying insurance, put steady "insurance" payments into an investment fund, and then you can earn on the interest rather than the insurance company. Best of all, it insures a lot more than just your gear: it's there as a pad if you can't work for any reason.

[MikeT156]

Insurance is a necessity if you live in a metropolitan area, you have to unload and leave your gear unattended for even short periods of time, or you have to leave equipment in your vehicle either overnight or long term, or if you live in an apartment building that one of the residents might burn down. Insurance is not a priority for me because of where I live and the type of places I pay. Conversely, when I do one nighters that require I move all my equipment in one trip, I have to rent a U-Haul. So I take the U-Haul insurance (which is cheap) to cover at least the cost of the trailer in case in gets hit or totaled. On winter weekend jobs when the roads are snowy or could be icy, I take out more insurance to cover my instruments to be on the safe side. I've never needed it, but the last thing I would want to do is have to pay U-Haul to replace a 15 year old trailer with a new one.

 

 

Mike T.