Musical instruments do depreciate and you can claim a depreciation deduction on your musical instrument – with a few notable exceptions. Almost any new instrument that you have been using in your business is deductible. They include brand-new guitars, violins, etc.
There are three methods using which you can depreciate musical instruments. They include the Modified Accelerated Cost Recovery System (MACRS), Convention, and Section 179 Deduction. Let’s take a brief look at all these methods to understand them better.
How to depreciate musical instruments?
There are three methods using which you can depreciate musical instruments. They include the Modified Accelerated Cost Recovery System (MACRS), Convention, and Section 179 Deduction. Let’s take a brief look at all these methods to understand them better.
1. MACRS
The Modified Accelerated Cost Recovery System (MACRS) is the method currently used to depreciate musical instruments, as well as other properties. Its name makes it clear that MACRS deducts more of an asset’s value in its early years of use than in its later years. Here’s why that’s important:
Assume for a moment that you’ve owned an orchestra band for a decade. MACRS’ algorithm, when calculating the depreciated amount, will give more weightage to the band’s early years of use. The last few years may not have had much impact on the deductible amount.
MACRS uses two systems to depreciate assets:
- General Depreciation System
This method depreciates personal property on the basis of the declining balance method. It calculates larger deductible amounts in the asset’s earlier years and smaller deductible amounts in its later years. Experts tell us that this technique is mostly used to depreciate gadgets that rapidly go out of date. Examples include computers and cell phones. So it may not be beneficial for owners of antique musical instruments.
- Alternative Depreciation System
The Alternative Depreciation System method relies on a straight-line method to calculate depreciation. When compared with GDS, it calculates the deductible amount over a longer period. You can choose whether to use ADS or GDS to calculate your musical instruments’ depreciation using IRS Form 4562 – Depreciation and Amortization. It helps you select the system based on your asset class basis.
2. Convention
If you have decided not to choose the foregoing method to calculate the depreciation of your musical instrument, you can select a convention class. A convention is basically a method using which accountants determine which portion of the year they should select to depreciate property.
Accountants have to select two years for applying the convention method: the year in which you purchased the musical instrument and the year in which you removed it from service. Apart from doing that, accounts must choose whether to select a half-year or mid-quarter convention.
Here’s what both these terms mean:
- Half-year convention
This convention works on the assumption that the musical instrument was purchased (or removed from service) in the middle of the year. It, therefore, allows only six months of depreciation deduction for the 1st and last years. Provided your accountant decides to use this convention, it would mean that at least eight years should pass for your instrument’s value to fully depreciate with a seven years life by MARCS.
- Mid-quarter convention
The mid-quarter convention works on the same principle as that of its half-year counterpart. But there’s one key difference as this convention assumes that you placed (or removed) your instrument from service at ½ of the calendar quarter. There’s one more thing you may need to know about the mid-quarter convention. It can only be used if, for all the assets (musical instruments) you purchased in a year, 40% were purchased in the final three months.
3. Section 179 Deduction
Section 179 allows US taxpayers to deduct as much as $105,000 from the cost of the musical instrument from the year you placed it in service. It’s another method that you can use to calculate the depreciation deduction of your musical instrument.
However, there are a few not-so-minor caveats you’ve to deal with if you’re going to claim a Section 179 deduction. It requires that the amount you’re claiming on the deduction isn’t greater than your aggregate taxable income. It also requires that you recover any depreciation whenever you sell the asset.
Let’s explain the final condition with an example. Assume for a moment that you purchased a guitar for $1000 and claimed an equal amount on its depreciation. If you went on to sell the same guitar for, say, $400, then you’ll have to pay tax on the entire $400 in the year you sold the guitar.
What is meant by depreciation?
Depreciation of an asset (like a musical instrument) points to the reduction in its value, either due to expiry over time or due to the use of the asset. Other factors that are responsible for depreciation include wear and tear, perishability, efflux of time, and expiry of usage rights, etc.
How to calculate the depreciated amount?
You need three factors to calculate the depreciated amount of any asset: useful/shelf life of the asset, salvage value of the asset, and cost of the asset. Here’s what each of these terms means and how, based on their numbers, you can calculate the depreciated amount:
- The useful life of the asset
Let’s assume you want to calculate the depreciation of your guitar. How much time does its manufacturer tell you the guitar would last? That time is its useful life. Note it down. - Salvage value of the asset
Imagine for a moment that your guitar cost you $400 four years ago. Its current price won’t be anywhere near that. You’ll probably need an accountant to get the salvage value. - Cost of the asset
Once you have the useful life of the asset and its salvage value, subtract the latter from the former. Divide the final amount by the asset’s cost (which includes money you spent on its purchase, transportation, and set-up).
Pro Tip: If you want to calculate the depreciation of your musical instrument for tax-related purposes, hire an accountant.
Related Readings:
Guitars – History, Invention And Interesting Facts
Drums & Percussions – History and Fascinating Facts
Conclusion
The majority of musical instruments depreciate in value over time. As an owner of one, you might want to claim depreciation on your instrument using any of the methods given above.
You also face the decision of whether or not to take Section 179 deduction (which will provide you with the ability to recoup a large portion of your instrument’s cost in the year of its purchase).
All these decisions won’t only affect the money in your wallet but they will also have a sizable impact on your tax returns. That’s why we recommend that whenever you purchase an instrument or claim depreciation, you should keep all records for the next three years.
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Started as a rapper and songwriter back in 2015 then quickly and gradually developed his skills to become a beatmaker, music producer, sound designer and an audio engineer.