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AMWLeesh
New Member

Should I deduct entire amount or depreciate musical instrument?

I'm a full-time professional orchestral musician (W2). I purchased an instrument in 2016 for $18,500.

How do I decide the best (or correct) way to deduct the expense? I think I am allowed to either deduct the total or depreciate over time.

Additionally, because the maker has retired, it will appreciate. Does depreciating pose any risk to its future appraised value?

Does either option have implications if I were to sell it years later?

Thanks!
1 Best answer

Accepted Solutions
Opus 17
Level 15

Should I deduct entire amount or depreciate musical instrument?

Anything you buy for work that is more than the de minimis safe harbor ($2500) and has an expected useful life of more than one year, is an asset that must be depreciated.  You are probably eligible to take section 179 depreciation, which is a way to take the entire amount in the first year, but it is still depreciation and not an expense and has certain future implications.  Also, because you are a W-2 employee, any depreciation you claim will be reported on form 2106 as an itemized deduction subject to the 2% rule, so your actual tax benefit may be limited, and if you qualify for section 179 you should take it.  List the instrument as an asset in the business expense section and let the program tell you if you are qualified for section 179.  The class life for musical instruments is 7 years.

Depreciation is a tax concept that has nothing to do with real value.  However, it has tax consequences if and when you sell or gift the instrument.  As of now, your cost basis is the purchase price.  If you sell the instrument for more than the basis, the difference will be long term capital gains income.  If you take depreciation, that reduces your cost basis by the amount of depreciation.  So after 7 years under standard depreciation, or after 1 year under section 179, your cost basis is zero.  When you sell the instrument, the entire sales proceeds are capital gains subject to tax.  The first $18,500 is "depreciation recapture" and is taxed at a straight 25%, the remaining gain will be taxed at whatever the current long term capital gains rate is. 

So claiming depreciation is a tax deduction now, but you will have to pay that back later.  Due to financial concepts like "future cost of money" it is still usually better to take depreciation.

The only out is if you pass the instrument to someone else after you die.  Your heir will receive a "Stepped up" basis equal to the fair market value on the date of your death.  Otherwise, if you sell in the future, you will owe capital gains tax (with recapture if you take depreciation now).  Also, if you take section 179 and then stop using the instrument for work before the 7 year recovery period is up, you owe recapture tax on the unused part of the depreciation even if you don't sell the instrument.

If you gift the instrument, you also give the recipient your cost basis at that time (which could be $18,500 or zero), which has implications if they later sell it.  

If you donate the instrument, the value of the tax deduction may be its present market value or your cost basis, depending on who you donate to.  If your basis is zero due to depreciation, the tax deduction value may also be zero.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

9 Replies
Opus 17
Level 15

Should I deduct entire amount or depreciate musical instrument?

Anything you buy for work that is more than the de minimis safe harbor ($2500) and has an expected useful life of more than one year, is an asset that must be depreciated.  You are probably eligible to take section 179 depreciation, which is a way to take the entire amount in the first year, but it is still depreciation and not an expense and has certain future implications.  Also, because you are a W-2 employee, any depreciation you claim will be reported on form 2106 as an itemized deduction subject to the 2% rule, so your actual tax benefit may be limited, and if you qualify for section 179 you should take it.  List the instrument as an asset in the business expense section and let the program tell you if you are qualified for section 179.  The class life for musical instruments is 7 years.

Depreciation is a tax concept that has nothing to do with real value.  However, it has tax consequences if and when you sell or gift the instrument.  As of now, your cost basis is the purchase price.  If you sell the instrument for more than the basis, the difference will be long term capital gains income.  If you take depreciation, that reduces your cost basis by the amount of depreciation.  So after 7 years under standard depreciation, or after 1 year under section 179, your cost basis is zero.  When you sell the instrument, the entire sales proceeds are capital gains subject to tax.  The first $18,500 is "depreciation recapture" and is taxed at a straight 25%, the remaining gain will be taxed at whatever the current long term capital gains rate is. 

So claiming depreciation is a tax deduction now, but you will have to pay that back later.  Due to financial concepts like "future cost of money" it is still usually better to take depreciation.

The only out is if you pass the instrument to someone else after you die.  Your heir will receive a "Stepped up" basis equal to the fair market value on the date of your death.  Otherwise, if you sell in the future, you will owe capital gains tax (with recapture if you take depreciation now).  Also, if you take section 179 and then stop using the instrument for work before the 7 year recovery period is up, you owe recapture tax on the unused part of the depreciation even if you don't sell the instrument.

If you gift the instrument, you also give the recipient your cost basis at that time (which could be $18,500 or zero), which has implications if they later sell it.  

If you donate the instrument, the value of the tax deduction may be its present market value or your cost basis, depending on who you donate to.  If your basis is zero due to depreciation, the tax deduction value may also be zero.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
AMWLeesh
New Member

Should I deduct entire amount or depreciate musical instrument?

Thank you for your help last year! I was able to take the 179 depreciation.

Where I'm stuck this year is that I can't figure out if the amount I did not deduct last year is automatically accounted for in TurboTax or if I have a Section 179 Carryover.

My elected cost was less than the total cost because I did not have enough taxable income to cover the total cost. I was hoping to deduct the remaining amount this year, as I may not be able to in future years due to tax reform.

Am I locked into the 7 year class life for musical instruments and therefore unable to deduct the remaining amount this year (year 2) or is that exactly what the Section 179 carryover is for?

Thanks!
Opus 17
Level 15

Should I deduct entire amount or depreciate musical instrument?

@Lisa995 @VolvoGirl @Hal_Al can you help with this?
*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Hal_Al
Level 15

Should I deduct entire amount or depreciate musical instrument?

Yes, the unused section 179 deduction can be carried over to the next year
Reference: <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.179-3">https://www.law.cornell.edu/cfr/text/26/1.179-3</a>
AMWLeesh
New Member

Should I deduct entire amount or depreciate musical instrument?

Thanks @Opus 17 and @Hal_Al !
I entered the remaining amount as a 179 carryover, but it gets flagged when I run the error check. TurboTax says the amount has match the "carryover of disallowed deduction to 2017" on 2016 form 4562, which is $0. Do you have any ideas about that?
Opus 17
Level 15

Should I deduct entire amount or depreciate musical instrument?

I know about sec 179 but haven't used it in the program.  I'll leave this for Hal when he comes back online.
*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Hal_Al
Level 15

Should I deduct entire amount or depreciate musical instrument?

I don't have an explanation of why it is doing that. But would assume you can override it.
xiaobao12
Returning Member

Should I deduct entire amount or depreciate musical instrument?

In 2017, my accountant depreciated my cello. How can I tell if he did it all at once or over 7 years? 

SusanY1
Expert Alumni

Should I deduct entire amount or depreciate musical instrument?

You will need to look at the depreciation schedule that should be part of your prior year tax returns.  If you do not have access to those or have misplaced your copies, you will need to ask your accountant to be certain.

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