I started a small business in June 2019 - I hold weekly group drumming classes in a very large space in my home and I am hired to facilitate rhythm events for work, church or family groups at my studio or at other locations.
For this business purpose, I put into use a large number of drums and percussion instruments and accessories that I had collected over many previous years. Because these instruments were not originally acquired for business purposes, they were never claimed as a business expense and I don't have any receipts or reliable records associated with their purchase.
Rather than depreciating each of these instruments and accessories over many years, I am choosing to consider them as a one time business expense. Instruments range from $4 for small children's percussion "toys" to $600 for professional grade hand drums.
Because there was very little income from this start-up business (less than $2K), and the total value of the instruments is about $20K, I ended up with a substantial NEGATIVE business income. Turbo tax flagged the return as "high probability of audit" - I understand this, but the fact that I don't have receipts to show in case I am audited is making me very uncomfortable.
I want to do the right thing; I called the IRS and the small business expert who helped me looked through many different documents, but couldn't find any guidelines that exactly fit this situation. SO, this is how I'm preparing for a possible audit. 1) I am making a detailed and accurate photographic inventory of all items I put into service for this business. 2) I created a spreadsheet that cross-references each image number with the item's current fair market value (finding online equivalents). This value is then discounted according to the current condition of the item (good judgement call). 3) I then added these resulting values to get the total business expense.
QUESTIONS:
A) Am I allowed to take previously purchased items/current business assets as a one time business expense?
B) Is my way of assigning value fair and legitimate? Is there another way of doing this?
C) Is there anything else I can do to prepare for a possible audit?
Thanks in advance, and sorry for the long explanation.
