Tax Time–Musical Instruments and Depreciation

Musical Instruments

When a musician buys an instrument or equipment that has a useful life of longer than one year, he or she can depreciate it over the tax life of the item—usually seven years. This has the effect of spreading out the deduction over time. An alternate course would be to expense the purchase (deduct the price paid) of the instrument in one year using Section 179 of the IRS tax code. This provides an immediate and one-time write off of the item. Whether to expense the instrument or to depreciate it is a question for your tax advisor, since there are conditions that must be met for both. For example, the Section 179 expense cannot be greater than total earned income.

If you sell something for more than you paid for it, you have a capital gain, on which the IRS requires us to pay tax. The good news is that, at least for now, the capital gain tax is generally less than the taxes we pay on our income. But, let’s say we bought a saxophone for $5,000, and over seven years we depreciate it down to zero. We decide to sell the instrument and we find that these instruments are in greater demand now than when they were new! They have actually appreciated, rather than depreciated! We are pleasantly surprised to find we can sell the sax for $7,000, which we quickly do. But as we walk away, counting our $2,000 profit, a thought stops us cold. We don’t just have a $2,000 capital gain on which to pay taxes. We have to add, into ordinary income, the total depreciated amount—$5,000. That results in a capital gain of $2,000, plus ordinary income (taxed at a higher rate) of $5,000. What’s more, even if the instrument did not appreciate and we sold it for $2,000, we would have ordinary income of $2,000, since we depreciated it down to zero.

Here’s another example of instrument appreciation. If you have old string instruments beware! In William T. Hunt’s excellent article on Polyphonic.org he writes:

In the past, the IRS has taken the position that old string instruments are antiques that appreciate in value and therefore are not depreciable. There have been several court cases involving this issue. The most recent rulings have maintained that antique instruments used in a trade or business are subject to the same wear and tear as any other property used in a trade or business, and therefore are deductible. Based on these court cases it appears, at least for the present, that all musical instruments, including old string instruments, are deductible as long as they are actually used in a trade or business (i.e., having the instrument in a display case or hanging on a wall would not satisfy this requirement). However, the IRS disagrees with these decisions and may still disallow the deduction outside of the judicial circuits where the cases were decided.

This discussion of depreciation has been from 40,000 feet. When you get down to street level there is much more to learn and absorb. For example, there are several methods of calculating depreciation. In my opinion, that is why you seek the advice of a tax professional.