studio and tax deductions

[discostu]

Hello everyone,

This may seem like an asinine question and forgive me for making this my first post, but I have to ask…

I am a musician and own a home with one room being a “home studio” for recording, mixing, etc. I just bought the house this spring so have never itemized deductions and I have been accumulating gear the entire year. I have never operated or owned a business so I am very green at anything concerning that, especially taxes.

So thusly I have an idea. I would like to start a small business this year (a recording studio), operated out of my home, mainly for the purposes of writing off all my gear. Whether or not I decide to go forth with actually running a studio would be decided later down the line, but again this is not my main concern.

I have read that I can write off all purchases made in the first year of business, including those made prior to obtaining the business license. I’ve included a link below that outlines Section 179. I also bolded a section that particularly piques my interest where even though I’m not turning any kind of profit, I can use my “normal” 9-5 income to exceed my business spendings.

I would appreciate any kind of feedback on this idea. I guess first and foremost, would it work? Secondly, since as I stated above I have never itemized deductions or owned a business, how much exactly can I “write off?” If I spent $5000 in studio gear, do I get that back in taxes? Or only a percentage? I’d rather get everything back in lump and not have to amortize.

Obviously I would get an accountant next year to do my taxes instead of the normal online HR Block I’ve been using the past years.

Again, apologies if you think this is stupid, however I feel this is a game worth playing.


This tax tip outlines Section 179 expensing that allows a business to fully deduct the cost of property in the year it is purchased rather than depreciating the business assets over years.

Deduction limited to taxable income

You have now determined the maximum deduction based on the amount of property purchased during the year. You now must pass the aggregate income hurdle.

Your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Active trade or business includes employee and spouse's wages, sole proprietorships, partnerships and S corporations. Basically, this means that unless you have other sources of business income, your Section 179 deduction can't create a taxable loss for your business.

More business owners are able to take advantage of the deduction when they combine their company earnings with those of a spouse or money earned in addition to (or before starting) their own company income.
For example, you are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase equipment and furniture. Even if your new business doesn't generate gross income that year, you can still take the Section 179 deduction on the new equipment and furniture. Why? Your wages exceed the Section 179 deduction.

This aspect of inclusion also applies to a spouse. For example, you earn annual wages of $60,000 as an employee. Your spouse doesn't work during the year but begins a new business at the end of the year. Your spouse purchases and places in service $15,000 of Section 179 property at the end of the year. Your spouse's business doesn't generate gross income at the end of the year. Even though your spouse hasn't earned trade or business income for the year, the Section 179 deduction of $15,000 is still allowed in full since your wages count as trade or business income.

Any amounts disallowed by the trade or business taxable income limit are carried over to the next year and added to the cost of any eligible property placed in service in that year. The same rules for maximum deduction, maximum annual investment and taxable income apply to the next tax year as well.

[surflounge]

that is exactly what got the IRS on my doorstep
special agents love any writeoff having to do with music recording or studios.
1st question they will ask: who has the master tapes?

[fabricaudio]

What i know from our accountants is that products purchased from outside your country, you country needs to be in Europe and buy from another country that is in Europe, you dont pay any tax so you dont claim and tac refunds at the end

My simple thinking is since you pay for tax you claim it back. If you dont pay you dont claim it.

Anyway, how i understand whatever you choose to do, pay or not.
At the end of the year you make the sum and from your receipts you gave you acquired 10,000 £ tax to the office lets say and you had already payed 10,000 £tax by buying equipment. Then you can keep this 10,000£ you acquired.


I hope i am not saying it wrong, but if i am, i am happy i have accountants and do mistakes on my own!!


Nikolas

[discostu]

Thanks for the replies.

@surflounge - I will have the masters.

@fabricaudio - I guess I don’t understand my presumptive situation correctly, which is why I posed the question. I acquired quite a few pieces via eBay and online vendors where tax was not applicable. So it appears that in order to claim the tax back on these I would have to pay the tax first! I also am not sure how the “assets” work either. I was under the assumption that the total value of the assets in my studio (let’s just say $5000) is what I would get back from the government. But apparently I would only get back what taxes I’ve paid on this gear? Looks like my MO is going to work against me because I frequently buy online to avoid the huge sales tax in my state.

Again, sorry for the green questions but this is new to me. Anyone else have some comments/advice?

[mfischman3]

" I was under the assumption that the total value of the assets in my studio (let’s just say $5000) is what I would get back from the government."

If you are to start a legitimate business any deductions merely offset your INCOME tax (sales tax is an entirely different story). For instance: if you purchase 5K worth of gear for your studio, you're not entitled to a direct 5k deduction of your annual income tax. Rather, 5k may be deducted from your earned income ultimately reducing the taxes which you owe by some related percentage.

There's lots to consider if you're going to register as a legitimate business... you'll be required to collect, report, and forward to the state and federal governments applicable sales tax for services rendered. And then, there's liability as well and getting your insurance company to now ensure equipment in your home that is used for a business (they do not like doing that) . Oh yeah, and posting a profit 3 our of your first 5 years.

[MarvinDog]

So thusly I have an idea. I would like to start a small business this year (a recording studio), operated out of my home, mainly for the purposes of writing off all my gear. Whether or not I decide to go forth with actually running a studio would be decided later down the line, but again this is not my main concern.

Starting a business should be with the purpose of making money. Starting a "business" with the purpose of writing off hobby expenses is asking for huge trouble with the IRS. I'm not trying to be a dick here, but you're now on record as actively planning to defraud the IRS. And how you've asked this question here, can come back to haunt you.

That said, if you decide to operate a business, keep records and receipts of everything. You will need to show that you are trying to make a profit and that you have revenue coming in. Read up on the IRS' rules for business deductions-- there are a lot of potential traps. As a lawyer once told me, it's not the law you know that gets you into trouble-- it's the law you don't know.

And not to belabor the revenue point, but if you can't show revenue after your second year of taxes, expect a painful audit with interest and penalties.


Edit to add a couple more points:
1. Sales tax recoupment is when you are running a retail operation. It's not going to apply to you. However, if you're audited by your state, expect to pay sales tax on everything you've purchased from another state.
2. CPAs are expensive. My wife's business is an S Corporation. Having an accountant do her taxes runs well over $1k/year. This does not include doing her books, which runs another couple grand per year.
3. A CPA will not file tax forms he/she believes may contain fraudulent figures.
4. Try a practice run at the taxes by re-doing your last year's taxes with form 1040 and a Schedule C. This will give you an idea of what you're in for and what you could save.
5. One of the IRS' red flags is co-mingled finances. You will need to have separate bank accounts and credit cards for business expenses.