Tax question: best way to deduct new instrument purchase?
I'm currently in the process of purchasing an instrument (not antique), and have taken out a loan to help cover the cost. I am a professional player and teacher who will use this instrument for business almost everyday. Some tax questions:
Is the loan money I just received "business income"? Will I need to claim the amount I borrowed as income on my Schedule C for this year?
Is there any method besides depreciation for me to spread out the cost of this instrument over several tax years? For example, since I have taken out a 5 year loan, can I consider my monthly loan payments as business expenses? It would be complete overkill from a tax savings standpoint for me to write off the entire cost of the instrument this year (unless I have to claim the loan as "income" as mentioned above). I'm not too keen on depreciation, as I may one day sell this instrument.
EDIT: I live and work in the US.
First, be sure to talk to an actual accountant. However...
I would consult a tax accountant with experience.
Re both: I've always been a DIY tax guy, but as this is a much larger purchase than I ordinarily make, perhaps it's time to seek out a pro.
After retiring from my long-term employment (34 years) with the U.S. Government I decided to build my Social Security and other retirement packages by becoming an independent consultant and hopefully earning extra money. I got advice from an accountant and followed it.
If you pay taxes in the US: What is clear is that a loan is not income for tax purposes. And interest payments are not deductible, except for mortgages on a house that you actually live in. A loan for a violin is treated by the IRS just like a car loan.
A professional accountant/tax preparer will treat this as a business expense (tools of the trade) just like computer, car, etc. Being a violin doesn't make the case special at all.
Don't consult an accountant. Just do whatever some amateur violinists on the internet suggest. What you save on accountancy fees can be spent on a new set of strings or a cake of REALLY great rosin.
Has your morning coffee kicked in yet?
Actually it can be very helpful to consult others musicians and violinists - I know I had a lot of conflicting information on whether or not a violin could be considered a depreciating asset, if it actually is expected to appreciate in value, etc. Yes, talk to an accountant, but see how other violinists have handled it. Not every accountant - or violinist - will give the same advice.
IIRC, the depreciation will be charged against income, BUT as the book value drops, the eventual capital gain upon a sale will go up. How that plays through if you trade it for an even more valuable instrument, etc., is something an accountant will be able to walk you through. Tax law isn't always logical.
there is a niche specialty for financing and depreciating musical instruments. If there's a lot of money involved, seek this out. This is one reason the most expensive instruments have become so much more expensive in the last several years!
I read an article about a young violinist (Zoe Martin-Doike) who is now studying accounting due to COVID.
I agree with Laurie, but so far I haven't seen a reply from anyone whose situation is the same as the OP -- taking out a loan for an instrument for professional work.
Even Reverse Mortgage income is not taxed as income. It is treated as a loan.
I can tell you from personal experience that this question is complicated, and you can get different advice from different accountants.
Normally loan payments are not deductible. Lease payments, yes, but that is a little complicated for a non-Cremonese instrument.
The loan is not income, no different from buying the violin with a credit card. If it is truly professional the interest on the loan would be deductible as an expense along with the cost of the violin (not the payments). Currently, in equipment purchases you can elect to write off the entire purchase price up to a pretty high limit the first year, or spread out over the purchase life, which can be 3-30 years depending on what category it falls into. Seems like the only complications are if they questioned violin playing was a business (income wise) or the appreciation of the violin, most things depreciate after purchase. And if you sold it later there would be tax issues, money owed on that depreciation.