Description
Business Use Assets and Depreciation
John paid $300,000 for a very old guitar that belonged originally to an accomplished musician. Since John is also extremely talented and is blessed with an amazing voice, he not only believes this guitar to be a great investment, but intends to play it at local eating and drinking establishments. John has now asked you whether he can deduct this guitar as a business use asset.
- What would you advise him, and why or why not?
- Would there be any limits to the deductions?
Provide specific details in your response to support your opinions.
Please do the discussion then response each posted down below.
Posted 1
I had to put the price tag to an actual guitar! Apparently, there are
guitars that sell for well over $300,000. In this case, George
Harrison's guitar sold for $300,000 according to Guitar World (2020).
With that, if my client was a musician and played at the local venues, I
believe his purchase would be more considered personal use and would be
HIGHLY scrutinized and disallowed by the IRS as a deductible business
expense. What's to say his local venue gig couldn't be just as easily
performed with a $2,000 Paul Reed Smith or Gibson Les Paul electric
guitar. On the other hand if my client was a professional musician and
regularly deals in high-end instruments or can show the instrument is
"reasonable in amount" and used for a bona-fide business use (i.e. he
was being paid very well for his gigs and able to his intent to earn a
profit, I'd tell him to go for it and advise him: as a sole proprietor
there's no limit to the amount of 1040 income he can offset with
business losses. If he were to take section 179 and/or bonus
depreciation on the Guitar, he could theoretically offset $300,000 of
other income he had, assuming $300,000 amounted to his business loss.
Any unused business losses would then be available to use in future
years.
Posted 2
I
would advise John to deduct his guitar as a business use asset.
Deducting the guitar enables the asset owner to maximize profits by
ensuring he is getting tax deductions from the depreciating asset (Bruce
et al., 2014). The decision to deduct the cost of the business asset
will require John to choose whether to claim the cost all at once or
spread it across the useful life of the guitar by claiming depreciation.
Depreciating an asset requires the owner to deduct a portion of its
cost each year for its useful life (Bruce et al., 2014). For instance,
since John bought the guitar at $300,000, he should depreciate it by
deducting a portion of the cost each year. One of the limits to the
deduction is the amount of taxable asset income. The deduction should
not exceed the taxable business income as the excess is carried forward
to unlimited future years (Bruce et al., 2014). John should determine
the guitar’s useful life and ensure his deduction does not exceed the
limit.
Explanation & Answer
View attached explanation and answer. Let me know if you have any questions.
Response to post 1
The guitar can be called a listed property because a client can use it for both personal and
business purposes. Being able to prove that the client deals with high end instruments and that
the guitar costed a reasonable amount then it will be possible to deduct a certain percentage of its
cost. Since the guitar can be a long-term asset its cost will be taken as deduction in increments
over the time it will be in use. IRS will spread out the cost of the guitar over time which they say
capitalizing and will be used to make profit.
Response to post 2
The expense will not be accounted for in one year, but it will be spread out over the life
of the equipment even when it is depreciating. This will make it to be considered as a capital
asset which john will use to make profit. The deduction for this guitar is called de minimis safe
harbor that shows it has been exempted for small amounts and john can spread it across its useful
life. John can take a business deductio...
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