Deduct Your A/V Gear From Your Taxes
No one ever said being a home theater enthusiast was cheap. If you've got a full 7.1-channel speaker system, tricked out with the latest gear, and topped off with a 60-inch plasma, it could cost you more than $10,000. Yeah, that thing saying "ouch" is your credit card.
But what if there was a way to soften the blow? You probably know someone who runs their own business or works freelance for a living - aren't they always deducting tons of crap they buy from their taxes? Surely you could work out something similar if you just put your mind to it.
Hey, don't stress that beautiful mind. We've done the research, talked to the experts, and have the skinny on home theater tax deductions. And, yes, you can do it, but there are some basic rules you need to follow to keep it all on the up and up. Specifically:
1. Get in Business This is the most basic hurdle you need to overcome, but it's also the biggest. The gear you've bought needs to be for your job. So as long as your job involves something to do with music or video, it's cool to deduct the cost of equipment? "No," declares Tom Ochsenschlager, vice president of taxation of the American Institute of Certified Public Accountants. "Even if you, say, worked for Disney as an animator, you couldn't deduct your home theater gear unless your employer didn't provide adequate facilities at the business itself."
Okay, so the day job is probably out, but what about income on the side? If you start charging your friends $5 each to come over for movie night, is that 50-inch LCD a business expense? Not so much, warns Gary Reing, a New York City-based tax lawyer. The expense needs to be "ordinary and necessary" for your business. In other words, there needs to be some kind of trade you're involved in, like writing or music production.
So what counts? Would, say, creating a blog where you review movies count as a trade? This is where things get gray. If the income generated from the site is too small, says Ochsenschlager, the IRS might designate the whole activity as a hobby, nixing any deductions. If reviewing is your trade, you should stick with legit publications - or get serious about the whole blog thing and come up with a business plan.
2. The 50% Rule Once you've established that your expense is clearly for your business (blog or otherwise), you need to make sure it doesn't get too "personal." While it's inevitable that any piece of business equipment will have some personal use, that use shouldn't exceed 50% of the time it's used.
"If personal use is more than 50%, you can't deduct it," says Ochsenschlager. "If you're, say, a lobbyist in Washington, and you have a TV in your office, you can deduct it as long as it's tuned to C-SPAN more than half the time it's on."
Before you count all those Nick at Nite marathons as company time, "professional viewing" doesn't count, says Reing. "It's not a write-off if you're doing 'research.'" The activity needs to be directly related to your job or business."
3. Spread It Out The IRS will most likely classify any piece of home theater gear that passes the 50% rule as "listed property." These are business assets that have a high potential for personal use, like computers, vehicles, cell phones, and, yes, multichannel speaker systems.
According to the IRS website, you have two options with listed property: either expense the cost of the asset in the year you "put it into service," or recover its cost over a long period by deducting a percentage of the cost each year, called depreciation. Each approach has advantages, though using depreciation is a safer approach. "The IRS has a fair number of arrows in its quiver," says Ochsenschlager. "To go after people who deduct items that have a personal use."
Depreciation is also the only approach for used equipment. "You can never use the one-time expense," says Reing.
4. Have a Paper Trail Although plenty of businesses were famously started in garages, the hallmarks of a "legit" company include well-kept financial records. Things like a separate bank account for your business, company stationery and checks, invoices, and a place in your home that's designated as a "work zone" are all good ideas. But the key item for any individual asset is a log that keeps track of the time it's used for business and when it's flipped over to personal. In addition to lending legitimacy to deductions, the log will also determine the amount you can expense.
"Is it always a 100% write-off? No!" says Reing. "Keeping a log is essential."
5. Don't Hold Back Once you've established a business, and you've bought equipment specifically for profit, be sure not to leave anything out. Even items that you may not think are deductible may turn out to be a write-off.
One reviewer of A/V media and equipment (who declined to be identified) talking about the tax write-offs notes, "I keep track of what I spend. If it's in any way connected with audio, video, music, or movies, I deduct it - new speakers for the desk, new LCD TV, movie rentals, CD or download purchases, spools of speaker cable. The software is probably the biggest recurring expense. I'll be deducting a new sofabed because it sits directly facing my reference system and I can't use the equipment without being seated on something. It's all directly or indirectly related to what I do."
Many Happy Returns? So there it is - deducting that plasma TV and home theater system from your taxes is possible, but you need to convince that IRS that it's needed for what you do for a living. The best approach would be to establish the business first, do the paperwork and create a "work" zone in your house, get some real income, then buy your gear . . . er, assets. Who knows? You might actually enjoy your new job.