Official Luthiers Forum!

I have a question for all you luthiers who run their shop as a business. In general, can you deduct all the costs assocaited with starting up and running your business like buying tools, supplies, computer, etc, even if you haven't made a profit selling guitars yet? As an example, I fully intend to sell the few guitars I make each year, and as such will report the income from the sale, as well as pay any other taxes. Am I entitled to deduct my expenses to setup and start the business? I am thinking about using the section 179 deduction to fully deduct equipment costs instead of depreciating them over time and am wondering how you all handle this.

Cheers!

John

John, in a word, yes. You can duduct EVERYTHING that is a business related expense. You can take a loss 2 years in a row or 3 out of 5 years (I think I have those numbers right) After that, the feds consider it a hobby and you can't write off expenses any more.

Hi John,
First of all why would you ask a question about taxes to a bunch of luthiers? Anyway let me try to answer some of your questions. The rule is...If the expenses are related to the production of income they are generally deductible. The IRS looks to see if you really are a Business or are you a hobbiest. Hobby rules are very different from business rules. So in order to "establish that you are a bonifide business the IRS has a list of things they look at such as...do you work full time, do you have other employment, do you have a business license, do you have letter head, business cards, a business phone, a business listing in a phone directory, how long have you been in business, are you trained/qualified by formal education, do you have employees, do you have a profit or have you been losing money for the last 10 years...and a lot other things. If you appear to have a profit motive and have most of the above...even if you only work at it part time...you are "probably" a "business" and not subject to the "hobby loss" rules/limitations. You can depreciate assets and claim amortization expense for start up costs etc. As far as Sect. 179 goes it is a wonderful part of the code EXCEPT you CAN NOT CREATE a LOSS with it. For instance let's say you bought $25,000 worth of machinery... write off every dime this year up to the point where you have zero profit...not one dollar more.
Now that doesn't mean you can't create a loss with depreciation and other expenses...it just means you can't do it with 179. So if with regular depreciation and expenses you have a loss all well and good.

The reason I made the statement at the introduction wasn't to insult anyone. I did it because all day long I hear... "but I was talking to my friend in the bar last night and he told me I could write off bla-bla-bla" and It's always wrong!. This forum has a lot of very intelligent, well meaning, helpful people, but ...they, as far as I know, are not CPA's. This tax stuff is quite complex and changes every year. It even changes from state to state. Some states have not only income tax, but Intangible Tax and Tangible taxes. If you need help, find a licensed CPA in your town and go talk to him or her... It won't be a waste of your time or money.

p.s. I am a Licensed CPA in the state of Florida. My friends claim CPA stands for Certified Pain in the Ass. Dave-SKG38393.9218518519

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Hi John,
First of all why would you ask a question about taxes to a bunch of luthiers?

Umm, maybe because one of the forum's members and sponsors is a CPA? Scroll back up, and look....

And maybe the others that are in business could add some relevant information. Of course, it could all be garbage...

[QUOTE=Mario] Hi John,
First of all why would you ask a question about taxes to a bunch of luthiers?

Umm, maybe because one of the forum's members and sponsors is a CPA? Scroll back up, and look....

And maybe the others that are in business could add some relevant information. Of course, it could all be garbage...[/QUOTE]

Mario...do you want me to scroll back up and look at my own advt.? I am going into the hospital for surgery next week I guess I should ask if there are any surgeons on the forum? Is that your point?Dave-SKG38393.9368634259

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Mario, you often grumpy sawdust maker, you stirring up trouble again?

I think John Elshaw's question to luthiers is sane myself. I hire a CPA each year to do my taxes and therefore know a lot of information that applies to luthiers at least on the federal level.

But since Dave are one, he sure sounds more official.

Dave, thanks for the letterhead tip, I'll have some made up when I pick up my new business cards ordered just last week.

And while we are at it, does a cell phone work for a business phone? I have a regular phone at home and keep the cell phone on me in the shop for "business only".

Hi Dave,

Thanks for the response. I asked this question to luthiers because most of us have other jobs, such as lawyers, teachers, CPA's, engineers, and even my undergraduate degree is in accounting. I know it's not failsafe tax advice, but it's a quick sounding board, and I was hoping you'd chime in because I knew you were the tax expert.

So, one more question about section 179 which is my big hangup... From what I understand, you can only claim section 179 deductions to the extent you have taxable income. Lets say I have taxable income of $100,000, but only $500 was from the sale of a guitar. According to the way I read the law, I should still be able to claim section 179 deductions on my return to the extent I have taxable income, not a loss from the business. Does that make sense? I'm going to bounce this off a CPA friend of mine but wanted to hear what you all said first. Thanks again for the advice Dave, you are the official OLF CPA. Do you think if I ever get audited by the IRS I could say "well there's this guy Dave, and he builds guitars, and he said..." Hmm, maybe not.

Cheers!


John

Dave, Mario, Bruce,

Thank you all for making me laugh like I haven't laughed in a long time. I really needed that...

And thanks Dave for sharing your wealth of knowledge in this area...it is greatly appreciated.

Just a "bookkeeper",

Don

_________________
"I want to know what kind of pickups Vince Gill uses in his Tele, because if I had those, as good of a player as I am, I'm sure I could make it sound like that.
Only badly."

John,
you are most welcome and I hope you understood my comment as I explained above.
I just figured if you wanted professional advice from me you would have emailed me. Sometimes these things can be personal and you don't want to give or recieve this type info in a public forum. I would never give professional advice in an open forum.

As far as 179 goes. You cannot take the excess 179 against your wages for instance. You can't take it from the bakery you own and apply it to the Golf Course you own. It is unique to that business.
If I can be of any assistance just let me know.

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

John, you own a golf course and a bakery, wow! You've been holding out on us! Mind if I stop by for 18 holes and a bagel?

you want me to scroll back up and look at my own advt.?

Ha! I never had you as yourself.<g>

I thought your name was "Dave John", as that's how your signature reads, though I always figured it should be "Dave Johns"...

What's "SKG" stand for?

You may want to re-think your signature...

And I still think it was fine for John Elshaw to ask "a bunch of luthiers" for tax advice; it was a smart 'first step', as a sounding board, as he put it. Heck, folks ask   this "bunch of luthiers" to pray for them when in need all the time, right? Ain't none of us ordained, but we can still offer up whatever help we can.

BTW, what are you getting cut up for? Must be urgent, to take you down in what must be your busiest work season. I have a musician friend who just had surgery, and she elected to have it during the winter because she tours all summer.Mario38394.0311342593

Dave...while I'm not a surgeon, I hang out with a few when I'm not in the shop. I hope it's not serious, but you seem like a crusty kind of guy who should bounce back in short order.

My best advice...treat your surgeon no differently than you treat your car mechanic. We have a tendency to ask more questions and have higher expectations about our cars than we do about our bodies. Keep his feet to the fire.

Let us know how it goes and be sure to post all the gory details! Good luck, dude.

Oh, and one more thing...make sure you send out those leather pieces before you go under the knife

_________________
JJ
Napa, CA
http://www.DonohueGuitars.com

Dave, check this out -- I think you can take section 179 deductions from other income as long as you still have taxable income. Look at the text below I copied from an IRS website and let me know what your take is on it:

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.


Boy oh boy, why do they have to make this stuff so simple?

John

John Elshaw, yep, my wife's income is untaxed as a result of my part 179's and we get a nice refund those years! Yippee!

It's just hard to explain to her why all the refund check belongs to me..... but I keep trying.

John,
I think your getting some of the same confused. That's confusing isn't it. What I mean is this...sect 179 is deductable only to the extent you have taxable income.

This is directly from the code:

"The amount eligible to be expensed for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business (determined without regard to this provision). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations)" Active trade or business income includes wages from that business BUT not wages from the grocery store job. This is how I have understood this part of the code since it's inception. I could be wrong...there could be a change this year. I don't think so tho...in the past the only part of sect 179 they messed with was the amount limits not the types of income.

I will research further, It is possible that part of the on going law changes (JGTRRA) allows section 179 to be taken against wages. I know for sure in the past it was not. I even had the IRS challange a return once where the client took an amount slightly over the limit thereby creating a loss. It was definitely a rule. "you could create losses with depreciation but not use sect 179 to do so". as I said above I will look into and get back to you.

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Hi again john,
I interpret this to be as I previously stated. Please pay close attention to the bottom paragraph:




5308 Limitations on Amount That May Be Expensed

The total amount that may be deducted under the election to expense certain depreciable business assets in any one taxable year is limited to the following dollar amounts for the following taxable years (§179(b)(1)):

For tax years beginning in 2003 through 2007: $100,000 (adjusted for inflation after 2003). For taxable years beginning in 2004, the amount is $102,000. Rev. Proc. 2003-85, 2003-2 C.B. 1184.

For tax years beginning in 2008 or thereafter: $25,000. §179(b)(1).

For New York Liberty Zone property: an additional $35,000. §179(b)(1); §1400L(f)(1)(A).

For sport utility vehicles placed in service after October 22, 2004, $25,000. §179(b)(6).

In addition, for 2003 through 2007 the amount that may be expensed is reduced by any amount by which the cost of the property eligible for the election and placed in service during the tax year exceeds $400,000 adjusted for inflation after 2003. §179(b)(2). For 2004, the figure is $410,000. Rev. Proc. 2003-85, 2003-2 C.B. 1184. For Liberty Zone property, the reduction is 50 percent of the amount over $400,000. §1400L(f)(1)(B).

EXAMPLE: Rod purchased and placed in service various machinery and equipment for use in his farming business in 2004. All of the property qualified for the §179 election, and the total cost was $412,000. Because the total cost of the machinery and equipment exceeded $410,000 by $2,000, the maximum amount that Rod can deduct under §179 is $108,000 ($110,000 minus $2,000).



For tax years beginning in 2008 and later years, the amount that can be expensed is reduced by any amount by which the cost of the property exceeds $200,000. §179(b)(2).

Finally, the amount that may be deducted is further limited to the taxpayer’s taxable income derived from the active conduct of any trade or business during the taxable year, computed without taking into account any §179 deduction, deduction for self-employment taxes, net operating loss carryback or carryover, or suspended deductions. Reg. §1.179-2(c)(1).

• TaxExpert §§189.4, 192.6

Wages has never been considered Trade or Business income when applying these rules unless the wages were from that Trade or Business. That's how it's been applied in the past. Please also keep in mind that the IRS and Congress make many mistakes when publishing these "rules" They are still cleaning up tax law "definitions" from George Senior. I will still look into more. This would be a Great discovery if true!!!

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Thanks Dave, I'm anxiously awaiting your answer and what you find out.

Cheers!

John

Hi John,
From my research I have found again more documentation that you CAN NOT TAKE a loss created with sect 179. This means you can NOT apply sect 179 to your wife's wages (unless she was your employee...then the wages would be considered from the same active Trade or Business). Here is yet another quote from a very Large Tax service company who design's professional use Tax Software and research software:

"The Section 179 deduction is further limited to the taxpayer's taxable income derived from the active conduct of any trade or business during the taxable year, computed without taking into account any Section 179 deduction, deduction for self-employment taxes, net operating loss carryback or carryover, or deductions suspended under any provision.
OBSERVATION:This limitation means that the Section 179 deduction cannot generate a loss for the taxpayer's trades or businesses. Any amount disallowed by this limitation may be carried over and deducted in subsequent years, subject to the maximum dollar limitations and taxable income limitations in effect for that year.

That tells me the loss lies right with the business and is not "applied" anywhere else.

This is a perfect example of why I said asking a question of this sort winds up with erroneous advice. If you recall...Bruce chimed in and stated "that his CPA does just that...and applies it to his wifes income". Now I am sure Bruce was only being helpful, But I would bet if he checks with his CPA he will either find one of two things...1) Bruce is mistaken or 2) His CPA made a mistake. My point, I think, is made as far as getting advice from well intentioned luthiers on tax issues. I know I upset some people...I DIDN'T MEAN TO!
PLease don't anyone take offense I am not putting down the good intentions of the people here. The point is these issues are complex, everchanging and wrong advice can have devastating consequences. Hey, I 've been doing this for 25 years and almost had a heart attack when John mis-understood what he was reading. I thought...maybe the law changed and I missed it...YIKES!

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

P.S. John if your Friend/CPA can find something in an IRS publication or Code Section to prove otherwise. I would greatly appreciate a copy. There still could be a law change and I just am not finding it. In the mean time I choose to err on the side of caution and not try to apply 179 to other items of income. PLEASE LET ME KNOW.
THANKS for the adrenilin rush!!

p.s. can you give me the exact url of the site you said you read that you could apply 179 to wages? I would like to read it myself. I checked the IRS.gov site and couldn't find it. Crazy tax laws...now you see why I want to do luthery full time!Dave-SKG38394.6680092593

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Sometimes it just doesn't pay to get out of bed.

I've been wrong, and I've been mistakened before.

Even with a business degree, I'd rather forget all about that and just build guitars.

The only problem with forgetting all about the business side, if we don't keep score, we don't know if we win.   

Bruce,
I could forget it in a heart beat...Hey if you're happy...YOU'VE WON!

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Dave:

Make sure you mark the area that the surgeon is going to operate on with a BIG RED X. My son went in for an operation on his eye and the doctor operated on the WRONG eye. This is the kind of stuff you read about in the newspaper and don't ever think it could happen to you.

_________________
tim...
http://www.mcknightguitars.com

THANKS FOR THE WARNING TIM. I AM A LITTLE LEARY OF THE WHOLE THING ANYWAY. ALTHOUGH ITS ORTHOSCOPY SO IT'S SUPPOSED TO BE LIKE GOING TO THE DENTIST...NO BIG DEAL. LET YOU KNOW

_________________
Dave Bland

remember...

"If it doesn't play in tune...it's just pretty wood"

Just finished my taxes last night and e-filed them. The Sect 179 doesn't work against other income. It was related strictly to the "luthiery" business. I know this because the TurboTax came back and told me the Sect 179 expense went against my loss (for last year) on the business. The 179 expense could be carried over to next year, and beyond, and go against a profit, if one is made. I ended up moving the 3 items that I was going to 179 into the Scheduled Depreciation list of tools, etc. and it worked fine. It will just take about 5 years to totally write them off.
So, you need to monitor your P/L as you prepare the taxes to see which direction you should go with expensing large $$$ items.

Dave, best of luck with surgery.

I just want to mention that Tim is right on with that big red X. Just like any field, it can be easy for a doctor to become complacent and this is a dangerous thing.

Many people do not know it, but even nowadays many doctors do not proerly wash their hands and sterilize their tools before going into surgey, and it can result in complete disaster. Also, just FYI for anyone going under the knife or knowing someone who is, statistics are available that are procedure specific to find out where the best place to go for surgery is. These statistics give numbers for complications during the specific surgeries.

best wishes,
Joshua French

_________________
Instagram: @jfrenchluthier
Web: https://www.jfrenchguitars.com/