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Topic: Are sample libraries equipment or expenses for tax purposes?

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  1. #1

    Are sample libraries equipment or expenses for tax purposes?

    Do you deduct them all in one year? or depreciate them over time?

    Also, If I'm a software developer (contractor) by day, and slowly trying to build a studio and transition to scoring/composing over time, can I deduct my purchases now? Or once I actually make money off of it?

    Thanks!

    -Eric

  2. #2
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    Re: Are sample libraries equipment or expenses for tax purposes?

    Quote Originally Posted by EricRichmond
    Do you deduct them all in one year? or depreciate them over time?

    Also, If I'm a software developer (contractor) by day, and slowly trying to build a studio and transition to scoring/composing over time, can I deduct my purchases now? Or once I actually make money off of it?

    Thanks!

    -Eric
    Talk to your accountant to be sure, but in my experience:

    * You can write things off as soon as you start *trying* to make money, not once you *actually* make money.
    * Even for equipment purchases, you can write them all off in one year (I think it's called Section 179). There's a limit on how much you can do this, but it's relatively high. I've written off software, computers, guitar amplifiers, etc. that way.

    Best,
    Stefan

  3. #3

    Re: Are sample libraries equipment or expenses for tax purposes?

    Quote Originally Posted by EricRichmond
    Do you deduct them all in one year? or depreciate them over time?

    Also, If I'm a software developer (contractor) by day, and slowly trying to build a studio and transition to scoring/composing over time, can I deduct my purchases now? Or once I actually make money off of it?

    Thanks!

    -Eric
    Eric,

    Here's what I got from a software company that was trying to sell me something for my business - but as always, you need to consult your Accountant.

    - Doug


    The following items may be applicable to your business, but check with your tax advisor for the specifics of how it may apply to your particular company and tax situation.

    TAX BENEFIT CHECK LIST FOR SOFTWARE PURCHASES

    Expensing Allowance
    Under IRS Section 179, up to $100,000.00 worth of equipment and software purchases can be expensed after December 31, 2002. Utilizing this allowance can save you up to $35,000.00 (Assuming a 35% tax bracket) through tax deductions. Using a Capitalized Lease Purchase to acquire the equipment and/or software can result in substantial tax savings with a minimum cash outlay.

    NEW! 50% Depreciation Bonus
    The Jobs and Growth Reconciliation Act of 2003 offers a new first year 50% depreciation bonus for equipment purchases and qualified leasehold improvements made after May 5, 2003 and before January 1, 2005.

    Estimated Quarterly Tax Payments
    It may be possible to adjust Estimated Quarterly Tax Payments. Equipment and Software Purchases may have an effect on final year end tax liability.

    Depreciable Life
    Proper classification of assets is important to achieving your maximum depreciable benefit.~ While equipment is normally depreciated over 5-7 years, certain high technology items such as computer equipment may have depreciable life of 5 years. Software may be depreciable over 3 years.

  4. #4

    Re: Are sample libraries equipment or expenses for tax purposes?

    Hey guys,

    Thanks so much, this is easily the most annoying/confusing part of this whole process, and for $$$ reasons maybe the most important

    One thing that has been annoying is that different accountants I've talked have had different ideas on the topic, and have been especially clueless when it comes to software concerns like sample libs

    -Eric

  5. #5

    Re: Are sample libraries equipment or expenses for tax purposes?

    Hey, Eric,

    I think (and I'm not an accountant, but I've been itemizing music deductions for 15 years) that TECHNICALLY software is supposed to be depreciated, but that specialized items like sample libraries can be written off all at once with the rest of your gear expenses. I've got a GREAT accountant who specializes in professional artists - I'd be happy to pass his name on to you.

  6. #6

    Re: Are sample libraries equipment or expenses for tax purposes?

    Hey Eric,

    My situation may not compare to your, also as I live in The Netherlands. I have been running my own 1 person company (software design and engineering) now for 7,5 years and each year have a nearly fixed proportion of costs, relative to my turnover. In these costs I have gradually thrown in all my samples and studio hard- and software.

    I have not yet have any visit from the tax agency (they seem to do that each 5-7 years an sometimes with starters. So, I am not really sure if my studio setup (see my website) is acceptable as cost. But I really think I can explain them as necessary investments for the survival of my company and myself

    In my country each company has to be enlisted with a local Chamber of Commerce and a few years ago I changed the description of my activities to also include music services, just to be sure. A few years ago I did some multimedia courseware projects, making editing software very plausible costs.

    Of course all my sample stuff is not yet paying me any cent, but still I think I am allowed to invest in future development and expansion of my company. I have also rented a former studio room as office. This may help the situation also, as it is weird to have a "hobby" room 10 km from your home. So this is business, hehe.

    Recently my accountant however did insist that any visit from the tax agency should be at HIS office and not in my office/studio, as they tend to look at the most ridiculous tiny things, like food in the fridge as being "fringe (fridge)" benefits for employees (not applicable in my case).

    Still, I don't think they will ever nail me having built what I have now. I now (finally!) also expect to have my first music related projects in 2005. That would have been entirely impossible without all this studying, talking on forums AND building this basic composition studio.

    All costs below 500 euro can always be deducted in one year. And in my "year" books I actually see hardly any equipment being written off over multiple years. Samples are software and I would always try to write them off in one year, although we know of course, that they can last much longer than hardware

    Talk to an accountant, don't call the tax agency for advice!

    BTW, I think it may be a bit harder to justify instruments (like a great Gibson Les Paul) as deductable cost than studio related instruments (like a master keyboard, virtual instruments, etc).

    Success!

  7. #7

    Re: Are sample libraries equipment or expenses for tax purposes?

    Computer software is depreciated over three years. It does not quality for section 179 treatment, nor the special write off in Bush's new tax cut legislation. Software samples, which are probably licenses and not software per se, would more likely be Section 197 intangible property...to be amortized over 15 years.

    But the bigger question, and perhaps the one you would be most concerned with has to do with the hobby loss deduction. The IRS does not allow hobby losses in excess of hobby income, and if you do not show a profit in three of five consecutive years, your venture can be construed, if audited, to be a hobby, and the burden of proof is on you to prove otherwise.

  8. #8

    Re: Are sample libraries equipment or expenses for tax purposes?

    The tax cut legislation of 2003 did change the sec 179 rules so you can deduct software in one year. Here is what I just found at the IRS website:


    Off-the-shelf computer software. Off-the-shelf computer software that is placed in service after 2002 and before 2006 is qualifying property for purposes of the section 179 deduction. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

  9. #9
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    Jul 2004
    Location
    Manhattan/Palm Beach, Fl
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    Re: Are sample libraries equipment or expenses for tax purposes?

    I'm in total agreement with 'Sporter'.

    Just one word of caution - whether Republican or Democrat, in the US, the IRS looks at the 'profitability' of an enterprise IN THE AREA IN WHICH YOU ARE TAKING THE DEDUCTIONS. If you do not show a profit in three out of five years, all your deductions will come back to hit you right between the eyes. So take care, especially if you are a hobbyist. CHECK WITH YOUR ACCOUNTANT!
    Last edited by eg21; 12-16-2004 at 01:05 AM. Reason: new fact

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