Depreciation for String Players
Author: Brad Howland
First Posted: October, 2000
What do you do if your instrument actually goes up in value? Should you claim depreciation on it? This is a tricky situation that musicians need to think about carefully.
String musicians should look at their instruments as a source of retirement funds. Eventually, you are going to retire from teaching and playing, and must consider the tax implications of selling your instruments at that time.
String instruments are expensive, so if you depreciate the instruments now you will have incredible tax savings. However, at some later date when you sell at a profit, you will have to pay back all those tax savings (this is known as "recapture"). You will also have long-term capital gains to pay, regardless of whether you depreciate now or not.
Claiming depreciation makes sense only if you take the current tax savings and scrupulously invest in a secure investment, such as savings bonds. The money will be there to cover the recapture when you eventually sell, and interest earned on the investment can help pay for the capital gain.
To do this technique, you need to work closely with your tax preparer or financial advisor, work out exactly how much of your tax savings each year comes from depreciation, and save it!
Report your dispositions of capital property and any resulting capital gain or loss on T1-S3: Capital Gains Summary. Capital gains are taxed at a lower rate (currently only 50% of the gain is taxed). Recapture is calculated on the Capital Cost Allowance schedule and reported on the business statement.