Hola, mis amigos en radio y producciones. In Raoul's last column, we talked about the concept of depreciation. Remember? It is basically telling the IRS that the crap you got ain't no good anymore, and you gotta go out and get some new crap; and, since you use it in your business, you are going to write it off on your taxes.
On the average tax return filed by an individual in your situation, there are pretty much two places where you would deduct depreciation. And, there is a very good reason for that. It's where it belongs. They are: 1) As job-related expenses, on Schedule A, in Miscellaneous Itemized Deductions, and 2) On Schedule C, Profit or Loss from Business or Profession.
Schedule A is where you record your itemized deductions such as real estate taxes, medical expense, mortgage interest, contributions, etc., including your job-related expenses. Now, the problem with this treatment is that there is a threshold you must exceed before you qualify for any itemized deductions! Those amounts are almost $4,000 for singles and over $6,000 for marrieds. Pisser? Not really. If you live in one of those states that has an income tax, you are on your way. And, more often than not, if you own a home and pay mortgage interest and real estate tax, you are surely over the top. Remember, depreciation does not stand alone, but is combined with all of your other business-related expenses.
The second place to express these expenditures is on the Schedule C. All you need to use this form is some free-lance production/talent income. However, if you invested in your equipment toward the end of the calendar year and do not yet have any income for your efforts, you can still take the depreciation deduction. There is no law that says you have to make money (as long as you were trying). The effort and some substantive evidential material to the effect that you were attempting to generate some outside income is usually enough.
Now, let Raoul take a wild guess. I'll bet that some of you are aware that there are people out there who don't report their free-lance income. Right? Well, it is Raoul's experienced opinion that, more often than not, those people are not only cheating the government, but are also cheating themselves. Strange but true. It is usually the people scamming the income who have no idea about what their legitimate business deductions are. Sometimes, reporting that scammed income and accounting for all your business expenses can even result in a tax loss, two words that when used in proper juxtaposition make Raoul's loins tingle and his vital juices flow. What a beautiful thing.
Technically speaking, there are two ways in which to deduct depreciation. They are: 1) Over a period of years (five on the average), or 2) All at once. The five-year method is referred to as MACRS. This is done mainly to confuse you. Remember Raoul's earlier columns? I could tell you what MACRS stands for, and you would probably have one of two reactions. You would either say, "What the hell does that mean to me?" or you would quit reading the remainder of this article. So, let's forget it. In this "over the years" method, the IRS has issued standardized tables which provide you with the applicable amount of your deduction, depending upon the estimated life, type of equipment, and time of the year acquired. You will find this information in the instruction book for form 4562.
The "all at once" method is called section 179 depreciation. Whoop-de-doo! The annual maximum used to be $5,000, then it went up to $10,000. But in the tax reform act of 1993, the Senate version of the bill called for $20,000 and the House version of the bill recommended $17,500. Now get this. With the infinite wisdom with which our government operates, they got together and compromised on $15,000.
At any rate, depending on a few criteria, you can immediately write off equipment in the year acquired up to $15,000. Now, some smarty pants out there is probably saying, "Well, gee whiz, R-man, if I do that, then I won't have any deduction left for the future years!" Correctomundo. But, it is Raoul's professional opinion to realize your tax savings as close to the time of your expenditure as possible. In fact, if you time it right, you can purchase equipment at the end of the year on credit and take the full depreciation deduction prior to making your first payment! Do you love it?
Regardless of the method that you feel is right for you, all depreciation is calculated on form 4562. Unfortunately, in a subject as complicated as this, Raoul can only scratch the surface. If this material tweaks your interest and you think that you have been missing the tax boat, there is another reason to seek the help of a professional preparer.
Now, Raoul has a little bit of a complaint. There must be a lot of Phi Beta Kappa's out there, because Raoul is not exactly getting flooded with a plethora of faxed tax and financial questions. Raoul is on the level and has a background of over twenty-five years in working with people in the broadcast and entertainment industries. So, look into the "For Members Only" section, and let's heat up the wires.