Business Finance Homework Help

Business Use Assets and Depreciation

John paid $300,000 for a very old guitar that belonged originally to
an accomplished musician. Since John is also extremely talented and is
blessed with an amazing voice, he not only believes this guitar to be a
great investment, but intends to play it at local eating and drinking
establishments. John has now asked you whether he can deduct this guitar
as a business use asset.

• What would you advise him, and why or why not?
• Would there be any limits to the deductions?

Provide specific details in your response to support your opinions.

Please do the discussion then response each posted down below.

Posted 1

I had to put the price tag to an actual guitar! Apparently, there are

guitars that sell for well over $300,000. In this case, George

Harrison’s guitar sold for $300,000 according to Guitar World (2020).

With that, if my client was a musician and played at the local venues, I

believe his purchase would be more considered personal use and would be

HIGHLY scrutinized and disallowed by the IRS as a deductible business

expense. What’s to say his local venue gig couldn’t be just as easily

performed with a $2,000 Paul Reed Smith or Gibson Les Paul electric

guitar. On the other hand if my client was a professional musician and

regularly deals in high-end instruments or can show the instrument is

“reasonable in amount” and used for a bona-fide business use (i.e. he

was being paid very well for his gigs and able to his intent to earn a

profit, I’d tell him to go for it and advise him: as a sole proprietor

there’s no limit to the amount of 1040 income he can offset with

business losses. If he were to take section 179 and/or bonus

depreciation on the Guitar, he could theoretically offset $300,000 of

other income he had, assuming $300,000 amounted to his business loss.

Any unused business losses would then be available to use in future

years.

Posted 2

I
would advise John to deduct his guitar as a business use asset.
Deducting the guitar enables the asset owner to maximize profits by
ensuring he is getting tax deductions from the depreciating asset (Bruce
et al., 2014). The decision to deduct the cost of the business asset
will require John to choose whether to claim the cost all at once or
spread it across the useful life of the guitar by claiming depreciation.
Depreciating an asset requires the owner to deduct a portion of its
cost each year for its useful life (Bruce et al., 2014). For instance,
since John bought the guitar at $300,000, he should depreciate it by
deducting a portion of the cost each year. One of the limits to the
deduction is the amount of taxable asset income. The deduction should
not exceed the taxable business income as the excess is carried forward
to unlimited future years (Bruce et al., 2014). John should determine
the guitar’s useful life and ensure his deduction does not exceed the
limit.