In a recent article, I explain the difference between arts and crafts costs versus tax deductible expenses. One of the differences I discuss is the treatment of arts and crafts fixed assets. Fixed assets are any long-term tangible assets you use in the normal course of business. Tangible means you can touch and feel them. So, when you purchase these items for your arts and crafts business, the price you pay or promise to pay, is a cost. Then as you use the fixed assets in the normal course of your business, you depreciate them.
Getting down to the practical, in this article I go through common arts and crafts tangible assets and how to depreciate them. There are basically three type you'll have for your arts and crafts business.
Three Types of Arts and Crafts Business Tangible Assets
Just about every business will have office and computer equipment. Arts and crafts businesses will have another class of tangible assets - those tools we use to make our handcrafted items. Some examples are hammers, looms and sewing machines.
Examples of Types of Office Equipment
Office equipment includes desks, tables, chairs, filing cabinets, telephones, safes and the like you use for your arts and crafts business.
Introduction to Depreciating Office Equipment
For tax purposes, using the Modified Accelerated Cost Recovery System (MACRS), these types of assets are depreciated over seven years. Although, please note this article does not address any special expensing depreciation; the article is just a straightforward explanation of how to use the MACRS system of depreciation with the half-year convention. You can use the half-year convention if you place in service (purchased and started using) over 60% of all your tangible asset purchases for the year prior to October 1.
In other words, less than 40% of your total depreciable office, computer or other assets placed in service during the year were done so in the fourth quarter of the year (October, November and December). Okay, you may be having a major head scratching moment here. So, I think this will be easier to understand if I give you a real life example.
Explaining the Half-Year Convention
I have a client who owns a jewelry-making business. During the year, he purchased new office and computer equipment in June costing $10,000. In November, he purchased some new jewelry-making equipment and a new printer that cost $2,000. His total asset purchases for the year was $12,000 with 83% ($10,000/$12,000)of those purchases taking place prior to October 1 - so he can use the half-year convention.
One more example: let's say that another crafter purchases $1,000 of office, computer and arts/crafts equipment in February and another $2,000 in December. Can this crafter use the half-year convention? No, because 67% ($2,000/$3,000)of the tangible assets were purchased in the fourth quarter of the year.
Step-by-Step: Depreciating Office Equipment
Office equipment is deemed to be a seven year asset by the Internal Revenue Service. Here are the percentages you can deduct as depreciation by year:
Year 1: 14.29%
Year 2: 24.49%
Year 3: 17.49%
Year 4: 12.49%
Year 5: 8.93%
Year 6: 8.92%
Year 7: 8.93%
Year 8: 4.46%
In the year of purchase, the percentage is 14.29%; the second year it's 24.49%; the third year it's 17.49% and so on. So if you buy a new desk for your arts and crafts business in 2012 costing $350, your 2012 depreciation expense for the desk is $50.02 ($350 x .1429). In 2013, the expense is $85.72 ($350 x .2449). Jumping a head a couple of years, in 2015 the expense is $43.72 ($350 x .1249).
The next article in this series of articles about depreciating arts and crafts asset is information how to depreciate used and donated assets.
