The Home Studio – my final entry for Tax Deductable Business Expenses

The home office or studio deduction has been one of contention for some time but it is really quite straight forward. To take the deduction you must use your studio exclusively for your business. It doesn’t have to be an entire room but the square footage that you use to calculate your deduction must be partitioned and used exclusively business. That is, if you have a 300 square foot family room and you partition half of the space for your studio, the deduction calculation will be based on 150 square feet. If you have a 2000 square foot home you will deduct 7.5% of home related expenses on Form 8829 (Expenses for Business Use of Your Home). Uses of the room in addition to studio space might include storage of artwork and supplies or office space for record keeping and other business expenses. The costs that you could deduct might include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. If your studio qualifies, this can be a powerful deduction for your business.

Assets and Depreciation: Equipment

The cost of equipment purchases may either be fully deductable in the year it was put into service or depreciated over time, usually over 5 to 7 years for art equipment.   There are IRS limits to the amount that can be deducted.  Generally, the maximum deduction is $250,000 for property placed in service in 2009.  If your purchase is within the IRS limitations you may take the “section 179 expense election” and deduct the full cost of the equipment in the year you placed it into service.  If the useful life of the equipment is greater than one year and the cost is greater than the IRS limitation you will take the expense over the useful life of the equipment.  Either way, the full cost of the purchase will be depreciated and deducted for income tax purposes.

Art equipment purchases that you will depreciate may include items such as a computer, a kiln, a printing press or other types of machinery.  Items that are directly expensed are the supplies for your art such as clay, paint, brushes, film, etc. 

If you are depreciating equipment over its useful life the accounting entries will look like this:

Furniture and equipment           $xx.xx
      Cash                                                          $xx.xx
                Computer purchase

Depreciation expense                $xx.xx
       Depreciation: Furniture & equipment    $xx.xx
                Computer depreciation

The first entry is made for the full amount of the purchase.  The second entry is for the amount of depreciation taken in the tax year and will continue to be made in subsequent years until the equipment is fully depreciated.