An interesting discussion arose recently in the WoodNet.net forum recently: can you claim tool value depreciation on your taxes? Upon researching I found that the short answer is – unless you’re turning a profit with those tools 3 years out of 5 you can’t. The long answer is… talk to your CPA ;)
The discussion on the board is great though, and reading through it will give you insight into how various woodworkers are thinking about business and their love of wood.
Check out: So who is depreciating tools?
For as many people there are who hold up the “3 years of profit out of 5” as a rule of thumb there are just as many who point out that you don’t have to show that profit, just be able to prove in court (potentially) that you have the intent to turn a profit.
Proof of intent includes stuff like letterhead, a separate business bank account, a business plan that leads to profit, etcetera. My non-professional impression is that it comes down to your willingness to build thorough business infrastructure for yourself and your willingness to go to court to prove that you’re running a for-profit business and not just trying to dodge taxes.
Here are the resources and articles that lead me to that impression:
Protect Your Business Losses by Incorporating
IRS Publication 535 Business Expenses
Hobby Loss Rule (a forum discussion…)
Hobby Loss Deductions (from an “aggressive” CPA)
What experience have you had with claiming tool-related business losses?
The area of depreciation is a minefield. It can be very tricky at times, especially when it comes to tax. Be prepared for it when preparing your taxes!