Tax Deduction for RED Equipment

[Yousuf Abbasi]

I purchased RED equipment over the last 2 years, but started my LLC in 2011. Now that's its officially for business use, is it possible to deduct the value of the equipment for the 2011 tax year? I never took a deduction on it previously because it was considered personal use.

 

[Bill Goehring]

I purchased RED equipment over the last 2 years, but started my LLC in 2011. Now that's its officially for business use, is it possible to deduct the value of the equipment for the 2011 tax year? I never took a deduction on it previously because it was considered personal use.

Tax deductions for capital investments in equipment are normally spread out over the "useful life" of the equipment, which can vary by the type of equipment. You can even elect to deduct the entire value of the equipment in one year under a section 179 deduction, so long as the cost basis of the equipment does not exceed the income derived from it in that year. Some RedUsers have asked over the years whether they can deduct their deposits or even full payment for RED gear before they actually receive it. This is not allowed, as deductions can only begin in the year in which the equipment is put into service for the business.

Deductions for business expenses are intended to offset the revenue generated from them, and, since you did not have a business generating revenue at the time your RED gear was purchased, you did not amortize any of the value away. Now that the equipment is generating revenue, you are free to balance it with the expense incurred in procuring the equipment, whether it be this year or last.

I am not a tax accountant or attorney. This is only my opinion. In fact, tax accountants and attorneys also issue opinions based on the U.S. tax code, a Byzantine structure, to be sure. My advice would be to consult an accountant to at least set up an amortization schedule, if not to file your yearly taxes. I think that you will find that employing their services will more than pay for itself over the years, both monetarily and as far as peace-of-mind is concerned. Also, if the IRS should audit you, it would probably be a wise choice to employ this accountant to represent you, since s/he will be able to fluently speak the language of the IRS agent and be able to make a cogent argument for the strategies you and/or your accountant have chosen to employ. You will often find that rules are guidelines based on principles, not hard-and-fast.

Do you think it is fair that GE paid NO corporate taxes this past year or that the IRS would have intended that they not have to pay anything? Probably not, but that is the case. It is no coincidence that GE paid no taxes and that it employs a staff of approximately 1,000 tax professionals . This is part of the reason the U.S. government is going broke, but that is the way the game is being played. Whether it is moral for you to play the game is up to you.

Sorry I got carried away. End of rant.

 

[Richard Foster]

This is also just an opinion, but I did something like this years ago. I believe you personally can sell your equipment to your business. But as Bill said please consult a professional. As soon as we formed our corporation we started using a tax accountant. even they have a lot of trouble keeping up with the rules.

 

[Yousuf Abbasi]

Thanks Bill and Richard for the responses. It turns out that I can in fact use some of my previously purchased equipment as tax deduction, as Bill you said. BUT the part that is still unclear is would the deduction represent a depreciated value of the equipment (not the purchase value), even if I never used it for business in the past?

Bill- It seems like what you are saying is that one could in fact take a deduction of the purchase value now, even though its few yrs old.

 

[Bill Goehring]

I would say you can use the purchase price as your basis for depreciation, especially since you haven't really "used up" any of the camera's value using it on personal projects and considering that the R1 has held its value well, probably mostly due to Red's trade-in offer for the Epic-X. "Depreciation" is an accounting concept which I don't think has any meaning in the context of personal usage. Depreciation is a way of balancing expenses against revenue so that, over time, profit (the difference between expenses and revenue) is realized from the asset. Dunno. This is only my opinion, based on a year of accounting principles in college 30 years ago and my tax accountant's treatment of my equipment depreciation schedule. Again, I urge you to consult a tax accountant.