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Cost of Making a Violin


Michael_Molnar
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I don't think we're going to successfully simplify the US tax laws in a discussion on Maestronet... and these laws are complicated even for US citizens filing US taxes, so I don't believe we'll settle concerns voiced here by those who don't live in the US.

 

Arguing about the veracity of the donation (who's right, who's not, if the system is fair, if the donation is altruistic or not) what to claim and how to claim it really isn't going to get Mike a reliable answer.  As far as the abuse Roger mentioned, I believe there has been and always will be abuse.  In the case he cited, I believe the principal was charged with tax evasion.  I'm sure many others aren't.

 

The FMV question Mike needs answered is simply one for a CPA (which it seems there isn't one present on the board), but I'll jot down some information from my CPA based on my own discussions, procedures and filings.

 

While the IRS link does outline the general rules for donation, it does not contain the various restrictions which exist for those making these donations.  For example; Through discussions with my own CPA, I am aware that there are restrictions to values claimed (for example, the IRS will not look favorably on a taxpayer who finds a "bargain", paying a fraction of the FMV for it, then donating at full FMV the same tax year as the purchase).  The reasons for this are pretty self evident.  That doesn't prevent some from trying it (I've been approached for appraisals by some attempting this, and declined the assignments).  Even if FMV of the violin were applicable, this restriction may or may not effect Mike's donation.  As I've stated, I don't know.  That's why I have a pro do my taxes.

 

When I provide a service for a non-profit (like an appraisal, etc.), I cannot claim the retail service fee for that service as a deduction (not that I'd want to anyway)... even though I suppose one could argue that the document itself is a "product".  Now, if I charged for the document, and then donated the proceeds back to that organization, my donation would most likely be deductible... but that fee would be applied to my income and I'd only see a deduction of around 30% of it (taxes).  Seems to me I'd not really be ahead.  A wash at best.

 

If FMV does not apply to this donation, another question for the CPA would be how to handle verifiable material expenses.  For example; Is there an advantage to claiming the materials and fittings as a cost of the donation, or is it acceptable (and if so, is there an advantage) to pass these through as general expenses (reduction of inventory).

 

I other words, there are checks and balances in the system...  no matter if we like the system or not... and a good CPA can offer advice, opinion and support concerning "the rules" and the return.

 

Mike.  Take away the pain.  Talk to your tax professional.   :)

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In tax code, there are no right answers.  There are risky answers and there are safe answers. 

 

Different CPAs will give different answers, and so do different IRS agents.  No one really understands all of it.  Each has their own algorithm, or checklist, they go through.  If the IRS claims you have underpaid taxes, you can fight it, and, depending on the situation, even come out on top.  The phrase I learned when I started filing violin-business taxes nearly twenty years ago was 'tax avoidance vs tax evasion.'  It is reasonable and legal to avoid taxes.  Evading them is when you get into trouble.

 

I would guess most of us US folk are happy to avoid any interaction at all with the IRS.  When I make material donations for unused goods I have not made, I use fair-market value.  Say I donate a set of strings for a fiddle-contest raffle.  I write off my cost of the strings.  That is the wholesale cost, because that is what I paid for the set.  I have the paperwork to prove it.

 

Could I declare the retail value of the strings?  Possibly.  I think an argument could be made for that.  People do pay retail for the strings all the time (though the definition of 'retail price' has become quite fuzzy these days), so it does qualify as a fair-market value.  But that's something I choose not to do.  I have other things I'd rather worry about than a possible audit-flag for overdeclaring deductions.  It's a safe deduction.  Some overzealous agent could still call it wrong, and then I'd have to defend it, but I don't lose much sleep over that possibility.

 

When I donate time to an event, I don't declare my time, my 'wages', as a deduction.  I don't believe I could do that anyway, but I think some people try.  I declare my mileage to and from the event as a normal cost of doing business. 

 

I also keep track of everything that comes in.  I have good records, and I make a reasonable attempt.  Again, I sleep better at night that way.

 

If you are a hobbyist donating something you made and want to declare the write-off, get good tax advice and an appraisal.  Consider, though, that if you were to donate the wood (unused), then the price of the wood is a good starting point.  If you want to donate a violin, first you would have to guess whether you improved the wood or not. 

 

If you've been through a divorce in a community-property state, you have some understanding of fair-market value.  A typical conclusion is that your stuff is often not worth nearly as much as you might believe.  As when selling at an auction, you want more than one person to consider it worth something.

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In tax code, there are no right answers.  There are risky answers and there are safe answers. 

 

Different CPAs will give different answers, and so do different IRS agents.  No one really understands all of it.  Each has their own algorithm, or checklist, they go through. 

 

Based on my own experience, when dealing with the (sorry, couldn't help it) "50 shades of gray areas" (donation, home office deductions, depreciation of objects, etc.), I tend to agree with the above.  Different kinds of businesses need to comply with varied rules as well (the issue of 1099 forms is not quite the same across the board; different rules for property rental businesses and some confusion about that from various tax preparers and IRS agents).  Again, a CPA (mine is on the conservative side) handling tax preparation is a small comfort from my point of view.  In the case of an audit, at least you won't be sitting across a table from the auditor all by your lonesome.

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Having donated many hours to non profit s and spending hours on the Phone with IRS agent setting up 501 c3 status , here's what the agent told me..."The law or code is one thing ....but in reality, it all comes down to the individuals agents opinion" FMV may be used ..however it may also be challenged ... So the "best thing to do" is to play it safe , go ahead and make the charitable donation ....but be prepared, a lot of the IRS' decision to pursue has to do with what percentage of total income is being donated . A person making $200,000 annually, can make a much larger donation, without scrutiny,  ,than one who only makes $20,000 annually ....  

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Too many people saying what they think the law is or how they interpret the small part of it they could find, or how they would do it if they were in charge; not enough saying what the law is. Funny, the guy with a real experience and the right answer is being mostly ignored, overpowered by people who have absolutely no idea what they are talking about giving bad advice. Must be Maestronet!

Maestronet is the equivalent * of sitting around the cracker barrel in an old general store (SADLY, long gone in America).  That's the charm of it.  If Clem, Abe, Philaster, and Bob waited until they were sure of what they spoke, their teeth would rot out from the chewing tobacco even sooner.  Talking forces them to spit first, thereby diluting the acids.  Long live the general store, I always say.

 

*  I should be more general and say "internet forums are the equivalent..."  And I actually mean it as a compliment.  Institutions do serve a worthwhile function, otherwise they cease to exist.

 

BTW, the first time I ever went to a tax preparer, the guy said their business was so respected that when the IRS received a form showing their stamp an agent would just sign off on it automatically.  Needless to say, that gave me a great deal of confidence and I was happy to know I was in good hands. NO ONE WANTS TO FACE AN AUDIT.  I felt warm all over.    

 

Then the following year—same accountants,  but different guy— in a lull in the conversation I asked, "After tax season, what do you guys do the rest of the year?"  He looked up and answered, "Oh the rest of the year we spend defending our clients in court."  That wiped the confident smile off my face and brought back the icy gut.

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The American way, in my observation, is to work the tax system for one's own benefit.  Some have a higher regard for legality, other don't.  Some even have morality... which has no weight in the tax codes.

 

If there is any questionable interpretation of the rules, I'd say pick the one most beneficial to you and go according to that, as long as you don't raise any "red flags" for an audit.  If you do get audited, if you have reasonable explanations, you won't go to prison, and probably just pay what you would have paid anyway.  Audits aren't very common for lowlife like us, so the odds are in your favor.

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"Mike.  Take away the pain.  Talk to your tax professional"

 

Yes, or even better, call the IRS. That's what I did after I received 2 different answers from 2 different CPAs.

I found the people at the IRS to be very helpful.

Better yet, correspond with the government tax people by email, if that's an option. That way, even if they give incorrect advice, at least you have a record of what they said, and a decent defense against deliberate tax evasion.

 

My accountant is also very conservative, and not only does he insist on everything being done legally and right, but he also advises against doing anything which is considered to bring special attention from the IRS, even if it's totally legal. According to him, they have certain categories of deductions they flag, for example, deductions having to do with boats or horses, and he says that it's better to fly under their radar and pay a little more, than trigger an audit or a court battle.

 

So there's probably not any single right answer,

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I don't see the advice offered Michael Molnar here on this thread as unhelpful as some believe.

 

The points of consensus seem to be:

 

1. Get professional, qualified help.  That means a CPA you trust, or reliable and convincing information from the IRS or the state.

 

2.  There seems to be a consensus that one (and maybe only one) of two ways would be appropriate for valuing the instrument: either fair market value or cost of materials.

 

Concerning point 2, above:  Whenever a problem has been reduced to two possible solutions, I think you've come a long way toward finding the correct solution.  The fact that there seem to be only two possible solutions can be exploited in consulting with your expert (the CPA or IRS).  In fact, it may help you in evaluating the worth of the opinion given.

 

Without suggesting one solution or the other, ask the expert what they believe the proper valuation method should be. 

 

If the answer is fair market value, then ask why that is so.  I would hope that a qualified professional would be able to cite the specific parts of the tax code which are relevant.  Then ask if the other possible solution, the cost of materials only, might apply, and look for a convincing answer. 

 

Do a similar sort of questioning if the expert's original, unprompted answer is that cost of materials is the solution, looking for specific support for that solution and looking for specific refutation of the fair market value solution.

 

I know that the kind of questioning of the expert I'm suggesting might seem like badgering and might be time-consuming, but I have found (especially in getting advice from lawyers and doctors and accountants) that competent experts are very willing to share their reasons for their judgments, sometimes without my asking for those reasons.  If the answer a supposed expert gives is "it's because I said so," I go looking for an answer from someone else, someone more willing to convince me of the correctness of their answer.

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Getting back to Mike's original question (the title of this thread), Joe pretty well answered it in the first response, except for the overhead part. Understandable, because that is the hard part. If you have separate shop space bought or built specifically for making violins it is much simpler, especially if it has its own power meter and telephone, etc. Tools bought and used only for that purpose are good, too. Even then, amortization on a per-instrument basis can be a nightmare unless you make the same number of instruments every year. My situation is the opposite: I work in what used to be my wife's garage, and is still her laundry. I use a band saw that was bought for general use. Same for drill press, jointer and table saw. I could depreciate those things for tax purposes, but if I ever sell one of them the proceeds are taxable. I like to keep things simple. I occasionally work on donated instruments, for which I could charge, but I normally also donate my time and even materials but do not bother to claim tax deductions.

 

As far as charitable donations go, if you keep the numbers on the low side the IRS is not likely to get interested. It also helps to use tax software such as TurboTax or Tax Act and file electronically. Just my opinion, since I am neither a CPA nor attorney and am barely able to add and subtract.

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Yes, getting back to the question of what does it cost the maker to make a single instrument, one might speculate on what the importance is for calculating that number. 

 

I don't think it has any importance in determining your tax burden, since that is determined in more generalized numbers of total revenue and total expenses for a given year.

 

But getting that number might be helpful for other things, the most important of which might be whether you can call yourself a business at all or are just working as a hobbyist. 

 

Clearly, if you can regard yourself as a business, then there are all kinds of deductions you can take for running a business.  Those $3,000 Stradivari books don't seem quite as expensive if they're a business expense.  On the other hand, there's no write-off for them if you're a hobbyist.

 

I would think that if you never have turned a profit in your violin making and never expect to, then I would bet that the taxing entities would regard you not as a business, but as a hobbyist.  But that is just my assumption, and I welcome corrections if that's wrong.

 

Knowing your approximate cost of producing one violin could help in deciding whether you'd ever be more than a hobbyist and be a business.  Getting that cost would tell you how many violins you would have to make a year at the price your instruments currently command in order to make a profit.  If it's clear that you will never reach that number, then calling yourself a business might be risky.

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I wonder if anyone remembers the big brouhaha of about 30 years ago, when the courts determined that players could depreciate their instruments even though they were going up in value.  The IRS didn't like that.  At least that's the way I remember it.

 

I believe that was concerning a Tourte bow owned by a 'cellist on the East Coast.  If I remember correctly, the decision of the court partially hinged on the definition of "tool" found in Webster's.  

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I believe the IRS comes out even eventually in such a case, because if a musician zeros out his equipment when he goes to sell it he pays for it at that time.  An illustration would be if I buy a violin for $10,000 and sell it two years later for $12,000, I would pay taxes on $2,000 profit.  If I have depreciated the same violin to $8,000—taking advantage of that depreciation for two years worth of taxes— I'd pay on $4,000 profit.

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Well Gang, I just got the lowdown from my tax guy on donation of a hand made item. I donated a set of cello pegs to a music festival in France so I had the same situation as Michael.

 

Basically you get to deduct nothing. You've already deducted the cost of the materials, as someone pointed out, and you can't deduct time spent making the item so that about  covers it. So even if Monet donated a painting to the Van Gogh Ear Hospital, he could only deduct the cost of the frame, providing he provided one. :( 

 

One might think that any monetary donation is an act of donating one's time since that is what they pay you for --but that's not how it works for self employed craftsmen..  

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Everyone is closing their eyes, sticking their fingers in their ears and saying "la la la la, I can't hear you, lalalalalala" :)

 

I don't think that's necessarily happening, even among the strongest believers in the fair market value.  I think everyone understands that the tax code isn't necessarily rational and doesn't need to be to be the law.

 

But I wouldn't blame someone for wanting more details, like where in the US tax code is this issue dealt with and exactly what is stated there.  In other words, how did Meyerfittings' tax guy arrive at his/her position?

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I read the tax code on artist donations but it only addressed art made by someone else not the artist themselves. Here is an article by a CPA who backs up what my own CPA told me.

Seems the deduction was open season till Richard Nixon tried to deduct dome gigantic amount off his taxes for his presidential papers.

It figures.

Nixon's the One!

 

http://www.freelancetaxation.com/can-i-deduct-my-art-when-i-contribute-it

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Seems the deduction was open season till Richard Nixon tried to deduct dome gigantic amount off his taxes for his presidential papers.

It figures.

Nixon's the One!

 

http://www.freelancetaxation.com/can-i-deduct-my-art-when-i-contribute-it

IMHO they should have charged him for storing such materials, but of course he was good at avoiding charges..... :lol: ["Pardon me"  (Chevy Chase, speaking to Gerald Ford)]

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I read the tax code on artist donations but it only addressed art made by someone else not the artist themselves. Here is an article by a CPA who backs up what my own CPA told me.

Seems the deduction was open season till Richard Nixon tried to deduct dome gigantic amount off his taxes for his presidential papers.

It figures.

Nixon's the One!

 

http://www.freelancetaxation.com/can-i-deduct-my-art-when-i-contribute-it

 

 

And the citation includes this: "How did this come to be? Perhaps this story is apocryphal but my understanding is that when Richard Nixon received a contribution value of more than one million dollars for the contribution of his manuscripts to a library,...."  (Boldface my doing.)

 

Apochyphal basis of tax-code, quite an idea!  It sounds like violin-makers talking about varnish.  On the other hand, many of us have been puzzling about taxes for several years now.  I think we can come up with good stories, too.  :)

 

I think the fundamental idea is correct -- that you cannot deduct the same thing twice.  So if you are trying to do that, then that's something to worry about.  And declaring nothing is certainly a safe solution. 

A couple of possible deductive alternatives that I would look into would be: (1) advertising, or (2) taking the item out of inventory for personal use, then declaring the deduction.  The 2nd possibility raises the issue of inventory, which is another can of worms that many folks involved in handmade items avoid, and probably rightfully so.

 

It could very well turn out that the deduction is not worth the effort or risk; you don't save the full-dollar amount on your taxes in any event.  You simply reduce your declared income by that amount, then the tax-savings is somewhere between 0% and, say 25% of the donated item, depending on your final, real, tax-rate.

 

Probably the best solution, financially, is to sell your fiddle, or painting, or manuscript to someone else, then let them donate it and worry about the deduction.

 

But the possibly the best solution, karma-ly, is, if you want to donate something you made, enjoy the good will and not worry about it.

 

I've learned things here.  Thanks, all.

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