An all-too-frequent conversation between me and my wife goes something like this; “Is that a new coat, how much was it?” Her reply, “I got it in the sale. It was originally £300.” Me; “So how much was it then?” Her; “Guess how much I saved?” Me: “Well, I’m guessing if it cost you anything above zero, then you didn’t save anything. You spent it.” Of course, we never have the conversation the other way around… because all my deliveries come to the studio! Whilst this story may resonate with many of you reading, it does feel a little like the line trotted out when people are trying to justify a new piece of equipment for the studio. “How much is it?” The reply, “It doesn’t matter. I can write it off against tax.”

They say the easiest kind of lie is a half-truth, and the “we can write it off against tax” is one such myth. In this article, we aim to explain why and how you should be careful about using it to justify spending money on your studio.

Tax Write-Offs

What many people fail to appreciate with the ‘Tax Write Off’ myth is that if it is going to apply at all (check your region's tax laws), then it can only work if you are making a profit. A little simplified explanation;

• You make $100,000 a year as a business (That’s probably not true, but this is to make the maths easy.)

• If your expenses are less than $100,000, say $80,000, then the money left is the profit. In this case, $20,000

• That’s the amount of money that will be taxed in most regions. Let’s say the tax is 40%. Then the amount of tax payable is $8000.

• However, if you spent some more money on the business, let’s say $15,000 on studio gear, you now have a tax liability of $5000. At 40% that’s a tax burden of $2000. In this case, the $15,000 spent has reduced your tax liability.

• However, and this is where people get tripped up, if your business turns over $100,000 and your expenses are $100,000, then there is no profit. This means two things: no tax liability, but more importantly, there’s no profit to potentially spend to acquire gear either.

To put it simply, you need to be making a profit. For two reasons. The first is to be able to take advantage of reducing your tax liability, BUT even more importantly, you can’t buy something if you don’t have the money.

The Details Matter

Of course, plenty of business owners have a period, often when starting up, of making no profit. In some cases, they even get tax rebates. However, that can’t last forever, it raises red flags for several people, one of them being the tax authorities.

At the heart of the matter lies the profitability conundrum: the ability to claim studio gear purchases as tax deductions is contingent upon the profitability of your business. Whether you're based in London or New York or operating from remote corners of the globe, the principle remains the same. However, the devil lies in the details, as the intricacies of tax regulations vary significantly from one region to another. Our advice, before embarking on a shopping spree for studio equipment, it's crucial to assess the financial health of your business and seek professional advice from qualified accountants familiar with the tax laws in your region.

This is why. While we can talk around the general principles, what may qualify as a deductible expense in one country could be subject to different rules or interpretations elsewhere. Hence, before making any significant investments in studio gear, conducting thorough research or consulting with tax advisors who can provide tailored guidance based on your specific circumstances and geographic location is imperative.

Purchasing Outright Might Not Be The Best Thing To Do

While outright purchasing studio equipment may seem like the most straightforward option, exploring alternative strategies that offer greater flexibility and tax efficiency is essential. One such option is leasing, which allows you to acquire the necessary equipment without a hefty upfront investment. Leasing arrangements often come with built-in tax benefits, making them an attractive option for production professionals seeking to optimise their financial strategies. In many cases, when it comes to large ticket items for your business, there can be little advantage to ownership. Leasing is often a better option. Our industry is worn down by the subscription train, but don’t confuse leasing a large capital investment with a software subscription. For many, once you do it, you will never go back to outright ownership.

Secondly, before committing to any large purchases, there may be a third way. In many cases, renting studio equipment on a short-term basis may be a more cost-effective solution, especially for projects with fluctuating demand or uncertain future requirements. By embracing a rental model, audio professionals can access the latest equipment without the long-term commitment or financial risk associated with ownership. Even better, you can often put it down to a project expense, rather than an overhead.

It wasn’t so long ago that when an album was being recorded in a studio, things like high end reverb units or other gear needed for the project were rented in and charged to the client.

In navigating the complexities of studio gear acquisitions and tax implications, the guidance of qualified professionals cannot be overstated. In the name of all that is sacred, social media and forums are not the place to get this kind of advice. It’s great for pictures of cats and air fryer recipes but not for serious advice. Invest in professional expert advice from a qualified tax specialist.

This is where your accountant can offer invaluable insights and strategic advice tailored to your specific needs and objectives. Before making any significant financial decisions, it's essential to leverage their expertise and seek their counsel to check you have the profit to spend and to maximise tax-saving opportunities.

The Myth

The myth of writing off studio gear purchases against tax is a complex and often misunderstood concept. While legitimate business expenses are deductible against taxable income, the feasibility of claiming studio equipment as tax deductions requires a nuanced understanding of your regional tax laws, strategic financial planning, and professional guidance.

Even better, by considering alternative acquisition strategies such as leasing and rental options and consulting with qualified accountants, music and post-production professionals can optimise their financial strategies and position themselves for long-term success in an increasingly competitive market.

Co-written by Russ Hughes and Mike Thornton