What is the purpose of Form 4562?
If you’ve made a new equipment purchase for your business over the past year, you’re probably looking to report that purchase on your taxes to make the most of any deductions you can get.
That’s where IRS Tax Form 4562 comes in.
Form 4562, Depreciation and Amortization, allows you to– surprise– record the depreciation and amortization of property you’ve purchased for your business.
Here’s the complete Form with all 6 parts, starting with page 1:
And page 2 with parts 5 and 6:
What property can I deduct on my business taxes?
When you purchase a piece of equipment or property to use for your business, you can deduct a portion of the value depending on the item by claiming a depreciation deduction on Form 4562.
In addition to tangible assets such as a building, rental property, or piece of equipment, you can even claim a deduction for intangible assets such as a copyright or patent.
And in the case of Section 179 property, reserved for equipment used continuously by the business in a particular tax year such as vehicles or various machines, you can deduct up to 100% of the value.
How do depreciation and amortization work?
If you’re new to business equipment and property purchases, it’s important to understand how both depreciation and amortization work.
Let’s start with depreciation.
When you make a large equipment purchase, such as a set of delivery vans, for your business, the value of those assets lessens or “depreciates” each year.
However, much those assets depreciated in value for that year is how much you can write off on your taxes.
Here’s how to calculate depreciation of an asset:
To learn more about depreciation, read out guide on The Ins and Outs of Depreciation.
Amortization works similarly, though it’s used to calculate the depreciation value of an intangible asset like intellectual property as we talked about a moment ago such as a copyright, patent, or registered trademark. However, that intangible asset can also be your list of existing clients as well.
Who should file Tax Form 4562?
So, now that you know more about how Form 4562 and its parts function, do you need to file Form 4562?
First, you only need to file Form 4562 if you’re deducting the depreciation of an asset on your taxes for a particular tax year. If you’re not, you don’t have to file Form 4562.
If you’re still unsure what you can deduct, this doesn’t include short-lived assets such as small office supply purchases or inventory, but rather assets that will have a multi-year life such as vehicles, property, and machines.
Every year that you deduct depreciation of that asset, you’re required to file Form 4562.
Do I need to fill out Form 4562?
You’ll need to fill out Form 4562 if you’re doing any of the below:
- Deducting depreciation for property, vehicles, or any other large used throughout that tax year
- A deduction for any vehicle reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040)
- Any depreciation on a corporate income tax return other than Form 1120S (Income Tax Return for an S Corporation)
- A section 179 expense deduction
- Amortization of costs during that tax year
The only way to know for sure if you need to fill out form 4562 is to consult a tax professional, but this will get you started in the right direction.
What do I need to fill out Form 4562?
If you know you need to fill out Form 4562, you’ll need to gather the following to complete the form:
- Your total reporting income for that tax year
- The asset’s price
- The receipt as proof of purchase for the asset
That’s it! Also, keep in mind that if you’re using a particular asset for personal use a percentage of the time, you’ll need the estimated percentage of how often you use that asset for business use and any possible data showing use for that asset.
Form 4562 Instructions: How to fill out IRS Form 4562
Now that you’ve gathered everything you need, it’s time to fill out Form 4562.
As IRS forms go, it’s on the shorter end, so it should be a smooth ride to completing it.
Before we break down each section to help you fill out Form 4562, it’s important to mention that it’s worth considering getting a tax professional to help you fill out IRS Form 4562, just to be safe.
With that said, let’s get started with Part I of the form 4562 instructions:
Part I: Property information
Part I is arguably the largest, if you consider Part IV several parts, so it will likely take the most time to fill out.
However, keep in mind that this only applies if you’re electing to expense property under Section 179 .
Let’s take it line-by-line:
- Line 1: The 2019 tax year maximum is $1,000,000.
- Lines 4+5: Only applicable if the asset is worth over $2,500,000.
- Line 6: List the assets you’re depreciating.
- Line 7: If you’re not sure what listed property is, see Part V before moving on.
- Line 10: If you wrote off a portion of said asset last year, enter the remaining amount not deducted from last year here.
- Line 11: So long as the asset is below $1,000,000, this is your net earnings for the year.
- Line 12: Put down the amount you’re deducting here.
- Line 13: This is the depreciation amount carrying over to the next tax year, which is calculated by subtracting line 11 from line 12.
Part II: Special depreciation allowance
Part II allows you to write off extra depreciation on certain property. However, it doesn’t apply to most.
Assets that qualify for Part II include any green asset you purchased for your business or if you own and operate a farm and the associated assets.
If you think you might qualify for this one, it’s best to contact a CPA to find out for sure and for help filling it out.
Part III: MACRS depreciation
MACRS stands for Modified Accelerated Cost Recovery System, a system used to determine the exact period of time you depreciate an asset.
It only applies if you’re not planning on writing off everything you can now with Section 179. So, if you plan on utilizing that, you can skip this section.
IRS Publication 946 has more info on how MACRS works. However, like the previous section know that this part of the form can be complex, so it’s best to consult a professional.
Here’s the breakdown for each line:
- Line 17: List depreciation you’re carrying over from previous tax years.
- Line 18: Purchase multiple similar assets that you’re deducting depreciation on at the same time such as a fleet of delivery vehicles? You can put them together into a group here.
- Line 19 (All): Enter information on the items that you’re deducting depreciation on here.
Part IV: Summary
If you skipped at any point in this article or reviewed Form 4562 Instructions in its entirety, you might find it odd that the IRS placed the summary right smack in the middle.
We don’t have an answer for that.
However! We can help you fill this section out so you can move on.
Here’s a breakdown:
- Line 21: The value of the property goes here. As mentioned before, if you’re unsure what listed property is and you used the property you’re deducting depreciation on partially for personal use, see Part V before finishing this section.
- Line 22: Your total deduction goes here. However, if your business is either an S corp or partnership, the total deduction on each individual’s return and not the business.
- Line 23: This line likely doesn’t apply. However, if you’re deducting the cost of acquiring or producing inventory, then consult a CPA on Section 263a and about what to put here.
Part V: Listed property
If you were directed to this section from an earlier one, we understand the pain you’re feeling right now. Form 4562 is structured a bit odd, at least that it mentions listed property at several points before having you calculate it.
In any case, in this section, you’re going to jot down all the necessary information if and only if you use the property you’re deducting partially for personal use.
For example, if you purchased a work van that you use during the day for business use then to pick up your kids from school in the afternoon, this applies.
Part V is broken up into 3 sections, which we’ll take one at a time:
Section A
- Line 25:
- If your property is both listed and qualified, you can claim an extra deduction. See Line 14.
- Line 26:
- Assets you use more frequently for business than for personal use should be listed here.
- Line 27:
- Assets you use more frequently for personal use than for your business should be listed here.
Section B
- Lines 30-37: List out the mileage of business vehicles. However, if you have employees who use the vehicles for work purposes only, you may not need to fill this out. See the next section to find out for sure.
Section C
- Lines 37-41: What really should have just been an intro to Section B is placed here. This set of questions will help you figure out if you need to fill out Section B.
Part VI: Amortization
Finally, the final section (you’re almost there!): amortization.
Fortunately, if you’re not amortizing any assets, you can skip this section entirely.
If you are, this is another delicate section that requires the hands of a professional to fill out correctly.
It’s difficult to calculate the value of intangible assets. Because amortization deals with exactly that, this section can often be impossible to do without the help of a CPA. So, consider getting one or a tax advisor for help completing the section accurately.
More tax guides
Putting together your taxes for this year?
Check out our other tax guides to make sure you’re crossing you’re making the most of this tax season:
