Let’s say you operate a shipping business and this year you purchased a new delivery truck. When it comes
time to file your business taxes you want to write off the cost of this vehicle
as a business expense. However, the IRS won’t let you deduct the full cost of the vehicle in one year.
Instead, you can deduct a portion of the cost of the vehicle for multiple years by claiming a depreciation
deduction and filing it on IRS Form 4562: Depreciation and
Amortization.
What Is IRS Form 4562?
IRS Form 4562 allows you to deduct a portion of the cost of a business property by claiming a
depreciation deduction. Depending on the class of the property you are claiming, you must claim a
depreciation deduction on IRS Form 4562 over a period of years in order to receive the full deduction.
IRS Form 4562 is submitted with your federal income tax return every year that you are claiming the
deduction.
IRS Form 4562 is designed to allow business owners to claim a deduction for both depreciation and
amortization. These tax write-offs can reduce your tax burden. Most business equipment and property can be
claimed on IRS Form 4562, given that it has a determinable “useful life”—meaning it’s something that
naturally wears out or loses its value. The IRS separates different types of property into classes based
on how many years you must claim a depreciation deduction before you can recover the full cost of the
property.
For example, you must claim a business vehicle on IRS Form 4562 for five years in order to receive the
full deduction. Other items you can claim a depreciation deduction for include buildings, furniture,
machinery, copyrights, and patents. You cannot depreciate any property used for personal reasons.
Read on to understand how depreciation and amortization work, how to accurately depreciate your business
properties, and how to fill out and file IRS Form 4562. Knowing how to handle depreciation and
amortization will help guarantee you maximize your business deductions come tax season.
IRS Form 4562: Depreciation and Amortization
In the instructions for how to fill out IRS Form 4562, the IRS defines depreciation as the following:
“Depreciation is the annual deduction that allows you to recover the cost or other basis of
your business or investment property over a certain number of years. Depreciation starts when you first
use the property in your business or for the production of income. It ends when you either take the
property out of service, deduct all your depreciable cost or basis, or no longer use the property in your
business or for the production of income.”
Here is the IRS definition of amortization:
“Amortization is similar to the straight line method of depreciation in that an annual
deduction is allowed to recover certain costs over a fixed time period. You can amortize such items as the
costs of
starting a business
, goodwill, and certain other intangibles.”
To accurately fill out IRS Form 4562, you must know the depreciation or amortization schedule for the item you wish to write off. The IRS separates different types of property into two
different depreciation systems: a general depreciation system (GDS) and an alternative depreciation system
(ADS). Both systems are part of the U.S. tax depreciation system known as the Modified Accelerated Cost
Recovery System (MACRS).
In most cases, you will use the GDS to determine the recovery period of different types of property. The
ADS only applies to listed properties used 50% or less for business purposes, property located outside the
U.S., certain types of farming equipment, and certain types of tax-exempt property. The ADS sets the
depreciation amount as the same each year (except for the first and last year of depreciation), and
extends the amount of years you can depreciate an asset.
For a full breakdown of property classes and how the IRS defines their useful lives, refer to IRS
Publication 946. Once you know the useful life of a property, you would determine the annual
depreciation deduction by multiplying the property’s cost basis by the percentage of business/investment
use.
One other aspect of depreciation we should mention is a Section 179 election. According to the IRS, “Section 179 property is
property that you acquire by purchase for use in the active conduct of your trade or business.” Examples
of Section 179 property include tangible property, including cellular telephones, similar
telecommunications equipment, and air conditioning or heating units (for example, portable air
conditioners or heaters).
The difference between Section 179 property and other property is that you can deduct the full price of
this property at one time instead of gradually writing it off over several years. There is a limit on the
amount of purchases eligible for this deduction. In 2018 that limit was $1 million.
Who Needs to File IRS Form 4562?
Business owners must file IRS Form 4562 if they are claiming any of the following:
- Depreciation for property placed in service during the tax year for which you’ll be filing.
- A section 179 expense deduction (which may include a carryover from a previous year).
- Depreciation on any vehicle or other listed property (regardless of when it was placed in service).
-
A deduction for any vehicle reported on a form other than
Schedule C
: Profit or Loss From Business, or Schedule
C-EZ: Net Profit From Business.
-
Any depreciation on a corporate income tax return (other than Form 1120S).
- Amortization of costs that began during the tax year for which you’ll be filing.
Note that employees deducting job-related vehicle expenses using either the standard mileage rate or
actual expenses must use Form 2106: Employee Business Expenses, or Form 2106-EZ:
Unreimbursed Employee Business Expenses.
You must also file a separate IRS Form 4562 for each business or activity on your return for which IRS
Form 4562 is required.
Where to File IRS Form 4562
IRS Form 4562 should be included as part of your annual business tax return. You need to file it for the
same year you bought the property you wish to depreciate or amortize.
IRS Form 4562 Instructions: How to File
There are six sections to IRS Form 4562. Let’s go step-by-step and explain how to fill out each
section.
IRS Form 4562: Part 1
In Part 1 of IRS Form 4562, you can elect to deduct the cost of a Section 179 property that you placed in
service during the previous tax year. Here is the information to put in each line:
- Line 1: Put the amount of the Section 179 deduction you are claiming (Note: In
2018 the maximum you could claim was $1 million).
- Line 2: Enter the total cost of all section 179 property you placed in service
during the tax year (including the total cost of qualified real property that you elect to treat as
section 179 property).
- Line 3: Enter the smaller amount from Line 1 or Line 2 on Line 3.
- Line 4: Subtract the number in Line 2 from the number in Line 3 and enter that
number in Line 4 (if the number is less than zero, select zero).
- Line 5: Subtract the number in Line 1 from the number in Line 4 and enter that
amount in Line 5. Note that if Line 5 is zero, you cannot elect to expense any section 179 property. In
this case, skip Lines 6 through 11 and enter zero on Line 12.
- Line 6:
- A: Enter a brief description of the property you elect to expense.
- B: Enter the cost of the property.
- C: Enter the amount you elect to expense. You can depreciate the amount
you do not expense.
- Line 7: Enter the amount that you elected to expense for listed property on
Line 29 here (more on this later).
- Line 8: Sum of amounts in Line 6(c) and Line 7.
- Line 9: Smaller amount from Lines 5 and 8.
- Line 10: Carryover of disallowed deduction from your previous year’s filing is
the amount of section 179 property, if any, you elected to expense in previous years that was not
allowed as a deduction because of the business income limitation.
- Line 11: Enter the smaller of business income based on your business entity
type. For example, a
partnership
would enter the smaller of Line 5 or the
partnership’s total items of income and expense described in section 702(a) from any trade or business
the partnership actively conducted.
- Line 12: The sum of Lines 9 and 10. However, the amount cannot exceed the
amount given in Line 11.
- Line 13: The sum of Lines 9 and 10, minus the number in Line 12.
IRS Form 4562: Part 2
In Part 2 of IRS Form 4562 you can claim an additional deduction known as the special depreciation allowance. This deduction only applies for the
first year that you use the property for your business, and is a 50% allowance (certain property acquired
after September 27, 2017, is eligible for a 100% deduction). This election applies automatically unless
you choose not to take it. To not elect the special depreciation, you must attach a statement to your
return indicating the property for which you do not wish to have the deduction apply to.
IRS Form 4562: Part 3
Part 3 of IRS Form 4562 is where you’ll list all properties that fall under GDS. In Line 17, enter the
deduction for assets placed in service during the year for which you’re filing. Then you will enter
details about the assets placed in service on lines 19(a) through 19(i) based on the property class
provided by the IRS. Here is what you would enter in each line:
- A: Property class (i.e. three-year property, five-year property).
- B: Month and year the property was placed in service.
- C: The cost or another basis on which depreciation is figured.
- D: The recovery period.
- E: The appropriate depreciation convention (i.e. a tax rule that impacts the
depreciation convention).
- F: The depreciation method (an even deduction, accelerated deduction, etc.).
- G: The deduction amount.
In Section C of Part 3, you can also list assets placed in service during 2018 using the alternative
depreciation system (ADS).
IRS Form 4562: Part 4
Despite their order, we recommend completing Part 5 of IRS Form 4562 before Part 4. This is because Part
4 is essentially a recap of Parts 1 through 3, but also requires a number you will input on Line 28 of
Part 5. Line 22 is the most important entry in Part 4, as it is the amount of depreciation that is tax
deductible. Whatever you input on Line 22 will go into your income tax return.
IRS Form 4562: Part 5
Part 5 is the largest section of IRS Form 4562. This is
where you will claim deductions for listed properties. The IRS defines listed properties as the following:
- Passenger automobiles weighing 6,000 pounds or less.
-
Any other property used for transportation if the nature of the property lends itself to personal use,
such as motorcycles, pick-up trucks, sport utility vehicles, etc.
-
Any property used for entertainment or recreational purposes (such as photographic, phonographic,
communication, and video recording equipment).
- Computers or peripheral equipment placed in service before 2018.
Exceptions to these rules include:
-
Photographic, phonographic, communication, or video equipment used exclusively in your trade or
business or at your regular business establishment.
-
Any computer or peripheral equipment used exclusively at a regular business establishment and owned or
leased by the person operating the establishment.
-
An ambulance, hearse, or vehicle used for transporting persons or property for compensation or hire.
-
Any truck or van placed in service after July 6, 2003, that is a qualified nonpersonal use vehicle.
In Section A of Part 5, you’ll enter the depreciation allowance for listed property. The information you
must provide includes:
- A: Property type.
- B: Date placed in service.
- C: Portion of business usage (listed as a percentage).
- D: Cost basis.
- E: Basis of depreciation (Determined by multiplying the amount in Column D by
the amount in Column C).
- F: The recovery period.
- G: The method or convention for depreciation.
- H: Depreciation deduction.
- I: Any Section 179 deductions.
Also take note of questions 24a and 24b. These questions ask if you have evidence to support the
deductions you’re claiming, and if the evidence is written. In other words, you need to be able to prove
the deductions you are claiming.
Section B is used by
Schedule C
, partners, or other “more than 5% owners” to
provide additional information on vehicles used for business purposes. There is space to provide
information for up to six vehicles. Questions asked include the total business miles driven by a vehicle
during the year, and whether or not the vehicle was also used for personal reasons.
Finally, Section C is designed for employers to provide information on the vehicles they provide to their
employees. This section is comprised of five yes-or-no questions, and can be skipped if you do not have
any employees.
IRS Form 4562: Part 6
IRS Form 4562’s Part 6 is for claiming deductions on
costs you amortize. Items eligible for amortization include costs of
starting a business
, goodwill, and certain other intangibles (like patents or copyrights).
To fill out this section, you’ll need to include a description of the amortized costs, date the
amortization began, the amortizable amount, code section, amortization period, and amortization amount for
the year. You will enter this information for amortized costs that began in the tax year for which you’re
filing on Line 42, and for costs that began before this year on Line 43.
When to File IRS Form 4562
IRS Form 4562 must be submitted as an attachment to your federal income tax return, and is due by April
15 for the previous tax year.
IRS Form 4562 and Depreciation
Filing IRS Form 4562 allows you to claim deductions for the properties you use to run your business.
However, figuring out how to depreciate your assets can be fairly complex.
