An Overview of IRS Form 4562 Depreciation and Amortization

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December 13, 2012 — 5,033 views  
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The purpose of Form 4562, “Depreciation and Amortization,” is to report the deduction for depreciation on property entered into service during the tax year, amortization of certain costs incurred during the tax year, Section 179 expense, Section 179 carryovers, 50 percent bonus depreciation, and depreciation on vehicles and other listed property. Form 4562 contains six parts.

Part I deals with the expensing of Section 179 property. Section 179 property includes personal property, vehicles weighing more than 6,000 pounds, computers, “off-the-shelf” software, and office furniture and equipment. If property is attached to a building but not considered part of the building’s structure, it qualifies for the deduction. Section 179 property must have been purchased and placed into use during the tax year. For property that is used for personal and business purposes, the percentage of time the property is used in the business determines the cost basis upon which depreciation is calculated.

For 2012, the Section 179 deduction limitation is $139,000. Any amount of property costs that exceed $560,000 will reduce the deduction. For example, for a piece of equipment costing $570,000, the Section 179 deduction will be $129,000.

Often called bonus depreciation, the “Special Depreciation Allowance” is entered in Part II of Form 4562. Bonus depreciation is in addition to the Section 179 deduction, is calculated after deducting the Section 179 expense, and is allowed only on purchased new property during the first year of use. Used property that is new to the business does not qualify. The calculation is based on 50 percent of the remaining basis amount after deducting Section 179 expense.

Part III of Form 4562 reports the depreciation on property placed into service during the current tax year. In Part III, the preparer enters the Modified Accelerated Cost Recovery System, “MACRS,” depreciation calculations, using the appropriate MACRS recovery period for each respective property, or the appropriate Alternative Depreciation System, “ADS,” calculations. Depreciation is calculated on the cost basis remaining after subtracting the Section 179 and bonus depreciation deductions. Depreciation on property purchased in previous years is also entered, in total, in Part III. A summary of entries is included in Part IV, concluding the first page of Form 4562.

Part V has three sections and deals with “Listed Property.” Listed property includes passenger vehicles weighing 6,000 pounds or less. For passenger vehicles that are listed property, there are specific limitations on the deduction of depreciation, bonus depreciation and Section 179 expense. If the standard mileage allowance is claimed in lieu of depreciation, the tax preparer must complete a portion of Section A, all of Section B and applicable portions of Section C. This information is required irrespective of the acquisition date of the vehicle. Unless owned property is used exclusively at a business location, computers and entertainment equipment are also considered listed property. If any listed property is used 50 percent or less for business purposes, the taxpayer cannot take Section 179 and bonus depreciation deductions.

Amortizable costs are reported in Part VI of Form 4562. Amortizable costs include business start-up expenses, lease acquisition costs, research expenses, bond premiums, goodwill, patents, copyrights and other intangible assets.

For more detailed information on the depreciation, Section 179 and bonus depreciation deductions, refer to Publication 946, “How to Depreciate Property.” Refer also to the detailed instructions for Form 4562.

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