Depreciation and Form 4562Tax Professionals' Resource
January 17, 2013 — 1,475 views
Depreciation allows a business to recover the cost of a piece of equipment through a yearly tax deduction. This deduction can be claimed on IRS Form 4562, titled Depreciation and Amortization. The IRS publishes estimates for the useful life of each piece of business equipment purchased, and the amount of the yearly deduction will be based on these estimates.
Form 4562 Page One
Part one concerns what the IRS calls Section 179 property. This includes personal property, vehicles that weigh in excess of 6000 pounds, office equipment, furniture and software. Even property that may be attached to a building but is not part of the building's structure will qualify for the depreciation deduction. Any property that is used for both business and personal purposes will be depreciated according to the percentage of time the property is expressly used for business.
Part two deals with what is deemed bonus depreciation. This is depreciation that is allowed on newly purchased equipment during the first year only. First, the Section 179 expense is deducted, and then a calculation is made based upon the remaining deductible amount.
Part three calculates depreciation on any property that was actually put in use during the current year. A calculation called the modified accelerated cost recovery system is used to figure this amount. Depreciation from equipment and property that was placed into service in any previous years is also totaled and entered here.
Part four merely summarizes all of the above entries and this concludes page one of Form 4562.
Form 4562 Page 2
Part five consists of five separate sections concerning listed property. This grouping lists passenger vehicles that weigh 6000 pounds or less. The depreciation of passenger vehicles is specifically limited. Even if the standard mileage allowance is to be used instead of depreciation, bonus depreciation, and Section 179 expenses, portions of Sections A, B and C need to be completed. Again, if the listed property is used for business purposes less than 50 percent of the time, it cannot be depreciated.
Part six deals with amortized expenses. These can be copyrights, goodwill estimates, and expenses for research, acquisition costs and general start-up expenses.
Tax professionals are encouraged to advise clients to save all copies of Form 4562 each year, since the current year's depreciation activity will be calculated based on the deductions claimed for the previous year. Special attention should also be given to any property that is used for both business and personal activities.