Every business has valuable assets, and you can claim the costs of these assets to reduce your tax bill for several years. The two processes for deducting these costs are depreciation (for tangible assets) and amortization (for intangible assets) using IRS Form 4562.
This article explains how to use Form 4562 to calculate and claim depreciation and amortization deductions for the year.
- IRS Form 4562 is used to claim deductions for depreciation and amortization for business assets.
- You can take yearly deductions for the cost of tangible assets (like machinery or furniture) and amortize intangible assets (like patents and trademarks) using this form.
- This form is also used for section 179 expense deductions and special (bonus) depreciation for the year.
What Is IRS Form 4562 Used for?
IRS Form 4562 is used to claim deductions for depreciation and amortization. It’s also used to expense certain types of property using an accelerated depreciation deduction under section 179 of the Internal Revenue Code.
A third use for this form is to give information on business use of vehicles and other types of property, called “listed property,” that can be used for both business and personal purposes.
Listed property is property that can be used for both business and personal purposes. Passenger vehicles are the most common kind, but other kinds of transportation vehicles are also included. Only business use of a vehicle is deductible—not personal use or commuting. To take depreciation deductions on listed property, you must be able to show that the vehicle is used more than 50% of the time for business purposes.
How Depreciation and Amortization Work
Depreciation and amortization are special types of business expenses that must be deducted over several years instead of a one-time deduction. These expenses apply to major property that a business owns and uses over several years.
Depreciation is the process used for tangible assets with physical form, like vehicles, equipment, furniture, and buildings. Amortization, meanwhile, is used for intangible assets (those without physical form) like patents, trademarks, trade secrets, and certain types of software.
The calculation is the same for both depreciation and amortization, as shown below:
- Find the value of the property—its basis.
- Find the number of years of its useful life.
- For depreciated property, the life of the asset differs depending on the type of the asset. For amortized property, the is usually 15 years.
- Divide the basis by the number of years of useful life to get the amount of depreciation or amortization for each year. This process is called “straight-line depreciation,” dividing the total into equal amounts for each year.
Some terms in the calculation are different for tax and accounting purposes, but they mean the same thing. “Recovery period” is used for taxes while “useful life” is used for accounting. The term “property” is used for taxes and “assets” for accounting.
Accelerated Depreciation on Form 4562
Your small business may be able to accelerate depreciation deductions, increasing the deduction in earlier years if you meet certain requirements.
MACRs Depreciation System
Modified accelerated cost recovery system (MACRS) is the accelerated depreciation process used to recover the cost of business and investment property. It includes two systems—a general depreciation system (GDS) and an alternative depreciation system (ADS). You generally use the GDS process in most cases, while using ADS for specific types of business property.
MACRS allows three depreciation methods: a straight-line method with equal deductions for each year of the recovery period, and two accelerated depreciation methods to allow property to be depreciated faster.
Section 179 Deductions
A section 179 deduction is an additional depreciation deduction for all or part of depreciation in the first year you own and use some types of business property. It’s only available for tangible property, like machinery and equipment, computer software, and some listed property, but not buildings or land.
You can’t use a section 179 deduction for amortized property.
Section 179 deductions for eligible property are limited to $1,040,000, with an overall maximum of $2,590,000 for all section 179 property; the maximum for SUVs is $25,900.
Bonus (Special) Depreciation
In addition to the section 179 deduction, you may also be able to take a special (bonus) 100% first-year depreciation allowance. This allowance applies to new and used business assets with a recovery period of 20 years or less, including machinery, equipment, computers, appliances, and furniture.
How to Fill Out Form 4562
Form 4562 is divided into several sections, so you can select the ones that apply to your business. In each section, you’ll need to enter information to calculate the amount of depreciation or amortization for that section.
- Part I: This is the section 179 deduction, including section 179 deductions for the listed property.
- Part II: This section is for the special (bonus) depreciation allowance. Listed property isn’t eligible for this depreciation deduction.
- Part III: This is for MACRS depreciation (not including listed property). In this section, you must separate types of property based on the recovery period and depreciation method. Depreciation on real estate rentals is included.
- Part IV: Totals Parts I, II, and III.
- Part V: This section is for listed property. You’ll need information about the type of property, date placed in service, business investment use, basis, recovery period, depreciation method, and section 179 cost. You must also include information on your total miles driven for each vehicle, separating out total business or investment miles driven, total commuting, and personal miles driven.
- Part VI: This section is for amortization. You must list the description of costs, date amortization begins, amortization costs, amortization period or percentage, and amortization deduction for the year.
If the number of assets in a category is greater than the lines on Form 4562, you can include a statement or spreadsheet showing each item of property and the required information.
The process of completing Form 4562 is complicated, with many qualifications and restrictions. Get help from a licensed tax professional to make sure you get the maximum allowable deduction.
How to File Form 4562
Most small businesses report their income taxes on Schedule C, as part of their personal tax returns on Form 1040. To report depreciation and amortization for your business, you’ll need to file Form 4562 along with this form and include information from Form 4562 on Schedule C, the tax form for sole proprietors and self-employed business owners.
Partners in partnerships and members (owners) of multiple-member limited liability companies receive a Schedule K-1, showing their share of income, credits, and deductions including depreciation and amortization. They must carry over information from this form on depreciation, amortization, listed property, and special deductions to their personal tax return (Form 1040).
What’s the Difference Between Depreciation and Amortization?
Depreciation and amortization are processes used to spread the cost of business assets over a number of years, with part of the total deducted in each year. Each year, you can deduct part of the cost until it’s fully recovered.
Depreciation is used to recover the cost of tangible property, like machinery, equipment, furniture, buildings, and improvements. Amortization is used to recover the cost of intangible property like patents, trademarks, and trade secrets. The amortization process is usually spread over 15 years.
Do I Need to Fill Out Form 4562?
You will need to fill out and file IRS Form 4562 if your small business has long-term assets and you want to claim a deduction for depreciation or amortization for the cost of these assets for the year. You can depreciate tangible assets like equipment and furniture, and amortize intangible assets like patents and trade secrets, with different processes for each.
The process for completing the form involves finding the cost of each type of property, the number of years over which you can spread out the deductions for that type of asset, and what depreciation or amortization method you are using. Information from Form 4562 is included on your business tax return, usually, Schedule C for small business owners.
What Assets or Property Can I Depreciate on Form 4562?
Tangible assets such as buildings, machinery, equipment, and vehicles; as well as intangible assets like patents will qualify for depreciation for tax purposes and can be included on Form 4562. Note that land cannot depreciate, so it can not be reported on this form.