It’s tax time again and you can’t wait to write off that expensive car you purchased for the business on your tax return. However, business tax accounting is a complicated matter that if done wrong, can bring you lots of troubles. To properly write off business assets, you’ll need to understand Form 4562, or, find someone that understands it well to help you. Form 4562, Depreciation and Amortization, as its name suggests, is used for depreciating and amortizing both tangible and intangible assets. As complicated as it sounds, let’s dive into this form and learn as much as you can about it.
Who Needs to File Form 4562?
Any business entity that owns a depreciable asset will need to file Form 4562. A depreciable asset is an asset that you plan on using for more than one year. For example, when you purchase a set of computers for the office, you expect them to last for at least the next five years. You’ll need to file Form 4562 each year you continue to depreciate the asset. Some examples of tax reductions that require the use of this form include:
- Properties used for business purposes
- Bonus depreciation
- Section 179 reduction
- Amortized expenses
Some intangible assets such as trademarks and patents can also be amortized using this form.
When to File Form 4562?
Form 4562 is filed at the same time as your tax return. You begin filing this form the same year you purchase the asset and continue to file it yearly until the depreciation is over.
What Information Do You Need for Form 4562?
First, you’ll need to gather all the financial records regarding your asset. To properly fill out Form 4562, you’ll need the following information:
- Price of the asset being depreciated
- Date of which your asset is put to use
- Receipt for the asset
- Total income you are reporting in the corresponding year.
If you intend to use the asset both for business and personal purposes, you’ll also need the following:
- A detailed breakdown by percentage of how much is used for work and how much is used for personal purposes.
- Proof of usage, for example, you may submit mileage logs in case of a vehicle.
How to Fill Out Form 4562
Before proceeding to fill out the form, make sure you understand which section is applicable to you and which isn’t. Consulting the help of a professional CPA is highly recommended. Depreciation is a complex subject that calls for extensive knowledge of how the tax system works. A CPA may suggest ways to proceed with the depreciation that benefit your business the most in the long run.
Here’s What Form 4562 Looks Like
Part I: Section 179 Deduction
This part is for properties that are expensed under Section 179. The property has to be put to use the same year you file this form. Under Section 179, you may choose to write off as much as possible the value of the property during the first year. The rest will be depreciated in the following years. In some cases, the entire value of the asset can be depreciated.
Here’s an explanation of Section 179 line-by-line:
- Line 1: The maximum amount you can deduct is $1,000,000.
- Lines 4+5: For assets over $2,500,000, you have to fill out these lines.
- Line 6: This is where you list the asset you are depreciating.
- Line 7: If “listed property” confuses you, skip ahead to Part V where it’s explained in detail.
- Line 10: If your asset has been written off the previous year, here is where you enter the remaining amount from last year.
- Line 11: As long as the value of your asset is under $1,000,000, this is where you enter your net profits for the year.
- Line 12: The amount being deducted.
- Line 13: Enter the amount you get from subtracting line 11 from line 12. It’s the depreciable amount carried over to the next fiscal year.
Part II: Special Depreciation Allowance
This part doesn’t apply to most businesses. Unless you own a “green” technology or a farm, it’s safe to skip this part. Follow this IRS instructions if you want to know if you qualify.
Part III: MACRS Depreciation
Part III is used when you plan to depreciate the asset over multiple years instead of writing it off as much as possible in the first year like in part I. This section is especially important for real estate investors who need to depreciate their income-generating properties over multiple years. The Modified Accelerated Cost Recovery System (MACRS) provided by the IRS dictates over how many years you should depreciate your property.
- Line 17: The depreciation amount carried over from last year.
- Line 18: You can group similar assets together as a “general account” to avoid repetitive listings.
- Line 19a through i: To accurately enter the details about the assets you are depreciating, check out IRS Publication 946 or consult a CPA expert.
Part IV: Summary
This is the part where you summarize all the previous calculations to make sure they add up. The final amount of depreciation will be reported in Form 1040.
- Line 21: You may need to complete Part V before filling out this line. It’s the value of your listed property. A listed property is a property used for both business and personal purposes.
- Line 22: For those that are filling on perhaps of an S corporation or partnership, this part is to be left blank. For others, it’s their total deduction value.
- Line 23: This line is applicable only to people who are deducting the cost of their inventory.
Part V: Listed Property
As we mentioned before, listed properties are properties that are used for both business and personal purposes. To qualify as listed property, an asset has to have a business use percentage of at least 50%. For example, a company limousine is used mainly for business purposes, however, sometimes, it can be used to transport the CEO’s family to different locations. Other common listed properties include computers, automobiles, boats, and aircraft.
Part VI: Amortization
If you have an intangible asset that needs to be amortized, such as a patent or trademark, this is where you should enter the information. Amortization can get tricky since people often argue about the value of something as intangible as a trademark, logo, or a company’s reputation.
Contact the Professionals
Don’t do the guesswork yourself here. Work with a tax advisor to get the best advice. If you want a tax advisor who is not only experienced but also cares deeply about your business benefits, contact us to learn more about how we can help you.