If you don’t own a business, breathe a sigh of relief. You won’t ever have to fill in depreciation and amortization tax forms. If, however, a vintage clothing shop owner purchases new racks and displays for her store, or a baker acquires a second-hand (new to him) delivery truck or perhaps a new iPad-based checkout system for his market stall, the IRS won’t allow business owners to automatically deduct the full cost of purchases like these in the first year. That’s where Form 4562 comes in.
In fact, if you purchased for business or investment purposes any equipment or machinery in 2017, bought a building or other property, or used a vehicle for business, you need to complete Form 4562, Depreciation and Amortization. This two-page form has six parts, but if you take it step-by-step, you’ll be able to complete the sections that your situation requires.
Form 4562 Explained
Depreciation and amortization are write-offs for the cost of acquiring various assets or incurring certain expenses used in business or for investment purposes (such as a landlord with a rental building). Sounds simple enough, but there are many conditions and requirements, special elections, special terminology (not all of which can be defined here) and other rules that complicate the topic. The following is a step-by-step approach to completing the form under the most common circumstances.
Form 4562 Part I
This part of the form is used to elect to expense tangible property, off-the-shelf software and certain types of realty (e.g., a greenhouse) placed in service in 2017 (called the Section 179 deduction). The maximum amount of this deduction is $510,000 for machinery and equipment (or $250,000 for qualified leasehold, retail and restaurant improvements).
Regardless of the deduction amount, you must apply the limitation that restricts the Section 179 deduction to the extent of your business profits (called “taxable income” without regard to certain deductions) for the year. The limitation – your net earnings from self-employment for sole proprietors or net profit for other business entities – is entered on line 11. If you had any Section 179 deduction disallowed last year because of this business income limitation, the carryover is entered on line 10; if any part of this year’s deduction cannot be used because of the limitation (and is carried over to 2018), enter it on line 13.
Note: You don’t have to use the Section 179 deduction; you can instead depreciate the property over the number of years applicable to the type of property involved (an option that makes sense if you think future depreciation will save you more taxes). You can choose to use the Section 179 deduction for a part of the cost of the property by entering the “elected cost” on line 6(c).
Form 4562 Part II
This part of the form is used for a special depreciation allowance (also called “bonus depreciation”), which is a 50% allowance claimed in the year that eligible property is placed in service. Certain property acquired after Sept. 27, 2017 is eligible for a 100% deduction, though you don't have to take it. Note: As of early 2018, Congress had not enacted legislation on the expired provisions related to depreciation.
Do not complete this part for:
- Property that is not “eligible property.” Only new property, and not pre-owned property, is eligible.
- “Listed property,” which is defined later (in Part V).
Bonus depreciation applies automatically to qualified property unless you decide not to take it. The election out of bonus depreciation is made by attaching a statement to the return indicating property for which you do not want to apply this special depreciation. Note: This election cannot be revoked without IRS consent, so be sure you want to opt out.
Bonus depreciation can be combined with the Section 179 deduction. As with the order of Form 4562, the Section 179 deduction is taken first, then bonus depreciation. If there is still any cost that has not been fully deducted, regular depreciation (in Part III) can also be claimed.
Form 4562 Part III
This section is for basic depreciation (other than depreciation for listed property, which is entered in Part V) under the Modified Accelerated Cost Recovery System (MACRS) that was created in 1986 and continues to apply today. A single entry on line 17 is used to report deductions for assets placed in service before 2017 (refer to your prior tax returns or any worksheets you may have retained to determine the amount to enter here).
Details about assets placed in service in 2017 are entered on lines 19a through 19i. For example, say your design firm bought and started using a $3,000 3-D printer so you could make your own prototypes of the housewares you were designing (and you did not expense the cost in Part I or use bonus depreciation in Part II). The tax law says the printer is five-year property.
- The date (month and year) it was placed in service on line 19b, column (b)
- The cost or other basis on which depreciation is figured in column (c)
- The recovery period if different from the basic recovery period (a time frame set by law for each type of property) in column (d)
- The appropriate convention (a tax rule that impacts the depreciation computation) in column (e)
- The depreciation method (e.g., an even deduction over the recovery period, called straight line method, or one that skews write-offs to early years, called accelerated depreciation method) in column (f)
- The amount of the depreciation deduction in column (g)
Residential rental property and nonresidential real property (e.g., office building, factory) automatically has a fixed recovery period, uses the mid-month convention (that assumes the property was placed into service in the middle of a month), and the method of straight line; no entries are required here.
Form 4562 Part IV
This part of the form is merely a summary from Parts I, II and III, as well as listed property in Part V. Line 22 is the key entry; it is the amount of depreciation that is deductible. The amount on line 22 is reported on the appropriate line of your tax return.
Form 4562 Part V
This section is for claiming write-offs for listed property: cars weighing 6,000 pounds or less, pickup trucks, computers and peripheral equipment, video recording equipment and other property specifically called “listed property.”
Section A is for the depreciation allowance for listed property, including the Section 179 deduction and bonus depreciation. You need to enter a lot of information about each item of property in this section:
- Type of property in column (a)
- Date it was placed in service in column (b)
- The portion of business and/or investment usage in column (c)
- The cost or other basis in column (d)
- The basis for depreciation [which reflects the amount in column (d) multiplied by the percentage in column (c)] in column (e)
- The recovery period in column (f)
- The method or convention for depreciation in column (g)
- The depreciation deduction in column (h)
- Any election Section 179 deduction in column (i)
- Line 24a in Section A asks two key yes-no questions: (1) Do you have evidence to support the business and/or investment use of the listed property and (2) is this evidence written? This means if you use your personal car for business, you need to be able to answer yes to both questions (e.g., you’ve kept a log – on paper, on computer, or via an app).
Section B is used to provide information about vehicles used by sole proprietors, partners or other “more than 5% owners” or people related to these business owners. There’s space for up to six vehicles; use an attachment for reporting any additional vehicles (which is generated automatically for electronic returns).
Section C is used by an employer to report certain information on employee use of company vehicles. There are five yes-no questions to answer here. If you don’t have any employees, skip this section.
Form 4562 Part VI
This part is for any amortization you claim. With amortization, costs are deducted evenly over a set number of years fixed by law or over the expected life of the property. Amortizable costs include start-up costs that were not fully deductible in the first year of business and costs for certain intangibles (such as goodwill, patents and copyrights). Amortization costs that begin in 2017 are entered on line 42 (along with a description of the costs and other information); amortization for costs that began before 2017 is entered on line 43.
The Bottom Line
If you didn’t acquire any assets in 2017 and are merely depreciating the cost of assets purchased in prior years, you may not need to complete this form (it depends on your business’ entity type and other factors). Not sure about this, or whether you’re up to the task of handling this form? Review the IRS instructions to Form 4562 or consult a tax professional.