IRS Form 4562, Depreciation and Amortization, is used to depreciate or amortize property you’ve bought for your business. Once you understand what each part of this tax form does, you can plan ways to use it to reduce your tax burden.
What are depreciation and amortization?
Depreciation is the act of writing off a tangible asset over multiple tax years. Depending on your business structure, you list your depreciation deduction each year on Form 1040 (Schedule C), Form 1120/1120S, or Form 1065.
When you make a big purchase, its value may be too large—according to IRS rules—to write off all in one year. That’s why you spread it out.
A tangible asset is something you can touch, like a sign for your car dealership, or the giant inflatable gorilla standing on its roof.
Amortization is similar to depreciation. But, instead of depreciating the value of a tangible asset, you depreciate the value of an intangible asset.
An intangible asset is harder to pin down than a tangible one. Patents, trademarks, and other intellectual property are intangible. So is a list of existing clients, or your reputation in the community.
There are a lot of gray areas when it comes to amortization. And it’s typical to amortize assets over long periods—like fifteen years. Your ideal amortization strategy will depend on your business income and the number of years you’re claiming the deduction. It’s a good idea to get help from a certified public accountant (CPA) if you’re planning to amortize an asset.
We’ll mostly be focusing on depreciation. If you’re still a bit blurry on depreciation and the different depreciation methods, check out our article on depreciation for small business. Then come back here—you’ll be better equipped to get into the nitty-gritty of Form 4562.
Form 4562 is also used to claim bonus depreciation.
Who needs to file Form 4562?
You are only obligated to file Form 4562 if you’re deducting a depreciable asset on your tax return.
A depreciable asset is anything you buy for your business that you plan on using for more than one financial year. Generally, inventory doesn’t count. Neither do small purchases like paperclips or windex. Think big picture—a van for your delivery company, a drill press for your fabrication shop.
You’ll need to file Form 4562 for every year that you continue to depreciate your asset.
When should you file Form 4562?
Form 4562 should be included as part of your annual tax return. You should file it for the same year you bought the property you’re planning to depreciate or amortize.
What do you need to fill out Form 4562
We’ll assume you’ve assembled all the records you need to file your income tax. On top of those, you’ll need the following to fill out Form 4562:
- The price of the asset you’re depreciating
- A receipt for the asset you’re depreciating
- The date the asset was put into use (when you started using it for your business)
- The total income you’re reporting for the year in question
On top of that, if the asset you’re depreciating is being used for personal reasons, as well as business, you’ll need:
- A breakdown, by percentage, of how often the asset is used for work, and how often for other reasons
- Any records you have of asset use, such as mileage logs for a vehicle
How to fill out Form 4562
You should have a broad view of what each part of Form 4562 does before you put pen to paper. That way, you’ll know which sections you need to fill out based on your circumstances, and which ones you can skip.
Many of the numbered lines on Form 4562 are self-explanatory. However, we’ll pick apart any lines that are likely to trip you up. You can clear up any further uncertainties by checking out the IRS instructions for Form 4562.
Finally, when it comes time to file Form 4562, it definitely benefits you to get the help of a CPA. Depreciation is a complex exercise, and this is just an introduction. A CPA can make the process easier, and may point out ways—highly specific to your business—you can save money on your return.
Form 4562 at a glance
Here’s what Form 4562 looks like. Refer back here as we walk through each of its six parts.
Part I: Section 179 deductions
When you expense property under Section 179, you choose to write off as much of it as possible during the first year. In fact, you may be able to write off the entire asset. If not, the overflow is depreciated over subsequent years.
The asset you elect for Section 179 has to have been put into service during the year you’re filing for.
Line 1. Generally speaking, the maximum you can deduct in one year is $1 million. This limit is reduced if the asset costs over $2.5 million.
Lines 4 and 5. This is where the limit reduction is applied to Line 1, if the property is worth over $2.5 million.
Line 6. You list the assets you’re depreciating here. If you use the asset only for business, list the price. If you aren’t depreciation the entire value of the asset, list the amount you are under “© Elected cost.”
Line 7. If you’re unsure what “listed” property is, skip ahead to our section on Part V before continuing with this part.
Line 10. If you wrote off a portion of an asset last year, and the rest of its value is carrying over and depreciating this year, you enter the amount here.
Line 11. This is the maximum amount you’re able to write off this year. It’s either your net earnings/profit for the year, or the amount on Line 1, after taking into account any reduction limits (Line 4 and 5). Choose the smaller of those two amounts.
Line 12. Enter the total amount you’re deducting here. If that amount is higher than the limit listed on Line 11, enter the value from Line 11.
Line 13. This is how much carryover depreciation you’ll have next year, since it’s in excess of the limit on Line 11. To get this number, subtract Line 11 from the total amount you’re writing off.
Part II: Special depreciation allowance
The special depreciation allowance only applies to certain qualified property. This is relevant if you have a farm, or you purchased “green” technology for your business. Check out the instructions if you think you may qualify.
The number crunching on qualified property can get pretty complex. If you’re writing off qualified property, your best bet is to meet with a CPA.
Part III: MACRS depreciation
This section is relevant if you’re planning to depreciate property over multiple years—rather than writing off as much as possible with Section 179, and then dealing with the overflow in the future.
The period for which you depreciate property is determined with Modified Accelerated Cost Recovery System (MACRS) guidance provided by the IRS. MACRS is an art unto itself. But the bottom line is that, depending on what type of property you’re writing off, it will be depreciated over multiple years—as few as three, as many as 25. You can figure out the length of depreciation by checking out page 8 of the IRS instructions.
IRS Publication 946 has any other info you may need about MACRS. Or, a CPA should also be able to answer your questions.
Line 17. Any depreciation from previous years that you’re carrying over goes here.
Line 18. If you have several similar assets to depreciate, you can group them together as a “general account” for the sake of simplicity. For instance, suppose you bought 15 new computers for your office, but don’t want to enter each of them individually on this form.
Line 19a through 19i. This is where you enter info about the items you’re depreciating. If you’re unclear on which details go here, check out IRS Publication 946.
Part IV: Form summary
This is where the IRS has decided to put the section where you summarize the contents of Form 4565: Not at the beginning, not at the end, but roughly in the middle. Make sure you skip ahead and read through the rest of the form before filling this out.
Line 21. Enter the value of your listed property here. Listed property is used partially for personal use. If you’re unsure about this, skip ahead to Part V, complete it if necessary, and come back.
Line 22. This is where you list your total deduction. If you’re filing for a partnership or S corporation, don’t fill this out—the total deduction will be listed on each individual member or shareholder’s tax return.
Line 23: If you’re deducting the cost of acquiring or producing inventory, then it has to be capitalized. Enter Section 263a—a thorny patch of number crunching most business owners thankfully don’t need to worry about. If you’re concerned this line may apply to you, check out this summary from Forbes.
Part V: Listed property
Listed property is any depreciable asset you use for both business and personal purposes. For instance, it could be a van you use to deliver your product, but also to take your kids to soccer practice.
Line 25: If your property is both listed and qualified, you can claim an extra deduction. See Line 14.
Line 26: Assets you use more frequently for business than for personal use should be listed here.
Line 27: Assets you use more frequently for personal use than for your business should be listed here.
Section B: Do you have employees who use company vehicles for work? If so, you may or may not have to fill out this section. Skip ahead to Section C to find out.
Lines 30-37: This is where you list mileage and other information for business vehicles.
Section C (Lines 37-41): This short questionnaire helps you determine whether you’re required to fill out Section B.
Part VI: Amortization
If you’re amortizing assets, you’ll list them here.
As we mentioned earlier, amortization can be a tricky business, because you’re dealing with tangible assets. For instance, how do you put a price on a patent? What about the trademark for your logo? If you plan on amortizing assets, you should meet with a CPA or tax advisor for guidance.
Looking for more tax write-offs? Check out The Big List of Small Business Tax Deductions.