What is the IRS Form 4562?
That new car that you have recently purchased to take care of your conveyance while you shuffle between your offices certainly makes your life easier. Yet, IRS Form 4562 is something that is eyeing your new vehicle closely; and also keeping a watch if you have filed it.
IRS Form 4562 is used to represent the Depreciation and Amortization of an asset that you have purchased for facilitating your business operations. The form can be helpful to you in reducing the tax load once you understand the minutes of the form.
This article aims to present the details surrounding the form along with the following terms:
- What Is the IRS Form 4562?
- What are Depreciation and Amortization?
- What is Bonus Depreciation?
- Who Should file Form 4562?
- When Should You file Form 4562?
- What Should You fill out in Form 4562?
- How to fill out Form 4562?
What Is the IRS Form 4562?
IRS Form 4562 is known as the Depreciation and Amortization form which you need to complete while filing your income tax return. There are assets such as land, vehicles, machinery, equipment, and so on, that are purchased by a company for business use. All assets depreciate and their value must be calculated for an accurate accounting process. Therefore, Form 4562 is filed to take into account the depreciation and amortization of these assets used for business purposes.
Companies can also claim Bonus Depreciation using Form 4562.
What are Depreciation and Amortization?
Depreciation refers to the process of writing off the value of a fixed asset or tangible asset over multiple tax years. Whenever an asset is purchased, it may have a huge value that may not be written off in a single year; and therefore, you need to distribute it over a span of a few years.
A tangible asset is one that can be touched and has a physical form. An intangible asset, on the other hand, does not have a physical appearance, nor can it be touched. Examples of intangible assets are patents, copyrights, goodwill, trademarks, and so on.
While tangible assets are depreciated, intangible assets are amortized. Amortization and depreciation are concepts that are quite similar to each other with the difference being in the type of assets that each one addresses.
If you find the concepts too much to bear, taking assistance from a certified and qualified CPA would work well.
What is Bonus Depreciation?
Bonus depreciation is a method of accelerated depreciation and is optional.
Since the Tax Cuts and Jobs Act of 2018, businesses can now deduct 100% of the cost of qualified property from their taxable income in the year it was purchased. This approach is taken instead of amortizing the asset cost over a period of time. From $500,000 to $1,000,000, there has been an increment in the annual limits for these types of deductions.
If a company takes advantage of bonus depreciation, its total expenses will increase in the year the purchase was made and thus shrink its profit. This would result in a lowered total taxable income, thereby reducing its tax obligations.
Who Should file Form 4562?
In case you are carrying out a deduction of a depreciable asset on your tax return, then you must file Form 4562.
As discussed in the previous section, all your tangible or fixed assets need to be depreciated. However, inventory is separate from your fixed assets, and is, therefore, not counted in while depreciation is being carried out. As a result, you are obligated to file Form 4562 every year you depreciate your assets.
When should You file Form 4562?
The form is to be included when you are filing your income tax returns. Importantly, you are required to file it for the year you purchased the asset or the property.
What Should You fill out in Form 4562?
Before you begin filling out the details, you need to gather up all your relevant documents and the information that you need to provide with the form. Once you have done that, jot down these significant data to fill out the details in the form:
- The newly acquired asset’s cost
- The asset’s receipt
- The date when you started using the asset for the business purposes
- The final and total income that is being reported for the year
Apart from these, if you are using the asset for personal use also, you will need to provide:
- A percentage breakdown of how frequently is the asset used for personal and business reasons
- Any other details or document pertaining to the asset
How to fill out Form 4562?
This section elaborately explains the text in the form 4562 as it would make it easier for you to know the sections that are mandatory and the ones you can skip. Here is how the form appears like:
The form consists of 6 parts as depicted from the images above.
Part I: Section 179 Deductions
The section 179 enables you to depreciate the maximum amount of the total amount/price of the asset in its first year. As a matter of fact, you can depreciate the entire asset, and if you are not able to do so, then you may distribute the amount over to the next few years.
When you are determining the asset for Section 179, ensure that the asset is already in use for that year.
Here is a Line-wise break-up of the fields that need to be filled in:
Line 1 | Maximum Amount: The maximum deductible amount is $1 million, although it gets reduced if the cost of the asset is more than $2.5 million. |
Lines 4 and 5 | Apply the limit reduction of your asset is over $2.5 million in cost. |
Line 6 | Provide the name of the assets you want to depreciate alon gwith the price, if the asset is for business use. If you are not depreciating the entire cost of the asset, provide its amount under the text: Elected Cost |
Line 7 | In case you are not sure about the ‘listed property’, then you can skip to Part V before you come back to fill it up. |
Line 10 | In this case, you enter the value of the asset whose value carried over and depreciated this year due to a write-off last year. |
Line 11 | This is your maximum deduction for the year. Taking into account any reduction limits (Lines 4 and 5) it is either your net annual profit, or your net earnings for the year. Select the smaller amount. |
Line 12 | Specify the amount you are deducting. Enter the value from Line 11 if the amount is higher than the limit on Line 11. |
Line 13 | The amount of carryover depreciation you will have next year is shown here, as it exceeds the limit on Line 11. This number is calculated by subtracting Line 11 from the total amount you're writing off. |
Part II: Special Depreciation Allowance
Special depreciation allowances are only applicable to certain qualified properties. This is important if your business uses "green" technology. Learn more to ascertain your qualification.
Calculating qualified properties can be quite complex and to eliminate complications, it would be wise to seek services and opinions from a CPA.
Part III: MACRS Depreciation
The purpose of this section is for those who plan to depreciate property over several years rather than utilizing Section 179 to write off as much as possible, and then paying later for the remaining part.
The IRS provides Modified Accelerated Cost Recovery System (MACRS) guidance on the period for which you depreciate property. There are different types of properties that depreciate over various years. Some can be depreciated in as less as 3 years and some can be depreciated over a period of two decades.
Line 17 | In this area you will find any depreciation carried over from previous years. |
Line 18 | To simplify depreciation, you can group similar assets together as a "general account." |
Line 19a through 19i | You enter information about the items that you are depreciating here. |
Part IV: Form Summary
This is a summary of the form 4562 and its contents. You may skip this for now and come back later.
Line 21 | Here you should enter the value of the property. Some of the listed property is used for personal reasons. |
Line 22 | Enter your total deduction here. The total deduction will be shown on each shareholder's tax return. If you're filing as a partnership or S corporation, do not fill this out. |
Line 23 | If you're claiming the cost of inventory acquisition or production, then you have to capitalize it. This brings us to Section 263a, a complicated piece of number crunching exercise. You may verify if this applies to you. |
Part V: Listed Property
You can use listed property both for business and for personal purposes. It could be a car that you use for your commute to office or for dropping kids to their school.
Line 25 | In line 25, you can claim an extra deduction if your property is both listed and qualified. Refer Line 14. |
Line 26 | List assets that you use more often for business purposes than for personal ones. |
Line 27 | This section should include assets that you use for personal use more often than business use. |
Section B | If you have any employees who use the company vehicles for work, then the information needs to go in here. |
Lines 30 to 37 | Enlist all the information related to your company vehicles here. |
Section C/ Lines 37 to 41 | The section lets you know if you should fill out section B. |
Part VI: Amortization
This part includes the details of any assets that are being amortized.
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Key Takeaways
Here are the important points from the article:
- All assets depreciate and their value must be calculated for an accurate accounting process. Therefore, Form 4562 is filed to take into account the depreciation and amortization of these assets used for business purposes
- IRS Form 4562 is used to represent the Depreciation and Amortization of an asset that you have purchased for facilitating your business operations
- Companies can also claim Bonus Depreciation using Form 4562, although its optional
- Depreciation refers to the process of writing off the value of a fixed asset or tangible asset over multiple tax years
- Amortization and depreciation are concepts that are quite similar to each other with the difference being in the type of assets that each one addresses
- If a company takes advantage of bonus depreciation, its total expenses will increase in the year the purchase was made and thus shrink its profit, ultimately reduces its tax obligations
- Companies carrying out a deduction of a depreciable asset on their tax return must file Form 4562.
- Assets cost, its receipt, date when it was put to use, and final income for the year are the primary information required to go in to the Form 4562