IRS Form 4562: A Comprehensive Guide for 2023

Filing IRS Form 4562 enables you to get back the funds you invested in assets or property you use in your business either in the same year or over several years.

Depreciation and amortization rules you must follow when completing the form are complex, and you must be familiar with the latest regulations to determine the maximum amount you can deduct from your taxes.

Making Section 179 election on Form 4562 will enable you to claim an immediate expense deduction but only for qualifying assets whose combined value doesn’t exceed $1,080,000.

Our comprehensive guide for 2023 will tell you everything you need to know about IRS Form 5462 and how to use it to amortize or depreciate assets.

Key Points

• Businesses can use IRS Form 4562 to deduct the costs of their tangible and non-tangible property.
• You must make Section 179 election on IRS Form 4562.
• Taxpayers must file this form with their tax returns.

What is Form 4562?

IRS Form 4562 Amortization and Depreciation is the form companies must file to deduct a part or the entire value of assets and property they use in their trade or business.

Freelancers, sole proprietors, and companies can list depreciation deductions on Form 1065, Schedule C (Form 1040), or other tax return forms, depending on the business structure, and attach Form 4562 to their returns.

The IRS can disallow the deduction if you don’t follow the depreciation rules or claim a deduction for non-qualifying property.

Business owners must use this form to make Section 179 election that enables them to expense the asset’s cost by the end of the tax year they purchased it.

According to conventional depreciation rules, businesses cannot claim the total asset value in a single year.

However, Section 179 provides a tax break for businesses by allowing them to deduct up to 100% of the funds they invested in assets they use for business

Differentiating Between Amortization and Depreciation

Knowing the difference between depreciation and amortization is vital when completing Form 4562. The term depreciation refers to expensing tangible assets, like non-residential rental property, vehicles, or office furniture.

On the other hand, amortization allows you to expense copyrights, patents, and different types of intangible assets for up to 25 years. Business owners should be familiar with amortization only if their company owns non-tangible assets.

Calculating depreciation and amortization can be difficult as you must be familiar with straight-line, declining balance, or units of production methods to determine the percentage of the asset’s value you can deduct from taxes in a year.

You must use MACRS (Modified Accelerated Cost Recovery System), usually with the straight-line method, to calculate the maximum deduction amount you can claim for an asset in a year.

It’s also worth adding that if a business exceeds the maximum Section 179 deduction, it must carry over the remaining amount to the following year. Moreover, only tangible assets qualify for the Section 179 deduction.

When to Use Form 4562?

Any business entity can submit Form 4562 to depreciate their assets, provided the property qualifies for the deduction.

You can make the Section 179 election or depreciation deduction for any asset you use for business, including smartphones, air-conditioning units, or qualified real property.

In addition, businesses must file Form 4562 when:

• They depreciate listed property or all other types of vehicles used for business for one or more tax years.
• They depreciate a property they used for business during the last tax year.
• Make a Section 179 election, including the carry-over from previous years.
• S corporation or an entity classified as S corporation must file Form 4562 if it depreciates any asset.
• Deducting the cost of a vehicle that isn’t reported on Schedule C (Form 1040).
• Amortizing expenses of non-tangible assets accrued during the last tax year.

To complete this form, you’ll need to determine if the asset qualifies for Section 179 election or MACRS depreciation. Moreover, you must find out the asset’s MACRS class to know for how many years you can recover its costs.

Besides the information from your tax return, you’ll also need the following information:

• Property’s price and receipt.
• The date when the asset was first used for business purposes.
• Your total taxable income for the tax year.

Taxpayers who use a property they’re depreciating for business and private purposes must also provide proof of its use for business purposes and indicate the time the property is used in professional settings.

How to Prepare IRS Form 4562?

You’ll need more than one IRS Form 4562 if you’re amortizing or depreciating multiple assets. Hence, the number of forms you must file depends on how many deductions you can claim.

You’ll also need all forms you filed over the years with the IRS to calculate the correct deduction amount for the current tax year.

Form 4562 has six parts, but you only have to complete sections of the form that apply to the asset you’re deprecating or amortizing. Here’s a quick overview of each form’s section.

Part I

You must complete this section if you want to make Section 179 election. However, if the asset is a listed property, you must complete Part V of this form before filling out Part I.

This portion of Form 4562 gathers information about Section 179 property’s value and the maximum deduction amount and asks you to indicate if you depreciated some of the asset’s value in the previous years.

Please note that the limitation reduction applies to assets over $2.5 million.

Moreover, individual taxpayers with married filing separately status, S corporations, other types of corporations, and partnerships must follow different rules when calculating the reduction in limitation.

You should indicate the amount you can deduct this year on Line 12.

Part II

Special depreciation allowance is available to businesses that obtained qualified property after September 27, 2017, and utilized such property for business before January 1, 2023.

Qualified properties like qualified film, theater, and television production, trees bearing fruit, or recycling equipment can be tangible assets depreciated under MACRS with a recovery period of under twenty years.

Part II of Form 4562 asks for special depreciation allowance, property subject to Section 168(f)(1) election, and other depreciation amounts.

Part III

As noted earlier, MACRS depreciation lets you expense property over three or more years. Part III of this form gathers information about an asset or a group of similar assets, and to complete it, you must indicate if you have already depreciated the asset in previous years.

Section B of Part III asks for information about assets used for business during the current tax year, and you must reveal when the asset was first used, its classification, recovery period, and depreciation method.

You must fill out Section C if you used the Alternative Depreciation System to calculate the deduction.

Part IV

The form summary asks for the listed property amount and the maximum deductions you claimed in Parts I, II, III, and V. Hence, you must complete each section that applies to the asset you’re depreciating before filling out Part IV.

Part V

Listed property is an asset that is used for work and personal purposes. For instance, any vehicle weighing less than 6,000 lbs or a camera you don’t only use for business is a listed property.

Part V of Form 4562 gathers information about the asset, including when it was first used, what type of property it is, the basis for depreciation, and the business use investment percentage.

Taxpayers using the standard mileage rate or submitting Form 4562 to expense leasing costs should only fill out Line 24a.

Filling out this section can be tricky because you must calculate the percentage of time an asset is used for business. You can skip Sections B and C unless your employees use company-owned vehicles.

Part VI

The last part of the form lets you list non-tangible assets you’d like to amortize. To fill out this part, you must describe the costs, specify the amortization period, and state the IRC section under which an asset is eligible for amortization.

You’ll also have to report when the asset’s amortization started and the total amortization amount on Lines 43 and 44.

Filing Form 4562 with the IRS

The simplest way to claim a deduction for your business assets is to complete the digital version of Form 4562 and attach it to your tax return.

Use additional sheets (or files) if you cannot fit all the necessary information on the form. Also, remember to use a separate Form 4562 for each asset you want to amortize or depreciate.

Keep copies of the form for your records because you may need them if you depreciate the property over several years.

Each copy should contain the taxpayer’s name, the same name as on the tax return, the business activity to which Form 4562 relates, and TIN, EIN, or other identifying number.

Frequently Asked Questions

Reducing Business Costs with IRS Form 4562

Depreciating assets can give your business the financial boost to remain competitive. But the rules you must follow to claim this deduction are complex.

You must understand the limitations before making Section 179 election or MACRS depreciation because the IRS can disallow the deduction if you attempt to write off more business expenses than you’re eligible for.

Feel free to seek advice from a tax professional if you need help with how to expense the property you use for business or whether filing Form 4562 is the right decision for your business.