Last Updated : January 14, 2009
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4562

Form 4562

Depreciation and Amortization

PURPOSE OF THE FORM:
Use form 4562 to :

  • Claim your deduction for depreciation and amortization,
  • make the election under section 179 to expense certain property, and
  • Provide information on the business/ investment use of automobiles and other listed property.

Who must file :

Complete and file form 4562 if the taxpayer is claiming any of the following:

  • Depreciation for property placed in service during the 2007 tax year.
  • A section 179 expense deduction (which may include a carryover from previous year).
  • depreciation on any vehicle or other listed property (regardless of when it was placed in service).
  • A deduction for any vehicle reported on a form other than schedule C (form 1040) , Profit or loss from Business, or Schedule C- EZ (FORM 1040) , Net profit from business.
  • Any depreciation on a corporate income tax return (other than FORM 1120S).
  • Amortization of costs that begins during the 2007 tax year.

DEPRECIATION :

Depreciation is the annual deduction that allows you to recover the cost or other basis of your business or investment property over a certain number of years.

Depreciation starts when you first use the property in your business or for the production of income. It ends when you either take the property out of service, deduct all your depreciable cost or basis, or no longer use the property in your business or for the production of income.

Generally , you can depreciate :

  • Tangible property such as buildings, machinery , vehicles, furniture and equipment; and
  • Intangible property such as patents, copyrights and computer software.
  • Exception : You cannot depreciate land.

AMORTIZATION :

Amortization is simi liar to straight line method of depreciation in that an annual deduction is allowed to recover certain costs over a fixed time period. You can amortize such items as the costs of starting a business , goodwill , and certain other intangibles.

PART - I ELECTION TO EXPENSE CERTAIN PROPERTY UNDER SECTION 179

SECTION 179 PROPERTY:


Section 179 property is property that you acquire by purchase for use in the active conduct of your trade or business , and is one of the following:

  • Tangible personal property.
  • Other tangible property (except buildings and their structural components) used as :
    • (1) An integral part of manufacturing , production, or extraction or of furnishing transportation, communications, electricity, gas , water , or sewage disposal services;
    • (2) A research facility used in connection with any of the activities in (1) above.
    • (3) A facility used in connection with any of the activities in (1) above for the bulk storage of fungible commodities.

  • Single purpose agricultural (livestock) or horticultural structures.
  • Storage facilities used in connection with distributing petroleum or any primary product of petroleum.
  • Off the shelf computer software.

NOTE :

An estate or trust cannot make election of PART - I.

The taxpayer can elect to expense part or all of the cost of section 179 property that was placed in service during the tax year and used predominantly (more than 50%) in your trade or business.


The taxpayer can make the election on FORM 4562 filed with either : the original return or an amended return filed within the time prescribed by law for the applicable tax year.

The election ( or any specification made in the election) can be revoked without obtaining IRS approval by filling an amended Return.

Line 1:
Generally the maximum section 179 deduction is $125000.

For an enterprise zone business or a renewal community business, the maximum deduction is increased by the smaller of : $35000 OR The cost of section 179 property that is also Qualified empowerment zone property or Qualified renewal property.


For Qualified section 179 GO Zone property, the maximum deduction is increased by the smaller of $100000 OR The cost of Qualified section 179 GO Zone property placed in service during the tax year.

Line 2:The Program sets the value of all such properties for which section 179 eligibility checkbox NO is checked from section 179 summary . Here value of section 179 property is arrived at by multiplying the cost of asset by the business use percentage.

Line 3:
The amount of section 179 property for which the taxpayer can make election is limited to the maximum dollar amount on line 1. In most cases , this amount is reduced if the cost of all section 179 property placed in service during the year is more than $500000.

If Qualified section 179 GO Zone property is paced in service during the tax year , the amount of property for which you can make the election is reduced if the cost of all section 179 property placed in service during the year exceeds $500000 increased by the smaller of : $600000 OR the cost of Qualified section 179 GO Zone property placed in service during the tax year.

Line 4:
The program subtracts line 3 inner box if higher limit is applicable from line 2 and enters the result on this line . Otherwise the program subtracts line 3 outer from line 2 and enters the result on this line.

Line 5:
The program subtracts line 4 from line 1 inner box if higher limit is applicable or otherwise from line 1 outer and enters the result on this line.
If line 5 is zero, the taxpayer cannot elect to expense any section 179 property.
If the filling status is married filling separately then the taxpayer and spouse must allocate the dollar limitation for the tax year. Do not enter on line 5 more than the taxpayer share of the total dollar limitation.

Line 6:
The program transfers the data relating to property if for that property section 179 eligibility checkbox is checked and is not a listed property.
column (a) :
The program transfers the description of property if that property doe snot qualifies for section 179 eligibility and is not a listed property.
column ( b ) :
The program transfers the net amount by subtracting land price from cash paid or Cost whichever is entered if that property is not eligible for section 179 and is not a listed property and such net amount is multiplied by business use percentage and entered on this line.
column ( c ) :
The program transfers the amount of 179 property election from depreciation worksheet if such property is not eligible for section 179 and is not a listed property.

Line 7:
The program enters the value on this line from form 4562 page-2 line 29 from part - V details of listed property which are used more than 50% in qualified business use.

Line 8 :
The program adds the amount of column c of line 6 and line 7 and enters on this line.

Line 9:
The program enters lower of line 5 or line 8 and enters the result on this line if the property does not qualify for section 179 deduction.

Line 10:
Enter on this line the carryover of disallowed deduction from 2006 that you elected to expense in previous years but was not allowed as a deduction because of the business income limitation. Enter on this line the amount from line 13 of your 2006 form 4562.

Line 11:
Enter on this line the lower of business income or line 5 amount.
The total cost which can be deducted is limited to your taxable income from the active conduct of trade or business during the year.
refer the instructions of FORM 4562 for amount to enter on this line.

Line 12:
The program adds lines 9 and 10 and enters the result on this line but not more than line 11 if such property is not eligible for section 179 deduction.

Line 13:
The program adds lines 9 and 10 and subtracts line 12 amount from the result and enters the net amount on this line. This is the carryover of disallowed deduction for 2008.

PART - II SPECIAL DEPRECIATION ALLOWANCE AND OTHER DEPRECIATION

Line 14:


For qualified property placed in service during the tax year , the taxpayer may be able to take an additional 50% (or 30% if applicable,) special depreciation allowance.


The program transfers the value of special depreciation allowance from all depreciation worksheets if the property claimed there is not listed property and is not a passenger automobile.


This allowance is an additional deduction that the taxpayer may take after any section 179 expense deduction and before any regular depreciation under MACRS. It can be claimed only for the first year in which the property is placed in service.


For definition of Qualified Property refer instructions of FORM 4562.

Line 15:
The program transfers the amount from all depreciation worksheets line current year depreciation on which the property claimed is not listed property and is not a passenger automobile but is having depreciation type 168 f -1.
The property claimed is elected to depreciate under the unit of production method or any other method not based on a term of years.
If the taxpayer claims a property under this section then he need to give complete details of facts like the description of property , depreciation method , depreciable basis , any 179 expense deduction , deduction for removal of barriers to the disabled and the elderly , disabled access credit etc.

Line 16:
The program transfers the property from all depreciation worksheets line current year depreciation on which the property claimed is not listed property and is not a passenger automobile and is having depreciation type other than 168-f1 , MACRS , Amortize and date placed in service is before 01-01-1987.
If the taxpayer uses the income forecast method, for any property placed in service after september 13 , 1995 the taxpayer may owe interest or be entitled to a refund .
Prior year's depreciation plus current year depreciation , cannot exceed the depreciable basis of the property.

PART - III MACRS DEPRECIATION

The term "Modified Accelerated Cost Recovery System" (MACRS) includes general Depreciation System and the Alternative Depreciation System. Generally, MACRS is used to depreciate any tangible property placed in service after 1986. However MACRS does not apply to films , Videotapes and sound recordings.

SECTION A :

Line 17:
The program transfers the property from all depreciation worksheets line current year depreciation on which the property claimed is not listed property and is not a passenger automobile and uses depreciation Type MACRS for its calculation. Such tangible property should be placed in service in tax years beginning before 2007.

Line 18:
The taxpayer needs to check this checkbox manually if he wishes to group assets into one or more general assets accounts to simplify the calculation of computation of MACRS depreciation.
If this method is selected then the assets in each general asset account are depreciated as a single asset and each general asset account must include only assets that were placed in service during the same tax year with the same asset (if any) , depreciation method, recovery period and convention .However, an asset cannot be included in a general asset account if the asset is used for both personal purposes and business/ investment purposes.
Once the election is made the election is irrevocable and applies to the tax year for which the election is made and all later tax years.

SECTION B :

Line 19:
Use line 19a through line 19i only for the assets placed in service during the tax years beginning in 2007 and depreciated under the General Depreciation System (GDS) except for automobiles and other listed property.

Column a :
The user needs to sort the property you acquired and placed in service during the tax year beginning the 2007 according to its classification.
The definition of various properties can be seen in instructions of form 4562.

Column b:

For lines 19h to line 19i , enter the month and year the property was placed in service. If the taxpayer converted the property held for personal use to use in trade or business for the production of income , treat the property as being placed in service on the conversion date.

Column c:
The program enters on this line from depreciation worksheets line basis of depreciation if the depreciation Type is MACRS and asset class is as shown in column a and such property is not a listed property or automobile passenger .
Sometimes the credits or deductions that reduce the basis of depreciation are also subtracted from the property.

Column d:
The program enters on this line from depreciation worksheets line recovery period if the depreciation Type is MACRS and asset class is as shown in column a and such property is not a listed property or automobile passenger.
For more details regarding the recovery period for MACRS property refer publication 946.

Column e:
The program enters on this line from depreciation worksheets line convention if the depreciation Type is MACRS and asset class is as shown in column a and such property is not a listed property or automobile passenger.
The applicable convention determines the portion of the tax year for which depreciation is allowable during a year property is either placed in service or disposed of.
There are 3 types of conventions and to select the correct convention it is necessary to know the type of property and when the property was placed in service.
for more details refer instructions.

Column f:
The program enters on this line from depreciation worksheets line depreciation method if the depreciation Type is MACRS and asset class is as shown in column a and such property is not a listed property or automobile passenger.
However the taxpayer can make an irrecoverable election to use the straight line method for all property within a classification that is placed in service during the tax year.

Column g:
The program enters on this line from depreciation worksheets line current year depreciation if the depreciation Type is MACRS and asset class is as shown in column a and such property is not a listed property or automobile passenger.
For more details refer publication 946.

SECTION C :

Line 20:
Complete line 20a through 20c for assets, other than automobiles and other listed property, placed in service only during the tax year beginning in 2007 and depreciated under the Alternative Depreciation System (ADS). The following types of property can be depreciated under ADS.

  • Tangible property used predominantly outside the United States.
  • Tax exempt use property.
  • Tax exempt bond financed property.
  • Imported property covered by an executive order of the president of the United States.
  • Property used predominantly in a farming business.

Column a:
Under ADS, the depreciation deduction for most property is based on the property's class life.
Use line 20a for all property depreciated under ADS, except property that does not have a class life , residential rental and non residential real property, water Utility property and rail road grading's and tunnel bores.
Use line 20b for property that does not have a class life.
Use line 20c for residential rental and non residential real property.

Column b:
For 40 year property , enter the month and year placed in service or converted to use in trade or business or for the production of income.

Column c:
The program enters on this line from depreciation worksheets line basis of depreciation based on recovery period if the depreciation Type is MACRS , depreciation method is ADS , date placed in service is current year date and such property is not a listed property or automobile passenger.

Column d:
The program enters on this line from depreciation worksheets line recovery period is other than 12 or 40 if the depreciation Type is MACRS , depreciation method is ADS , date placed in service is current year date and such property is not a listed property or automobile passenger.

Column e:
The program enters on this line from depreciation worksheets line convention based on the recovery period if the depreciation Type is MACRS , depreciation method is ADS , date placed in service is current year date and such property is not a listed property or automobile passenger.

Column g:
The program enters on this line from depreciation worksheets line current year depreciation based on the recovery period if the depreciation Type is MACRS , depreciation method is ADS , date placed in service is current year date and such property is not a listed property or automobile passenger .
For more details refer publication 946.

PART - IV SUMMARY

Line 21:
The program enters the value on this line from form 4562 page-2 line 28 from part - V details of listed property which are used more than 50% in qualified business use.

Line 22:
The program adds Line 12 , line 14 through 17 , line 19 and line 20 in column (g) and line 21 and enters on this line.

Line 23:
If the taxpayer is subjected to the uniform capitalization rules of section 263A , enter the increase in the basis from the costs that must be capitalized on this line .
For partnerships and S corporations refer the instructions.

PART - V LISTED PROPERTY

SECTION A:

Line 24:
The program checks the yes checkbox if on depreciation worksheet page -3 checkbox yes for support of evidence of property for business use and its evidence is attached is checked if such property is listed property or a passenger automobile.
The program checks the NO checkbox if on depreciation worksheet page -3 checkbox NO for support of evidence of property for business use and its evidence is attached is checked if such property is listed property or a passenger automobile.

Line 25:
The program enters on this line from depreciation worksheets line special allowance depreciation if such property is a listed property or automobile passenger.
This special depreciation allowance is included in the overall limit on depreciation and section 179 expense deduction fro passenger automobiles.
If the taxpayer placed in service, qualified GO Zone property during the tax year , he may be able to deduct an additional special depreciation allowance.

Line 26 and line 27:
Use line 26 to figure depreciation for listed property used more than 50% in a Qualified business use. Use line 27 to figure the depreciation for property used 50% or less in a Qualified business use.
On line 26 and line 27 details of listed property will flow from depreciation worksheet depending upon the business use percentage entered for that property on the worksheet.
For example: if business use percentage of listed property is 45% then it will be reported on line 27 from depreciation worksheet , if business use percentage of listed property is 75% hen it will be reported online 26 from the depreciation worksheet.
If the property is acquired through a trade-in , special rules apply for determining the basis, recovery period, depreciation method, and convention.

Line 28:
The program adds the depreciation deduction from line 25 to line 27 and enters result on this line.

Line 29:
The program adds the section 179 elected cost of all properties entered on line 26 and enters the result on this line.

SECTION B:

The taxpayer needs to complete lines 30 through 36 for each employee identified in section A. Employees must provide their employers with the information requested on lines 30 through 36 for each automobile or vehicle provided for their use.

Line 30:
The program enters on this line the business miles of a property from the depreciation worksheet if the property entered is a listed property or passenger automobile.

Line 31:
The program enters on this line the total commuting miles of a property from the depreciation worksheet if the property entered is a listed property or passenger automobile.

Line 32:
The program enters on this line the personal other miles of a property from the depreciation worksheet if the property entered is a listed property or passenger automobile.

Line 33:
The program adds the miles entered on line 30 , line 31 , line 32 for a particular vehicle and enters the result on this line.

Line 34:
The program checks the yes checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox YES for Is vehicle available for personal use is checked if such property is listed property or a passenger automobile.
The program checks the NO checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox NO for Is vehicle available for personal use is checked if such property is listed property or a passenger automobile.

Line 35:
The program checks the yes checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox YES for If vehicle was used primarily by more than 5% owner or related person is checked if such property is listed property or a passenger automobile.
The program checks the NO checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox NO for If vehicle was used primarily by more than 5% owner or related person is checked if such property is listed property or a passenger automobile.

Line 36:
The program checks the yes checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox YES for Is another vehicle available for personal use is checked if such property is listed property or a passenger automobile.
The program checks the NO checkbox if on depreciation worksheet page -3 for a particular vehicle checkbox NO for Is another vehicle available for personal use is checked if such property is listed property or a passenger automobile.

SECTION C:

Employers providing vehicles to their employees satisfy the employer's substantiation requirements under section 274(d) by maintaining a written policy statement that:

  • Prohibits personal use including commuting or
  • Prohibits personal use except for commuting.

An employee does not need to keep a separate set of records for any vehicle that satisfies these written policy statement rules.
The taxpayer needs to answer the related questions on line 37 to line 41 that are applicable to him by checking the checkbox YES or NO.

Line 37:
A policy statement that prohibits personal use must meet all of the following requirements.they are :

  • The employer owns or leases the vehicle and provides it to one or more employees for use in the employer's trade or business.
  • When the vehicle is not used in the employer's trade or business , it is kept on the employer's business premises , unless it is temporarily located elsewhere.
  • No employee using the vehicle lives at the employer's business premises.
  • No employee may use the vehicle for personal purposes.

Line 38:
A policy statement that prohibits personal use (except for commuting) is not available if the commuting employee is an officer, director , or 1% or more owner.
THis policy must meet all of the following conditions.

  • The employer owns or leases the vehicle and provides it to one or more employees for use in the employer's trade or business, and it is used in the employer's trade or business.
  • For bona fide non compensatory business reasons, the employer requires the employee to commute to and/ or from work in the vehicle.
  • The employer establishes a written policy under which the employee may not use the vehicle for personal purposes, other than commuting.

Line 39 :
The taxpayer needs to check the appropriate checkbox if the question applies to him.

Line 40:
An employer that provides more than five vehicles to its employees who are not 5% owners or real ted persons need not complete section B for such vehicles. Instead the employer must obtain the information from its employees and retain the information received.

Line 41:
An automobile meets the requirements for Qualified demonstration use if the employer maintains a written policy statement that:

  • Prohibits its use by individuals other than full time automobile sales persons ,
  • Prohibits its use for personal vacation trips,
  • Prohibits storage of personal possessions in the automobile, and
  • Limits the total mileage outside the salesperson's normal working hours.

PART - IV AMORTIZATION

Each year the taxpayer can deduct part of certain capital costs over a fixed period.


If the taxpayer amortizes property , the part he amortizes does not qualify for section 179 expense deduction or for depreciation.

Line 42:
Complete line 42 only for those costs the taxpayer amortize for which the amortization period begins during the tax year beginning in 2007.

Column a :
The program enters on this line from depreciation worksheets page -1 line description of asset if the depreciation Type is Amortize and date placed in service is in current year.

Column b:
The program enters on this line from depreciation worksheets page -1 line date placed in service if the depreciation Type is Amortize and date placed in service is in current year.

Column c:
The program enters on this line from depreciation worksheets page -1 line Basis of Depreciation if the depreciation Type is Amortize and date placed in service is in current year.

Column d:
The program enters on this line from depreciation worksheets page -1 line amortized code section if the depreciation Type is Amortize and date placed in service is in current year.

Column e:
The program enters on this line from depreciation worksheets page -1 line recovery period if the depreciation Type is Amortize and date placed in service is in current year.

Column f:
The program enters on this line from depreciation worksheets page -1 line current year depreciation if the depreciation Type is Amortize and date placed in service is in current year.

Line 43:
The program enters on this line from depreciation worksheets page -1 line current year depreciation if the depreciation Type is Amortize and date placed in service is not in current year but in prior years.

Line 44:
The program adds line 42f and line 43 and enters the total on this line.

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