Form 4562

Form 4562, Depreciation and Amortization, is the schedule that carries a taxpayer's cost recovery deductions onto the return. It is filed with the income tax return for each separate business or activity, which means a taxpayer with a Schedule C and a rental activity files more than one.

The form is not required every year. It is required when the taxpayer places property in service during the year, elects Section 179 expensing, claims depreciation on listed property, begins amortizing costs in the current year, or claims a deduction for a vehicle. A business whose only depreciation is the continuing MACRS deduction on assets placed in service in earlier years, with no listed property, does not file it, and the deduction goes straight onto the return.

The parts follow the order of the computation. Part I handles the Section 179 election, including the dollar limitation, the investment phase-out based on total property placed in service, and the taxable income limitation that can defer part of the election to a later year. Part II covers the special depreciation allowance, commonly called bonus depreciation, for qualified property placed in service during the year. Part III is the MACRS computation, split between assets placed in service this year, grouped by recovery class with the convention and method shown, and the aggregate deduction for assets from prior years. Part IV summarizes. Part V is listed property, where the business-use percentage has to be substantiated and where the answer to the written-policy questions on vehicles matters. Part VI is amortization, covering section 197 intangibles, startup and organizational costs, and other amortizable items beginning this year.

The form's accuracy depends entirely on the depreciation schedule behind it, and that is where the recurring errors are. Disposals that were never removed leave phantom assets depreciating for years. Construction in progress that went into service was never transferred out. Assets bought in the fourth quarter push the taxpayer over the 40% test and trigger the mid-quarter convention, changing the deduction on every asset placed in service that year. A short tax year prorates the deduction, and the software does not always know it is a short year. And a cost segregation study reclassifies components into shorter recovery periods, which changes both the schedule and the form and usually arrives after the schedule was already built.

Two ties should be checked every year before the return is signed: the total depreciation on the form should agree to the depreciation schedule, and the schedule's accumulated depreciation should agree to the balance sheet. Where the book and tax schedules diverge, and they nearly always do because book lives and tax recovery periods differ, the difference is a temporary book-tax difference that has to be tracked rather than explained away.

Related terms: Depreciation Schedule, Cost Segregation Study, Form 1120, Book-Tax Differences

Related skill: Depreciation tie-out

Tying a depreciation schedule to the return and to the balance sheet is repetitive, high-volume checking work. Adopt's agents run the tie-out, find the disposals and the convention breaks, and leave a documented trail behind the numbers. Sign up free.