Inventory capital, which includes assets that businesses use to conduct their operations, makes up a whopping 7% of the GDP of the entire United States! As you can imagine, the IRS wants to keep a watchful eye over all these assets, and they also want to tax them when possible.
Of course, it wouldn’t make sense to continue taxing a business at the same rate for an asset that isn’t as valuable as it was when it was purchased years ago. That’s why Form 4562, Depreciation and Amortization, exists. It helps businesses identify cases of depreciation and potential amortization, too.
Are you feeling a bit thrown off by these terms and the form itself? Don’t fret! We’re here to go over everything you need to know about Form 4562. Learn more about this form, who needs to file it, and how to fill it out below.
What Is Depreciation and Amortization?
Before we get started on explaining the ins and outs of Form 4562, we need to clarify what exactly depreciation and amortization are.
Depreciation is what happens when you purchase property to use for your business and you plan on using that asset for more than one year. After the first year, most assets lose some of their original value. Depreciation begins as soon as you start using the property or asset as part of your business operations. Depreciation ends when that property fails, you stop using it, or you’ve deducted all the depreciable cost of the item.
While you can use depreciation on most assets and property, you can’t depreciate land. You can, however, use depreciation on copyrights, computer software, vehicles, buildings, equipment, and more.
Amortization is a strategy that helps you stretch out the cost of an asset over the course of its entire life. You can amortize items like the costs of goodwill, intangible assets, and starting a business.
If you have more questions about how various taxes might apply to your business, check out this guide to small business income tax.
Who Should File Form 4562 Depreciation and Amortization Forms?
Do you currently own a business that uses assets and property as part of its operations? If so, you’ll likely need to fill out Form 4562 at some point. After all, assets and properties rarely maintain the same value year after year.
Here is an overview of situations that might require you to file this important form according to the IRS:
- A deduction for a vehicle you reported
- Depreciation on corporate income tax return
- Amortization of costs that began in the tax year you’re filing for
- Depreciation of property you used in the tax year you’re filing for
- A Section 179 deduction
- Depreciation on any vehicle or listed property
If you fall into one of these categories, you’ll want to fill out a depreciation and amortization form. If you have separate businesses or activities that require Form 4562, you’ll need to fill out a separate form for each one.
Form 4562 Instructions: How to Fill out Form 4562
As anyone knows, tax forms can get complicated pretty quickly, so we’ll provide you with the most detailed and accurate Form 4562 instructions to help you along the way.
Before you get started, you’ll need to gather up a few things, including:
- IRS Form 4562
- Any receipts for the assets
- The price of the asset
- The date your business started to use the asset
- The total income you are reporting in the tax year you’re filing for
Depending on how you fill out your taxes, you can submit the form electronically or print it off and send it via snail mail. Either way is acceptable, but it is much faster, easier, and cheaper to fill out your form online.
Next, you need to fill out the basics. Start with the name you used on your return, the business attached to the return, and your identifying number. From there, you’ll move on to Part 1. You’ll put in the following information on each line:
- Line 1: Maximum amount of all property during tax year
- Line 2: Total cost of all property during the tax year
- Line 3: Maximum cost of property before reduction
- Line 4: Any reductions
- Line 5: Dollar limitation (if line 5 is 0, skip to line 12 where you will also enter 0)
In the next section, you’ll describe the property, cost, and elected cost. If you need help with line 3 or this section, check out this IRS worksheet. For additional one-on-one help, consider speaking with a tax expert.
Do You Have More Questions About Form 4562?
Form 4562 can seem pretty intimidating and confusing at first glance. The good news is that you’ll only have to fill out this important form if you’ve purchased property for your business that you plan on using and writing off on your taxes. Since that valuable piece of property won’t retain the same value forever, Form 4562 will come in handy in the years to come. After all, no one wants to continue paying the tax rate allotted for a $50,000 work vehicle if it’s depreciated to only be worth $20,000!
Do your business a favor and stay on top of your asset’s depreciation and potential amortization—it will keep you from paying too much or not enough on your next business tax return.
Do you have more questions about Form 4562 or where to find depreciation and amortization information about your assets? Do you need additional help with your tax situation in general? Here at Tax Group Center, our agents have extensive experience helping both individuals and businesses solve their tax problems and remain in good standing with the IRS. Reach out to our firm now to learn more about how we can help your business thrive.