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What is IRS Form 4562?
When depreciating business assets such as investment real estate or certain types of personal property, the depreciation deductions will be calculated and reported on IRS Form 4562 with your tax return. As a real estate investor, this form is a crucial part of your income tax return as it allows you to take advantage of one of the best real estate tax benefits.
Form 4562 is also used for amortizing certain intangible business assets. Some intangible assets that can be deducted with Form 4562 include patents, trademarks, franchise agreements, and organizational costs.
Who should file IRS Form 4562?
Anyone who owns business property that they want to depreciate will need to file Form 4562. The following tax deductions will require the use of this IRS tax form:
- Commercial real estate depreciation.
- Residential rental depreciation.
- Personal property used for business.
- Section 179 deduction.
- Bonus depreciation.
- Amortized expenses.
How do I complete IRS Form 4562?
With the various types of depreciation schedules and deductions reported on Form 4562, it is generally recommended that taxpayers use a certified public accountant to assist with completing Form 4562 as well as calculating all other business tax deductions. However, it is still beneficial to understand what goes into calculating Form 4562 depreciation deductions.
Part I: Election to expense certain property under Section 179 note
If you have qualified property that's eligible for Section 179, Part I of Form 4562 is where you would elect to take the Section 179 deduction. You will use this part of the form to calculate how much you're allowed to deduct from purchases of Section 179 property. You will also choose how much of that allowed amount you are electing to deduct.
Part II: Special depreciation allowance and other depreciation
Part II of Form 4562 is the section where you will list any types of special depreciation you're claiming. The most common one here is bonus depreciation. Any Section 168(f)(1) elections are also listed here. This type of depreciation is based on the amount certain types of qualified property is used, so that it's depreciated in line with its wear and tear instead of just its age in years. You will also list any other types of depreciation not asked for elsewhere on the form, including Accelerated Cost Recovery System (ACRS) depreciation.
Part III: MACRS depreciation
Part III of Form 4562 is used to list Modified Accelerated Cost Recovery System deductions (MACRS). This section is particularly important for real estate investors because it is where business and income-producing real estate depreciation is claimed. The Modified Accelerated Cost Recovery System provides a depreciation deduction each year over what the Internal Revenue Service (IRS) considers its useful life. Real estate is deducted over its useful life as follows:
- Residential rental properties are depreciated over 27.5 years.
- Commercial properties are depreciated over 39 years.
MACRS is also the standard system used for depreciating most other depreciable business property when Section 179 and bonus depreciation aren't used.
Part IV: Summary
Part IV of Form 4562 is where the total amount of depreciation from each part of the form is added up. This is the amount of depreciation that will be put in Line 13 of Schedule C for Form 1040.
Part V: Listed property
Part V of Form 4562 is used for depreciating certain classes of business property that are also used for personal use. This is called listed property. To be classified as listed property, it must be used at least 50% in a qualified business use. Common examples of listed property are automobiles, aircraft, boats, equipment used for entertainment, and computers.
Part VI: Amortization
Part VI of Form 4562 is for amortization of intangible capital costs. These costs are not related to the purchase of physical business property. Common examples of expenses that are amortized instead of depreciated are patents, trademarks, upfront franchise fees, and organizational costs.
The bottom line
The Internal Revenue Service (IRS) provides detailed instructions for Form 4562. These instructions go into more detail as to how you should fill out each line in the form. You can also get more information on what types of property should be depreciated and what system of depreciation should be used in IRS Publication 946.
Taking advantage of this real estate tax benefit to claim deductions for depreciation requires that you keep accurate and detailed records of your purchases of property that you are able to depreciate. It's also important to keep track of how long you have been depreciating each property and its current tax basis each year. The best way to do this is to keep your Form 4562 from each tax year in a place that is easy to reference.
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