When businesses and individuals invest in tangible property—such as machinery, vehicles, or office furniture—or incur costs for intangible assets like patents or goodwill, the IRS allows them to deduct the cost over time through depreciation and amortization. To claim these valuable deductions, you must use Form 4562.
This detailed blog will walk you through what Form 4562 is, who needs to file it, how depreciation and amortization work, and how to fill out the form properly to reduce your taxable income and increase your tax savings.
What Is Form 4562?
Form 4562 is used to claim deductions for the depreciation or amortization of property placed in service during the tax year. It also allows taxpayers to:
- Claim a Section 179 expense deduction
- Report depreciation on listed property (like vehicles and electronics)
- Claim amortization for intangible assets
Form 4562 is attached to your income tax return (Form 1040 with Schedule C, Form 1120, 1065, etc.).
Who Must File Form 4562?
You must file Form 4562 if:
- You are claiming depreciation or amortization for the current year
- You are claiming a Section 179 expense deduction
- You are reporting depreciation on listed property
- You are carrying over any Section 179 amount from a previous year
This form is common among small business owners, landlords, corporations, and sole proprietors who purchase assets for business use.
Understanding Depreciation
Depreciation is the process of allocating the cost of a tangible asset over its useful life. The IRS defines specific recovery periods and depreciation methods for different asset types under the Modified Accelerated Cost Recovery System (MACRS).
Common recovery periods include:
- 3 years – Certain tools and livestock
- 5 years – Computers, office equipment, vehicles
- 7 years – Office furniture, fixtures
- 15 years – Land improvements
- 27.5 years – Residential rental property
- 39 years – Commercial real estate
MACRS allows for either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS), depending on the nature of the asset and use.
Understanding Amortization
Amortization is similar to depreciation but applies to intangible assets such as:
- Patents
- Copyrights
- Franchise rights
- Startup organizational costs
- Goodwill (usually over 15 years)
The amortization deduction is calculated on a straight-line basis over a predetermined period (usually 15 years unless otherwise specified).
Key Sections of Form 4562
Part I – Section 179 Expense Deduction
Section 179 allows businesses to deduct the full cost of qualifying property (up to a limit) in the year it’s placed in service instead of depreciating it over time.
- For 2024, the Section 179 limit is up to $1,220,000
- The deduction phases out if total property placed in service exceeds $3,050,000
- Qualifying property must be tangible, used in a trade or business, and cannot include land or inventory
Part II – Special Depreciation Allowance and Other Depreciation
This section is used to report bonus depreciation (also known as the additional first-year depreciation). For property placed in service in 2024, the bonus depreciation is 60% (phasing down from 100% in 2022).
Bonus depreciation can be applied in addition to Section 179 and allows faster cost recovery for qualified new or used assets.
Part III – MACRS Depreciation
This part is for reporting depreciation under MACRS. You’ll need to provide:
- Date the property was placed in service
- Cost or basis
- Recovery period
- Convention used (Half-Year, Mid-Quarter, or Mid-Month)
- Depreciation method (e.g., 200% declining balance, straight-line)
Part IV – Summary
This section totals all depreciation and amortization deductions calculated on the form and reports them on your applicable tax return.
Part V – Listed Property
Listed property includes assets prone to personal use such as:
- Passenger vehicles
- Cell phones
- Computers (in some cases)
You must maintain detailed records for listed property to prove business use. If business use is under 50%, more restrictive depreciation methods apply.
Part VI – Amortization
Here you report amortizable assets such as intangibles. You must list:
- Description of the asset
- Date acquired
- Cost or other basis
- Amortization period
- Amortization for the year
Common Mistakes to Avoid
- Depreciating non-depreciable assets (e.g., land)
- Using incorrect recovery periods or depreciation methods
- Failing to track listed property usage correctly
- Overlooking Section 179 limits and phase-outs
- Forgetting to file Form 4562 when required
Recordkeeping Requirements
Good recordkeeping is critical. You should maintain documentation such as:
- Receipts and invoices for asset purchases
- Service dates
- Cost basis calculations
- Logbooks for listed property usage
These records may be requested in an IRS audit and are essential for accurately calculating depreciation or amortization.
Where to Report the Deduction
The total depreciation and amortization amounts from Form 4562 are reported on the applicable line of your return, such as:
- Schedule C (Line 13 for sole proprietors)
- Form 1120 (corporations)
- Form 1065 (partnerships)
- Schedule E (for rental property depreciation)
Useful IRS Resources
- IRS Form 4562 Instructions
- IRS Publication 946: How to Depreciate Property
- Publication 535: Business Expenses
Conclusion: Leverage Form 4562 to Your Advantage
Form 4562 is more than just paperwork—it’s a powerful tax planning tool. Whether you’re a small business owner investing in new equipment or a landlord with depreciable real estate, understanding and properly using this form can significantly reduce your tax bill.
Given the complexities of depreciation methods, special allowances, and eligibility rules, it’s wise to consult a tax professional or use robust accounting software. But by taking the time to understand Form 4562 and applying its provisions correctly, you can optimize your deductions and improve your financial outcomes year after year.
