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Form 4562

Tax Year 2012

Depreciation and Amortization
This form is used to calculate the taxpayer's available depreciation deduction, special depreciation bonus deduction, and/or section 179 deduction for assets placed in service during the tax year and previous tax years.

 

This form will be automatically generated, and the deduction will be calculated based on the information entered into the Add Asset worksheets, which can be accessed from any business activity worksheet.

 

Recordkeeping
The IRS does not require the taxpayer to submit detailed information with the taxpayer's return on the depreciation of assets placed in service in previous tax years. However, the information needed to compute the taxpayer's depreciation deduction (basis, method, etc.) must be part of the taxpayer's permanent records.

 

The following are definitions related to IRS Form 4562. See the 2011 Instructions for Form 4562 and IRS Pub. 946, How to Depreciate Property for more information and details.

Types of Depreciation Deductions
The following descriptions explain the different types of depreciation deductions available:
Section 179 Property The cost of this type of property can be recovered in part or in whole during the tax year it is placed in service, within certain limitations. In other words, by taking the Section 179 deduction a taxpayer chooses to deduct depreciation up front rather than over the life of the asset. The section 179 deduction may be taken only on assets acquired for use in a trade or business, and is not available for property used for other income-producing activities, such as rental activities.

 

Maximum Section 179 Deduction Allowed
For 2012, the maximum Section 179 deduction is $139,000 and the limit on capital purchases is $560,000.

 

All Tax Years
The following types of properties are eligible for this deduction:

  • Tangible personal property including machinery, equipment, attachments to real property, gasoline storage tanks and pumps at retail service stations, and livestock
  • Other tangible property, except buildings and their structural components, which are used as the following:
    • An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
    • A research facility used in connection with any of the activities in above, or
    • A facility used in connection with any of the activities above for the bulk storage of fungible commodities
  • Single purpose livestock or horticultural structures
  • Storage facilities, except buildings and their structural components,) used in connection with the distributing of petroleum or any primary product of petroleum
  • Off-the-shelf computer software

Section 179 property generally does not include the following:

  • Land and land improvement including buildings and permanent structures such as swimming pools, paved parking areas, docks, bridges, and fences
  • Property leased to others, unless by a corporate lessor
  • Property used mainly outside the United States (except for property described in section 168(g)(4))
  • Property used mainly to furnish lodging or in connection with the furnishing of lodging (except as provided in section 50(b)(2))
  • Property used by a tax-exempt organization, other than a section 521 farmers' cooperative, unless the property is used mainly in a taxable unrelated trade or business
  • Property used by a governmental unit or foreign person or entity, except for property used under a lease with a term of less than 6 months
  • Air conditioning or heating units
  • Any property which is classified as an ordinary and necessary deductible Expense of the current tax year
  • Any property which is classified as a Cost of Goods Sold

Important: Special rules apply when section 179 property is purchased from related parties. See IRS Pub. 946, How to Depreciate Property, Chapter 2 for more information.

Special Bonus Depreciation This is a special depreciation deduction for certain property, including all MACRS property with a recovery period of 20 years or less, that allows the taxpayer to deduct up to 50% of the cost of qualified property in the tax year it is placed into service for several tax years, including 2012.

 

This deduction is taken after any section 179 deduction is taken on the property, and before any regular depreciation is calculated and deducted.

Depreciation Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year. Land is not depreciable because the useful life is infinite. Depreciation becomes available when the taxpayer first uses the property in the taxpayer's business or for the production of income. Depreciation is no longer available when the taxpayer takes the property out of service, deducts all the taxpayer's depreciable cost or other basis, or no longer uses the property in the taxpayer's business or for the production of income.

 

To be depreciable, property must have a determinable useful life that wears out, decays, is consumed, becomes obsolete, or loses its value from natural causes over a period of time. Also, the determinable useful life must be longer than a year. If the property is not depreciable, the full cost of the property can be deducted as an expense in the year it is purchased or used.

The following property cannot be depreciated:

  • Land (as explained above)
  • Property placed in service and disposed of in the same year
  • Equipment used to build capital improvements, of which the depreciation must be added to the basis of the improvement
  • Section 197 intangibles which must be amortized
  • Certain term interests

 

Several other rules apply to depreciating property. See below for more details and definitions, and see IRS Pub. 946, How to Depreciate Property for details and specific examples.

Amortization This is the system used to recover the costs of intangible business and investment property, such as business startup costs and good will. Amortization is always done by the straight line method.
Definitions Related to Depreciation
The following definitions are applicable to depreciation:
Methods of Depreciation in General
The method of depreciation determines the amount of the deduction allowable per year over the recovery period of the asset. The methods of depreciation depending on the classification of property are as follows:
  • “200 DB” for 200% declining balance over a MACRS/GDS recovery period
  • “150 DB” for 150% declining balance over a MACRS/GDS recovery period
  • “Straight” for straight line over a MACRS/GDS recovery period
  • "ACRS" for Accelerated Cost Recovery System
MACRS
The Modified Accelerated Cost Recovery System (MACRS) is the method of depreciation introduced by the Tax Reform Act of 1986. MACRS is not an entirely new system of depreciation, but rather a series of significant modifications to the ACRS system (see below). MACRS is mandatory for most depreciable assets placed in service after December 31, 1986, and was available on an optional basis for assets placed in service after July 31, 1986, and before January 1, 1987. However, MACRS does not apply to films, videotapes, and sound recordings. See section 168(f) for other exceptions. Under MACRS, costs of qualified property are written off over predetermined periods.
ACRS
The Accelerated Cost Recovery System (ACRS) is the method of depreciation that came into effect in 1981, replacing traditional methods of depreciation based on useful life. Under ACRS, costs of qualified property are written off over predetermined periods. The minimum number of years and the applicable percent of cost that may be deducted each year depends on the class of the property. The Tax Reform Act of 1986 contained several changes to the ACRS rules. The changes are generally effective for property placed in service after December 31, 1986.
Convention for Partial Year Recovery
The 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. The three types of conventions are as follows:
  1. Half-year convention: This convention applies to all MACRS property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any tax year as placed in service (or disposed of) at the midpoint of that tax year.
  2. Mid-quarter convention: If the total depreciable bases of MACRS property placed in service during the last 3 months of the taxpayer's tax year exceeds 40% of the total depreciable bases of MACRS property placed in service during the entire tax year, the mid-quarter convention generally applies. The mid-quarter convention treats all property placed in service (or disposed of) during any quarter as placed in service (or disposed of) on the midpoint of that quarter. However, no depreciation is allowed under this convention for property that is placed in service and disposed of within the same tax year. In determining whether the mid-quarter convention applies, do not take into account the following:
    • Property that is being depreciated under a method other than MACRS,
    • Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores, and/or
    • Property placed in service and disposed of within the same tax year.
  3. Mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.



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