OVERVIEW
If you've purchased property to use in your business, you can deduct a portion of your costs by claiming a depreciation deduction and reporting it on IRS Form 4562.
Deducting property costs
When you purchase property to use in your business, the IRS doesn’t allow you to claim the full cost as a business deduction in the first year. However, you can deduct a portion of your costs each year by claiming a depreciation deduction and reporting it on IRS Form 4562, Depreciation and Amortization. The amount you can deduct on Form 4562 will vary depending on the IRS estimated useful life for each piece of property.
What is depreciation?
You can think of depreciation as the process of gradually writing off the annual wear and tear of each piece of property. The IRS estimates the number of years that certain types of property will be useful to you by establishing different property classes. Each class dictates how many years you must claim a depreciation deduction before you can recover the full cost of the property. For example, if you own a business vehicle, the IRS requires you to treat it as “5-year property” which allows you to claim five annual depreciation deductions for the vehicle.
Property you can depreciate
Generally, you can depreciate most business equipment and property that has a useful life of more than one year and that you actually use for more than one year. Although not an exclusive list, this includes buildings, furniture, machinery and even some patents and copyrights. You cannot depreciate property you use for personal purposes or any land that you own, even if used solely for business.
Accelerating your deductions
The Internal Revenue Code encourages businesses to make capital investments by allowing you to deduct the full cost of some depreciable property in one tax year if you make a Section 179 election. Generally, the IRS places an annual limit on the amount of purchases eligible for this accelerated deduction. For example, in 2022 you can elect to deduct up to $1,080,000 of costs. If you purchase more than this, the excess is subject to the normal depreciation deduction rules. You can make the Section 179 election right on Form 4562.
Bonus Depreciation
Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus "expensing" of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions (qualified film, television, and live staged performances) and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
Filing Form 4562
File Form 4562 with your individual or business tax return for any year you are claiming a depreciation deduction or making a Section 179 election. When you claim depreciation, it’s incredibly important that you retain copies of all 4562's so you can track your prior deductions and claim the appropriate amount in future years.
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