What is Form 4562 and How Do You Prepare It?
If you own a Sole Proprietorship and purchased any personal property (equipment, machines, office furniture, computers, etc.
) or real estate (office building, storefront property or a warehouse) for use in that business, you are required to file Form 4562 as part of your federal personal income tax return.
The challenge is this: Form 4562 takes you into one of the most complicated areas of tax law in the universe.
What's a self-employed person to do? Read on to find out.
You have two options: 1.
Do it yourself, and as Dave Barry says, "Sharpen up your pencil and stab yourself in the aorta" or 2.
Don't do it yourself.
Hire a tax professional to do it for you.
I'm assuming you are foolish enough to do it yourself.
So here we go with an overview of what Form 4562 is all about.
Part 1.
Election To Expense Certain Property Under Section 179.
Lines 1-13.
There's a very cool tax rule known as Section 179, which allows you to deduct 100% of the cost of business property in the year of purchase rather than depreciate it (i.
e.
take a partial deduction) over several years.
It sounds too good to be true.
And there's a sense in which it is, because even the Section 179 rules are complicated, so be sure to read up on this to make sure you qualify.
Most small business owners do qualify, and the tax benefits are many, and you will avoid the boar's nest of depreciation facing you below in Parts 2 and 3.
Part 2.
Special Depreciation Allowance and Other Depreciation.
Lines 14-16.
There's a special rule that let's you deduct 50% of the purchase price of business property instead of depreciating it.
So here we have yet another exception to the normal depreciation rules.
And again, be sure to read the directions, or you'll end up making a mess of things.
Part 3.
MACRS Depreciation.
Lines 17-20.
Do you really want to know what "MACRS" stands for? Here it is: Modified Accelerated Cost Recovery System.
(I told you only a fool would tread these waters without professional help.
) This is the part of the form that will make your head spin right off your shoulders.
At least be sure you are using a decent software program that supports these depreciation rules.
There are so many, it's unbelievable, not to mention ludicrous.
But isn't that the whole point of our tax system? Part 4.
Summary.
Lines 21-23.
This is really the only easy part of the form, where you add together subtotals from other parts of the form.
Part 5.
Listed Property.
Lines 24-41.
Listed property is tax code lingo for things like cars and "certain other vehicles", cell phones, "certain computers" and "property used for entertainment, recreation, or amusement".
In other words, things that people tend to use for personal use as well as business use.
So the tax code just requires even more information about these items.
Part 6.
Amortization.
Lines 42-44.
Amortization is just about as complicated as depreciation.
Nuff said?
) or real estate (office building, storefront property or a warehouse) for use in that business, you are required to file Form 4562 as part of your federal personal income tax return.
The challenge is this: Form 4562 takes you into one of the most complicated areas of tax law in the universe.
What's a self-employed person to do? Read on to find out.
You have two options: 1.
Do it yourself, and as Dave Barry says, "Sharpen up your pencil and stab yourself in the aorta" or 2.
Don't do it yourself.
Hire a tax professional to do it for you.
I'm assuming you are foolish enough to do it yourself.
So here we go with an overview of what Form 4562 is all about.
Part 1.
Election To Expense Certain Property Under Section 179.
Lines 1-13.
There's a very cool tax rule known as Section 179, which allows you to deduct 100% of the cost of business property in the year of purchase rather than depreciate it (i.
e.
take a partial deduction) over several years.
It sounds too good to be true.
And there's a sense in which it is, because even the Section 179 rules are complicated, so be sure to read up on this to make sure you qualify.
Most small business owners do qualify, and the tax benefits are many, and you will avoid the boar's nest of depreciation facing you below in Parts 2 and 3.
Part 2.
Special Depreciation Allowance and Other Depreciation.
Lines 14-16.
There's a special rule that let's you deduct 50% of the purchase price of business property instead of depreciating it.
So here we have yet another exception to the normal depreciation rules.
And again, be sure to read the directions, or you'll end up making a mess of things.
Part 3.
MACRS Depreciation.
Lines 17-20.
Do you really want to know what "MACRS" stands for? Here it is: Modified Accelerated Cost Recovery System.
(I told you only a fool would tread these waters without professional help.
) This is the part of the form that will make your head spin right off your shoulders.
At least be sure you are using a decent software program that supports these depreciation rules.
There are so many, it's unbelievable, not to mention ludicrous.
But isn't that the whole point of our tax system? Part 4.
Summary.
Lines 21-23.
This is really the only easy part of the form, where you add together subtotals from other parts of the form.
Part 5.
Listed Property.
Lines 24-41.
Listed property is tax code lingo for things like cars and "certain other vehicles", cell phones, "certain computers" and "property used for entertainment, recreation, or amusement".
In other words, things that people tend to use for personal use as well as business use.
So the tax code just requires even more information about these items.
Part 6.
Amortization.
Lines 42-44.
Amortization is just about as complicated as depreciation.
Nuff said?
