Estimated reading time: 5 minutes
The Section 179 Tax Deduction is an excellent way for businesses to save money on their taxes. It allows companies to deduct the entire cost of certain qualifying assets in the year they are purchased or financed instead of depreciating them over time. As a result, small businesses can make the most of Section 179, leveraging their tax savings to invest in different areas to promote growth. In short, Section 179 is a powerful tax tool that can help small businesses reduce their tax burden and reach new heights.
It is essential to know that the Section 179 tax deduction is not automatic. If you want to claim a deduction for depreciation and amortization, you must complete IRS Form 4562 and include it with your yearly tax return. Understanding this tax form might seem daunting, which is why many small business owners get professional assistance from a certified accountant. That said, business owners need to understand how Section 179 works and what needs to be included on IRS Form 4562. In this Balboa Capital blog post, we have the information you want. It is a helpful guide to IRS Form 4562.
What is Section 179?
Before we explain IRS Form 4562 in greater detail, we want to provide you with an overview of the Section 179 tax deduction. As mentioned earlier in this blog post, Section 179 is an IRS tax code that lets business owners deduct the cost of qualifying property used for business purposes. In 2023, the deduction limit is $1,160,000. Many types of tangible property are eligible. This includes business vehicles, heavy machinery, business equipment, office furniture, and technology such as computers and hardware.
Section 179 also works with various types of intangible business property. These include intellectual property (business patents, copyrights) and software used for business purposes. The Section 179 tax deduction is a powerful tool for businesses to reduce their taxable income.
What is IRS Form 4562?
IRS Form 4562 consists of six parts and is required for businesses to report their depreciation and amortization expenses. The form is also needed when companies elect the Section 179 tax deduction to expense equipment that qualifies for the deduction. In addition, the form provides the IRS with more detailed information on any vehicles or property used for business purposes. Currently, businesses are not able to depreciate land purchases. Following is a list of the six parts of IRS Form 4562, which are outlined in greater detail on the IRS website¹.
I. Election to expense certain property.
The first section in IRS Form 4562 covers property eligible for the Section 179 tax deduction. For example, suppose you purchased or financed a vehicle or equipment for your small business and want to write off a large portion of it instead of depreciating it over several years. In that case, you will need to complete this section.
II. Special depreciation allowance.
This section must be completed if you purchased or financed property eligible for bonus depreciation or another IRS depreciation allowance. Bonus depreciation, for example, enables you to deduct a specific percentage of the cost of qualifying property in the year you purchased or financed it.
III. MACRS depreciation.
The third section covers the Modified Accelerated Cost Recovery System (MACRS). This is an accelerated depreciation process used by businesses to recover the cost of their asset investments. The IRS determines the depreciation time frame (3 to 25 years) based on the type of equipment or asset. MACRS, like the other sections in IRS Form 4562, requires accurate accounting numbers and can be challenging to grasp. Therefore, it is a good idea to consult with a certified accountant who is experienced with business taxes.
Yes, the summary is the fourth section of IRS Form 4562, not the last section. It is the shortest section, too, with just three line items. There is a line to enter the value of your listed property and a line to enter the total deduction amount from the previous sections. Note: if your business is an S corporation or a partnership, you can skip this section because the deduction information will be included on each shareholder’s annual tax return.
V. Listed property.
Part five of the form is where you need to indicate the specific types of property you acquired, the dates on which it was placed into service, the percentage breakdown for business and personal use, and other related information. This is the most comprehensive form section because it requires detailed property information and has numerous questions to answer. For example, if you list a business vehicle, you will need to provide the number of miles driven during the year, including those driven for non-business purposes.
The final section of IRS Form 4562 is where you list any eligible property you amortize. Amortization is a financial term that spreads out the cost of an asset over its useful life. It is a way of reducing the cost of an asset by spreading out its payments over time. Amortization can be used for patents, copyrights, and goodwill, to name a few.
Filing IRS Form 4562 is an essential part of the tax filing process for small business owners who want to report the depreciation and amortization of business assets. Just remember that you must complete and file your form correctly. You can do this by understanding the best practices when filing Form 4562 and seeking assistance with a certified accountant if needed.
Section 179 limits and information on the Balboa Capital website are for illustrative purposes only; the Section 179 limits and information provided are subject to change by the IRS. Please visit the IRS website or consult a qualified tax professional for confirmation of the current Section 179 limits and information related to your situation.
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Internal Revenue Service (IRS). The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.