Depreciation and Amortization (Including Information on Listed Property)

Changes To Note

• The March 2002 revision of the 2001 Form 4562 reflects changes made by the Job Creation and Worker Assistance Act of 2002. If these changes affect you, you should use the revised 2001 version of Form 4562 for tax years beginning in 2000 or 2001. If you have filed a tax return, you may have to file an amended return.

  If you use the revised form for a tax year beginning in 2000, you must reduce the amount of the maximum section 179 expense deduction to $20,000 (before adding the additional amount that applies to certain businesses).

• You may be able to take an additional 30% depreciation deduction for property placed in service after September 10, 2001. See the instructions for line 14 on page 3 (for listed property, see the instructions for line 25 on page 7).
• For tax years beginning in 2001, the maximum section 179 expense deduction has been increased to $24,000 ($44,000 for enterprise zone businesses and renewal community businesses; $59,000 for qualified New York Liberty Zone property placed in service after September 10, 2001). See the instructions for line 1 on page 2.
• The recovery period for qualified New York Liberty Zone leasehold improvement property placed in service after September 10, 2001, is 5 years (9 years under the Alternative Depreciation System). See the instructions for line 19 on page 4 and line 20 on page 6.
• Certain taxpayers may elect out of the mid-quarter convention. See page 5 for details.

Purpose of Form

Use Form 4562 to:

• Claim your deduction for depreciation and amortization,
• Make the election under section 179 to expense certain tangible property, and
• Provide information on the business/investment use of automobiles and other listed property.

Who Must File

Except as otherwise noted, complete and file Form 4562 if you are claiming any of the following.

• Depreciation for property placed in service during the 2001 tax year.
• A section 179 expense deduction (which may include a carryover from a previous year).
• Depreciation on any vehicle or other listed property (regardless of when it was placed in service).
• A deduction for any vehicle reported on a form other than Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business.
• Any depreciation on a corporate income tax return (other than Form 1120S).
• Amortization of costs that begins during the 2001 tax year.

However, do not file Form 4562 to report depreciation and information on the use of vehicles if you are an employee deducting job-related vehicle expenses using either the standard mileage rate or actual expenses. Instead, use Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, for this purpose.

Note: File a separate Form 4562 for each business or activity on your return for which Form 4562 is required. If you need more space, attach additional sheets. However, complete only one Part I in its entirety when computing your section 179 expense deduction. See the instructions for line 12 on page 3.

Additional Information

For more information about depreciation and amortization (including information on listed property) see the following.

• Pub. 463, Travel, Entertainment, Gift, and Car Expenses.
• Pub. 534, Depreciating Property Placed in Service Before 1987.
• Pub. 535, Business Expenses.
• Pub. 551, Basis of Assets.
• Pub. 946, How To Depreciate Property.

Definitions

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. However, land is not depreciable.

Depreciation starts when you first use the property in your business or for the production of income. It ends when you take the property out of service, deduct all your depreciable cost or other basis, or no longer use the property in your business or for the production of income.

Section 179 Property

Section 179 property is generally any tangible property that can be depreciated under the Modified Accelerated Cost Recovery System (MACRS) (see page 4) and that you acquired by purchase (as defined in section 179(d)(2)) for use in the active conduct of your trade or business that is:

• Personal property,
• A single purpose agricultural or horticultural structure (as defined in section 168(i)(13)), or
• Certain other property described in section 1245(a)(3).

Section 179 property does not include the following.

• Property held for investment (section 212 property).
• 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.

Amortization

Amortization is similar to the straight line method of depreciation in that an annual deduction is allowed to recover certain costs over a fixed time period. You can amortize such items as the costs of starting a business, goodwill, and certain other intangibles. See the instructions for Part VI on page 9.

Listed Property

Listed property generally includes:

• Passenger automobiles weighing 6,000 pounds or less.
• Any other property used for transportation if the nature of the property lends itself to personal use, such as motorcycles, pick-up trucks, etc.
• Any property used for entertainment or recreational purposes (such as photographic, phonographic, communication, and video recording equipment).
• Cellular telephones (or other similar telecommunications equipment).
• Computers or peripheral equipment.

Exception. Listed property does not include:

1. Photographic, phonographic, communication, or video equipment used exclusively in a taxpayer's trade or business or at the taxpayer's regular business establishment;
2. Any computer or peripheral equipment used exclusively at a regular business establishment and owned or leased by the person operating the establishment; or
3. An ambulance, hearse, or vehicle used for transporting persons or property for hire.

For purposes of the exceptions above, a portion of the taxpayer's home is treated as a regular business establishment only if that portion meets the requirements under section 280A(c)(1) for deducting expenses attributable to the business use of a home. However, for any property listed in 1 above, the regular business establishment of an employee is his or her employer's regular business establishment.

Commuting

Generally, commuting is travel between your home and a work location. However, travel that meets any of the following conditions is not commuting.

• You have at least one regular work location away from your home and the travel is to a temporary work location in the same trade or business, regardless of the distance. Generally, a temporary work location is one where your employment is expected to last 1 year or less. See Pub. 463 for details.
• The travel is to a temporary work location outside the metropolitan area where you live and normally work.
• Your home is your principal place of business under section 280A(c)(1)(A) (for purposes of deducting expenses for business use of your home) and the travel is to another work location in the same trade or business, regardless of whether that location is regular or temporary and regardless of distance.

Alternative Minimum Tax (AMT)

Depreciation may be an adjustment for the AMT. For details, see Form 4626, Alternative Minimum Tax - Corporations; Form 6251, Alternative Minimum Tax - Individuals; or Schedule I of Form 1041, U.S. Income Tax Return for Estates and Trusts.

Recordkeeping

Except for Part V (relating to listed property), the IRS does not require you to submit detailed information with your return on the depreciation of assets placed in service in previous tax years. However, the information needed to compute your depreciation deduction (basis, method, etc.) must be part of your permanent records.

Because Form 4562 does not provide for permanent recordkeeping, you may use the depreciation worksheet on page 12 to assist you in maintaining depreciation records. However, the worksheet is designed only for Federal income tax purposes. You may need to keep additional records for accounting and state income tax purposes.

Identifying number. Individuals, enter your social security number. All others, enter your employer identification number (EIN).

Part I - Election To Expense Certain Tangible Property Under Section 179

Note: An estate or trust cannot make this election.

You may elect to expense part or all of the cost of section 179 property (defined on page 1) that you placed in service during the tax year and used predominantly (more than 50%) in your trade or business. However, for taxpayers other than a corporation, this election does not apply to any section 179 property you purchased and leased to others unless:

• You manufactured or produced the property or
• The term of the lease is less than 50% of the property's class life and, for the first 12 months after the property is transferred to the lessee, the deductions related to the property allowed to you solely under section 162 (except rents and reimbursed amounts) are more than 15% of the rental income from the property.

If you elect to expense section 179 property, you must reduce the amount on which you figure your depreciation or amortization deduction (including the special depreciation allowance) by the section 179 expense deduction.

You must make the election with either:

• The original return you file for the tax year the property was placed in service (whether or not you file your return on time) or
• An amended return filed no later than the due date (including extensions) for your return for the tax year the property was placed in service.

Note: If you timely filed your return without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Write Filed pursuant to section 301.9100-2 on the amended return.

Once made, the election (and the selection of the property you elect to expense) may not be revoked without IRS consent.

Limitations. The amount of section 179 property for which you may make the election is limited to the maximum dollar amount on line 1. In most cases, this amount is reduced if the cost of all section 179 property placed in service during the year is more than $200,000. The total cost of section 179 property for which the election may be made is figured on line 5. The amount of your section 179 expense deduction for 2001 cannot exceed your business income (line 11).

For a partnership (other than an electing large partnership, as defined in section 775) these limitations apply to the partnership and each partner. For an electing large partnership, the limitations apply only to the partnership. For an S corporation, these limitations apply to the S corporation and each shareholder. For a controlled group, all component members are treated as one taxpayer.

For more details on the section 179 expense deduction, see Pub. 946.

Line 1

For an enterprise zone business or a renewal community business, the maximum section 179 expense deduction of $24,000 is increased by the smaller of:

• $20,000 or
• The cost of section 179 property that is also qualified zone property or qualified renewal property (including such property placed in service by your spouse, even if you are filing a separate return). For qualified renewal property, you must have acquired the property after December 31, 2001.

For qualified New York Liberty Zone property, the maximum section 179 expense deduction is increased by the smaller of:

• $35,000 or
• The cost of section 179 property that is also qualified New York Liberty Zone property (including such property placed in service by your spouse, even if you are filing separate returns).

Note: You must have acquired the qualified New York Liberty Zone property after September 10, 2001, and no written binding contract must have been in effect for the acquisition before September 11, 2001.

If applicable, cross out the preprinted entry on line 1 and enter in the margin the larger amount. For the definitions of enterprise zone business and qualified zone property, see sections 1397C and 1397D. For the definitions of renewal community business and qualified renewal property, see sections 1400G and 1400J(b). For the definition of qualified New York Liberty Zone property, see section 1400L(b)(2).

Recapture rule. If any qualified zone property placed in service during the current year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 expense deduction must be reported as other income on your return. Similar rules apply to qualified New York Liberty Zone property that ceases to be used in the New York Liberty Zone.

Line 2

Enter the cost of all section 179 property placed in service during the tax year. Include amounts from any listed property from Part V. Also include any section 179 property placed in service by your spouse, even if you are filing a separate return.

For an enterprise zone business, a renewal community business, or qualified New York Liberty Zone property, include on this line only 50% of the cost of section 179 property that is also qualified zone property, qualified renewal property, or qualified New York Liberty Zone property.

Line 5

If line 5 is zero, you cannot elect to expense any section 179 property. In this case, skip lines 6 through 11, enter zero on line 12, and enter the carryover of any disallowed deduction from 2000 on line 13.

If you are married filing separately, you and your spouse must allocate the dollar limitation for the tax year. To do so, multiply the total limitation that you would otherwise enter on line 5 by 50%, unless you both elect a different allocation. If you both elect a different allocation, multiply the total limitation by the percentage elected. The sum of the percentages you and your spouse elect must equal 100%.

Important: Do not enter on line 5 more than your share of the total dollar limitation.

Line 6

Important: Do not include any listed property on line 6. Enter the elected section 179 cost of listed property in column (i) of line 26.

Column (a). Enter a brief description of the property for which you are making the election (e.g., truck, office furniture, etc.).

Column (b). Enter the cost of the property. If you acquired the property through a trade-in, do not include any undepreciated basis of the assets you traded in. See Pub. 551 for details.

Column (c). Enter the amount you elect to expense. You do not have to expense the entire cost of the property. You can depreciate the amount you do not expense. See the line 19 and line 20 instructions.

To report your share of a section 179 expense deduction from a partnership or an S corporation, write from Schedule K-1 (Form 1065) or from Schedule K-1 (Form 1120S) across columns (a) and (b).

Line 10

The carryover of disallowed deduction from 2000 is the amount of section 179 property, if any, you elected to expense in previous years that was not allowed as a deduction because of the business income limitation. If you filed Form 4562 for 2000, enter the amount from line 13 of your 2000 Form 4562. For details, see Pub. 946.

Line 11

The section 179 expense deduction is limited by the business income limitation under section 179(b)(3).

For purposes of the rules that follow:

• If you have to apply another Code section that has a limitation based on taxable income, see Regulations section 1.179-2(c)(5) for rules on how to apply the business income limitation under section 179.
• You are considered to actively conduct a trade or business only if you meaningfully participate in its management or operations. A mere passive investor is not considered to actively conduct a trade or business.

Individuals. Enter the smaller of line 5 or the aggregate taxable income from any trade or business you actively conducted, computed without regard to any section 179 expense deduction, the deduction for one-half of self-employment taxes under section 164(f), or any net operating loss deduction. Include in aggregate taxable income the wages, salaries, tips, and other compensation you earned as an employee (not reduced by unreimbursed employee business expenses). If you are married filing a joint return, combine the aggregate taxable incomes for you and your spouse.

Partnerships. Enter the smaller of line 5 or the aggregate of the partnership's items of income and expense described in section 702(a) from any trade or business the partnership actively conducted (other than credits, tax-exempt income, the section 179 expense deduction, and guaranteed payments under section 707(c)).

S corporations. Enter the smaller of line 5 or the aggregate of the corporation's items of income and expense described in section 1366(a) from any trade or business the corporation actively conducted (other than credits, tax-exempt income, the section 179 expense deduction, and the deduction for compensation paid to the corporation's shareholder-employees).

Corporations other than S corporations. Enter the smaller of line 5 or the corporation's taxable income before the section 179 expense deduction, net operating loss deduction, and special deductions (excluding items not derived from a trade or business actively conducted by the corporation).

Line 12

The limitations on lines 5 and 11 apply to the taxpayer, and not to each separate business or activity. Therefore, if you have more than one business or activity, you may allocate your allowable section 179 expense deduction among them.

To do so, write Summary at the top of Part I of the separate Form 4562 you are completing for the aggregate amounts from all businesses or activities. Do not complete the rest of that form. On line 12 of the Form 4562 you prepare for each separate business or activity, enter the amount allocated to the business or activity from the Summary. No other entry is required in Part I of the separate Form 4562 prepared for each business or activity.

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