Claiming Your Depreciation Deductions

If you're completing your own tax returns, you may want a little more detailed explanation of exactly how to report depreciation deductions.

In most cases, your depreciation deductions will be entered on IRS Form 4562, Depreciation and Amortization, and then the total amount will be carried over to Line 13 of your Schedule C if you are a sole proprietor, or to Form 1120 for a C corporation, Form 1120S for an S corporation, or to Form 1065 for a partnership or LLC.

You must file a Form 4562 for the first year you claim depreciation or amortization on any particular piece of property, for any year you claim a Section 179 expensing election (including an amount carried over from a previous year), and for every year you claim depreciation on a car, other vehicle, or any other type of listed property. You don't have to file this form if you are simply claiming continued depreciation on property that is not considered listed property, or if you are claiming auto expenses based on the standard mileage rate.

Do not combine depreciation expenses for more than one business or investment activity on the same Form 4562. If you operate more than one business, or if you conduct some other type of activity for which you can deduct depreciation (e.g., you own some rental real estate that will be reported on Schedule E), you'll need to consider each activity's expenses separately in determining whether you need to file a Form 4562 for that business. It's very common to include several 4562s in the same tax return. Just be sure that, at the top of the form, you write the name of the business or activity to which that copy of the form relates, along with its employer identification number, if you have one.

If you (and your spouse, if filing jointly) are filing more than one Form 4562, you should use one of the forms as a "master" and complete Part I on that form only. This section of the form computes your Section 179 expensing election and applies the dollar limit, and since the limit applies "per taxpayer" rather than "per business activity," you need to total up all your elected amounts in one place.

Part V of the form relates to cars and other listed property and should generally be completed first. The total section 179 expensing election claimed for this type of property, if any, is entered on Line 29 and carried over to the front of the form (Line 7). Bonus depreciation of all listed property is combined on Line 25. The total amount of regular depreciation plus bonus depreciation on listed property is entered on Line 28 and is carried over to the front of the form (Line 21).

Once you've taken care of Part V of the form, you can go back and complete Part I, which helps you to compute your Section 179 expensing election for any new property placed in service during the year, or any carryover of an elected amount from previous years.

Next, you can fill in Part II of the form with the bonus depreciation taken on qualified, non-listed property placed in service during the year, and with other more unusual types of depreciation.

Then, complete Part III for any new property other than cars and listed property placed in service during the year. If you have more than one piece of property in an asset class (for instance, you purchased several pieces of office furniture which are considered seven-year property), your entry for column (c) in Part III will be the total basis for all items in the class, and your entry for column (g) will be the total depreciation deductions for all items in the class.

Part III asks you to total up your depreciation deductions for "old" property that is, any property not first placed in service in 2014. The total for property placed in service in 1987 or later is entered on Line 17.

The grand total of your depreciation deductions are calculated on Line 22, and then carried over to the appropriate Schedule C (or other form).

Amortization deductions are treated separately, on Part VI of the Form 4562 (Lines 42-44). Once entered here, they are not added to the rest of your depreciation deductions. Instead, they are carried over as "other expenses" to your Schedule C, and must be listed separately on the back of that form. See our discussion of how to compute your amortization expenses, in the context of business startup expenses.

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