How to Use Equipment Depreciation as a Tax Deduction

With equipment depreciation, the original lump-sum value of equipment is reduced in asset value over the life of the equipment. Each year the dollar value of that year's depreciation is reflected as an expense for that year. The IRS allows taxpayers to use equipment depreciation as a tax deduction provided that the specific equipment is used in a business or business activity.

Difficulty: Challenging

Instructions

Things You'll Need:

• Form 4562
• Professional tax service or commercial tax filing software

Use Equipment Depreciation as a Tax Deduction

1. Maintain a file on each piece of equipment for which you will use equipment depreciation as a tax deduction. Include the purchase date, the date it was placed in service, the purchase price, usage and maintenance records and disposition or salvage. Include a schedule of amounts charged to annual depreciation based on IRS instructions and your actual tax filings.

2. Keep a master depreciation spreadsheet, listing all the information contained in these equipment files. Use this spreadsheet as your guide when it is time to file your tax return.

3. Read the IRS Form 4562 Instructions to learn how equipment depreciation figures in your business taxes and what the IRS expects in the form of record keeping from businesses that use equipment depreciation as a tax deduction.

4. Consult with your accountant or professional tax service or use your commercial tax software to determineeach piece of equipment's statutory depreciation schedule and annual depreciation allowance.

5. Record this information for Step 4 in your equipment depreciation files, your master depreciation spreadsheet and in the appropriate line for that type of equipment on IRS Form 4562.

6. Complete IRS Form 4562 with any supplemental schedules that may be required to provide additional information.

7. Record information from IRS Form 4562 as required on your business Schedule C. File both forms with your annual tax return.

8. Maintain copies of all annual Form 4562 filings attached to your Master Depreciation Spreadsheet so that when filing your taxes in future years, you can access the record of your annual depreciation deductions. The most common error that taxpayers make in taking deductions for equipment depreciation is to state prior year depreciation account balances and schedules incorrectly.

Tips & Warnings

• Any business that uses depreciation of equipment as a tax deduction should consider retaining a professional tax service or using commercial tax software to protect itself and stay abreast of changes in depreciation rules.