How to Take Depreciation on Income Taxes
If you own a small business or make your living as an independent contractor, you may have purchased equipment for the business or to do your contracting work. Tools and equipment that are acquired for businesses purposes are deductible on your federal tax return; however, if the tools or equipment has a useful life of more than a year, the Internal Revenue Service requires you to expense a portion of the tools or equipment over the useful life of the assets. The expensed portion of the assets is called depreciation.
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Instructions
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1
Make a list of all the tools and equipment used for your business that meet the criteria for depreciation per the IRS regulations and the cost of the items. Refer to IRS Publication 946 for a complete explanation and description of depreciable property.
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2
Determine the method of depreciation applicable based on the property type. Almost all property is depreciated using the Modified Accelerated Cost Recovery System (MACRS) method of depreciation, but refer to IRS Publication 946 for a list of items that do not use MACRS.
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3
Obtain a MACRS calculator and calculate depreciation expense for each asset. MACRS software is available for purchase, or you can use a free MACRS calculator online (see Resources).
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4
List the tools and equipment purchased for your business on Form 4562 in Part III, along with the depreciation calculated in Step 3.
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Total the amount of the depreciation deduction and enter the total at the bottom of Form 4562. Transfer the total depreciation amount to the form used for filing your business income and expense. This form will vary depending on the type of business you have.
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Tips & Warnings
For certain types of property, the IRS allows you to elect a Section 179 deduction, which lets you deduct the entire cost of the asset in the tax year it was purchased. The amount of Section 179 deductions that you are allowed is limited each year. If you prefer to take the full amount of the deduction in the year the property is purchased, make sure your property is eligible for the Section 179 deduction and check the limits for the current taxable year.
If you are unsure how to calculate depreciation or prepare the IRS forms, consider hiring a tax professional to assist you with preparation and filing.
