How to Prepare Form 4562 - The Big Picture

If your small business is a Sole Proprietorship and you are involved with the preparation of your income tax return, you will eventually run into Form 4562, one of the most complicated tax forms on the planet, if not the universe. But do not despair, for help is on the way. The purpose of this article is to give you an overview of Form 4562 so you know enough to decide whether to tackle this form yourself or turn it over to a professional tax preparer.

When to go it alone. The purpose of Form 4562 is to report the purchase of business property and the deductible expense related to that purchase. By "business property" we mean both personal and real. By personal property, we mean things like computers and machines. By real property we mean land and buildings and building improvements. If you only purchase personal property for your business, and you don't buy more than $500,000 worth of such business property in a year, and your business has a profit that exceeds the amount of your business property purchases, then you just may be smart enough to prepare Form 4562 by yourself.

The reason for this advice has to do with something called the Section 179 deduction, which allows you to deduct the full purchase price of your business property in the year of purchase, provided you meet certain conditions. And some of those conditions include the items mentioned in the paragraph above.

If you meet the criteria listed above, you are likely to qualify for the Section 179 deduction, in which case you only have to complete Part I of Form 4562, a mere 13 lines.

When to get help. If you happen to buy real estate, or if you purchase more than $500,000 of any type of property in a year, or if your property purchases exceed your business profit, than you are better off to hire a tax pro to do your return.

Real estate is rarely eligible for the Section 179 deduction. Instead, you have to deduct the purchase price over many years via a complex calculation known as depreciation. For example, if you buy an office building on January 1 for $100,000, you get to deduct that $100,000 over 39.5 years. (Yes, you read that right. I did say 39.5 years.) So you only get to deduct $2,531 in the first year, $2,531 in the second year, and so on. I know that sounds crazy, but that's our tax system. My goodness, will you even be alive for another 39.5 years?

But the point here is that these depreciation calculations are quite complicated. Example: if you bought the building in February instead of January, the depreciation amount would be different than $2,531 in the first year, which is why most accountants now use a computer software program to do the calculations and to keep track of the depreciation from year to year. And should you sell the building before the end of the 39.5 year depreciation period, you've got an even messy-er calculation to deal with.

So, the bottom line is this: If you qualify for the Section 179 deduction and can fully deduct the cost of your business property purchases every year, you just might prepare Form 4562 without a glitch or even an IRS audit. Otherwise, swallow your do-it-yourself pride and get some professional help.