Comprehensive Example

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This chapter consists of a comprehensive example that illustrates a filled-in Form 4562 as well as the Depreciation Worksheet from the form instructions.

Fields of Flowers, Inc., operates a retail florist shop. It files its corporate tax return based on a calendar year. The corporation began its operation in 1999. The corporation uses all of its property 100% for business purposes.

Depreciation Worksheet

The worksheet shows the information needed to figure depreciation on each item of property and the total depreciation for 2003. The corporation's books and records support the information on the worksheet. There is an account for each item of property. These accounts show the following information.

For information on business recordkeeping, see Publication 583, Starting a Business and Keeping Records.

On February 2, 2001, the corporation bought the building used as its place of business for $250,000 and placed it in service. It also bought and placed in service on that date the following property.

The building is nonresidential real property. Fields of Flowers depreciates it using the straight line method and mid-month convention over a recovery period of 39 years. It uses Table A-7a.

The desk and chair are 7-year property. The corporation claimed a section 179 deduction for their full cost. It takes no depreciation for this property. The refrigeration equipment, work tables, and cash register are 5-year property. The corporation depreciates this property using the 200% declining balance method. No property was placed in service in the last quarter of the tax year, so the half-year convention applies. The corporation uses Table A-1 to figure the depreciation for each item.

In 2002, Fields of Flowers bought and placed in service the following new items of property.

The corporation claimed a $24,000 section 179 deduction for the truck. It used the remaining cost of $12,000 ($36,000 - $24,000) to figure a special depreciation allowance for the truck of $3,600 (30% of $12,000). The basis of the truck for depreciation is $8,400 ($12,000 - $3,600). The corporation claimed a special depreciation allowance of $90 (30% of $300) for the copier. The basis of the copier for depreciation is $210 ($300 - $90). It chose to use the 150% declining balance method over the GDS recovery period for these property items. The recovery period for both the truck and copier is 5 years. It applied the half-year convention for both items and used Table A-14.

In 2003, Fields of Flowers bought and placed in service the following new items of property.

The corporation elects to claim a section 179 deduction of $55,000 on the SUV and $45,000 on the van.

The total depreciable bases of the counters and the van, placed in service during the last three months of the corporation's tax year, is $6,670. This is more than 40% of $10,145, the total depreciable bases of all property placed in service during 2003. The corporation must apply the mid-quarter convention for all four items.

The corporation reduces the $49,800 cost of the van by its section 179 deduction of $45,000 for the van. It uses the remaining cost of $4,800 to figure a special depreciation allowance for the van of $2,400 (50% of $4,800). The basis of the van for depreciation is $2,400 ($4,800 - $2,400).

The corporation claims a special depreciation allowance of $1,500 (50% of $3,000) for the computer, $238 (50% of $475) for the file cabinets, and $935 (50% of $1,870) for the store counters. The basis of the computer for depreciation is $1,500 ($3,000 - $1,500). The basis of the file cabinets for depreciation is $237 ($475 - $238). The basis of the store counters for depreciation is $935 ($1,870 - $935).

The file cabinets are 7-year property for which the corporation uses Table A-4. The counters, the van, and the computer are 5-year property items. The corporation elects to use ADS for its 5-year property. The ADS recovery period is 9 years for the counters and 5 years for the van and computer. The corporation uses Table A-10 for the computer and Table A-12 for the store counters and van.

Form 4562

Fields of Flowers is a corporation, so it reports depreciation on Form 4562. The corporation enters the total depreciation deduction ($9,829.55) for the property placed in service before 2003 on line 17 in Part III.

The delivery truck has seating only for the driver. It is not listed property. If it were listed property, its depreciation would have been reported in Part V of Form 4562.

The corporation reports the special depreciation allowance for the computer, file cabinets, and store counters in Part II. It enters the total allowance of $2,673 for all 3 items on line 14.

The corporation reports the MACRS depreciation for the file cabinets in Section B, Part III. It uses GDS for this property and applies a mid-quarter convention. On line 19(c), it enters “MQ” in column (e) to show the mid-quarter convention is applied and “200DB” in column (f) to show it is using the 200% declining balance method. It enters the depreciation deduction of $25.38 in column (g).

The corporation reports the depreciation for the store counters and the computer in Section C, Part III. Both properties have a class life assigned to them in the Table of Class Lives and Recovery Periods in Appendix B and neither class life is 12 years or 40 years (lines 20b and 20c). Therefore, the corporation enters the depreciation deduction of $200.50 on line 20(a) in column (g).

The SUV is listed property. Fields of Flowers has taxable income of $145,389. It elects to take the entire $55,000 cost of the vehicle as a section 179 deduction, which it reports on line 26 in Part V of Form 4562 in column (i). The SUV weighs over 6,000 pounds. It is not a passenger automobile and is not subject to the passenger automobile limits discussed under Do the Passenger Automobile Limits Apply? in chapter 5.

The van is also listed property. The corporation reports the special depreciation allowance and the MACRS depreciation for it in Part V of Form 4562. It elects to take a section 179 deduction of $45,000 on the van. The van weighs over 6,000 pounds. It is not a passenger automobile and is not subject to the limits discussed under Do the Passenger Automobile Limits Apply? in chapter 5.

The corporation reduces the cost of the van by the amount of the section 179 deduction and special depreciation allowance. It enters “5” on line 26 in column (f) to show the recovery period in years and “SL” and “MQ” in column (g) to show it is using the straight line method and the mid-quarter convention. It enters the MACRS depreciation deduction of $60 in column (h) and the section 179 deduction of $45,000 in column (i). It enters the special depreciation allowance of $2,400 on line 25 in column (h).

The corporation enters the amount from line 28 on line 21 and the amount from line 29 on line 7. It completes Part I to determine its allowable section 179 deduction. It adds the amounts on lines 12, 14, 17, 19(c), 20(a), and 21 and enters the total, $115,188.43, on line 22. It rounds the total to $115,188 and enters it on the depreciation line of its tax return.

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