Book vs. Tax Depreciation

[KBTS]

I am working with a new client that is a fiscal year, accrual basis S-Corp. In reviewing the tax returns from the last several years, I noticed the prior accountant adjusted Schedule M-1 and/or M-2 for book vs. tax depreciation amounts. They did not do this for all the returns, so I am a bit confused as to why they did this in the first place and if it is even necessary. There is no need to produce financial statements on a GAAP basis for this company, so that would eliminate a main reason to keep the extra set of depreciation records.

Any thoughts or help would be really appreciated.

[Snaggletooth]

Only the Shadow Knows

Can you contact the previous accountant? He's the only one who could tell you.

I believe there is a threshold on these schedules - i.e. if under certain revenue limits or total assets, they are not required.

I remember in my own practice I didn't fill these out if under the threshhold. Later as I developed better quality control procedures I fill them out without exception nowadays. Could be the previous accountant was much like myself.

GAAP would not require a book-to-tax differential to be recognized on the books if the corporation was an S-corp.

[KBTS]

Prior Accountant

I spoke to the prior accountant a while back about some other issues with the client. He is a bit eccentric and I'm not sure contacting him again would prove much help. For instance, he reduced the amount of vehicle expenses by a large amount in a prior year because he felt the number could not be correct (even though the client had all the records to prove their figure).

As far as the schedules go, the client is small enough that I would not have to complete them on the 1120S but PA requires all the information, so I would still have to have something to file with that return.

[KBTS]

Bump

Just moving back up to see if anyone else had thoughts on this. Thanks.

[Nashville]

Prospective - Not Retrospective

KBTS-on-the-air:

I have hesistated to respond to this because it is the wrong answer, but I will candidly tell you what I do when I see this. This is very, very common to go behind someone else's work and find that depreciation has been miscomputed.

Firstly, I give the client the option of filing amended returns if the correction can be accomplished within the statute. This is normally a lot of work and consequently very expensive for the client. This can result in a prior year refund in some cases, but since you cannot simply apply credit on your account from an amended return, I've never had anyone willing to risk chasing the money in exchange for scrutinizing the account plus "drying up" available depreciation for further years.

So I let the prior depreciation stand for itself and remain the responsibility of the prior accountant. Then I take the remaining book value (right or wrong) and use it to calculate the remaining depreciation over the remaining life. Example: Log Loader - original cost $10,000, accum depreciation after 2 yrs, $6000 under 5 yr DD. If done correctly, the depreciation would have been only $5200. Rather than amending anything for $800 difference, I simply take the $4000 book value (wrong though it may be), and continue with year #3 depr at $1600.

Fact of the matter, upon audit I have discovered the IRS doesn't really like this, but not the first time have I had an auditor go to the trouble to recalculate the depreciation and restate the taxpayer's liability for several years. All of the depreciation is deductible in some year if not another, and even though a timing difference might result in more revenue in a high bracket year, I've never had an auditor go the trouble.

So any previous year error falls out in prospective calculations going forward, instead of retrospective amendments. There will be some "purist" readers who will be apalled that any tax preparer would be this incompetent.

If you are one of these, just understand that MANY of us do stuff like this and I am only honest enough to tell you I'm doing it. Sometimes you're dealt a bad hand and you just have to play with it instead of trying to get a re-deal.

If you've had accounting classes, you all will remember some chapter where there is a fire and everything burns up except the general ledger, and gist of the chapter is that you simply must reconstruct whatever you can and move on.