New reg; 481(a) adj

[TaxprepP]

I have some clients with depreciation in incorrect class lives from previous other tax preparers. Such as farm equipment classed under MACRS at 5 years instead of 7 years. Farm buildings classed 7 years instead of 20. What would be the best way to correct? Calculate what accumulated depreciation should be and make a 481(a) adjustment or leave accumulated depreciation balance as is at end of 2013 and change class life for 2014 and going forward?

[Lion]

Form 3115.

[TaxprepP]

Form 3115.

I know to use form 3115. I seeking asistance for what or how to figure the adjustment. I havent'yh found any detail explainations on going about at when there is a change in depreciation class life. I will admit I am no mastermind expert in depreciation.

[TaxGuyBill]

That sounds like a "Impermissible to permissible method of accounting for depreciation", using Code 7 on Form 3115 (see page 22 of Revenue Procedure 2015-14).

http://www.irs.gov/pub/irs-drop/rp-15-14.pdf#page=22

For Line 25 of 3115, you show the calculation of the actual depreciation taken ("impermissible" method) for each year and add it up.
Then you show the calculation of what is SHOULD have been ("permissible method) for each year and add it up.

The difference is your 481(a) adjustment.

The current year return will depreciate the assets using the correct class life, using the prior depreciation that SHOULD have been used.


Does that help?

[BHoffman]

I have some clients with depreciation in incorrect class lives from previous other tax preparers. Such as farm equipment classed under MACRS at 5 years instead of 7 years. Farm buildings classed 7 years instead of 20. What would be the best way to correct? Calculate what accumulated depreciation should be and make a 481(a) adjustment or leave accumulated depreciation balance as is at end of 2013 and change class life for 2014 and going forward?

I believe that brand new farm equipment purchased in 2009 (and only in 2009) was eligible for a 5 year class life.

Is the farm building a silo, grain storage bin, trailer on wheels, single purpose agricultural structure, or other qualifying property? I believe there are some farm buildings that do have a 7 year class life, and it's even possible that those buildings were eligible for Sec 179.

See Pub 225.

HTH

[TaxprepP]

Thank you for the information. This message board has been very helpful to me this year.
I am wondering about rental real estate. I have a couple of new clients where their rental properties were classed at 15 yr property instead of 27.5 yr. In pub 527 for 2014 states "Rental property placed in service brfore 2014. Continue to use the same method of figuring depreciation that you used in the past." In interpreting this statement would you say it would include the recovery period. Or, would it require an 481(a) adjustment and/or form 3115? I Welcome comments and imput.

[BHoffman]

Thank you for the information. This message board has been very helpful to me this year.
I am wondering about rental real estate. I have a couple of new clients where their rental properties were classed at 15 yr property instead of 27.5 yr. In pub 527 for 2014 states "Rental property placed in service brfore 2014. Continue to use the same method of figuring depreciation that you used in the past." In interpreting this statement would you say it would include the recovery period. Or, would it require an 481(a) adjustment and/or form 3115? I Welcome comments and imput.

When were the properties placed into service? If in an open year, you can amend those tax returns.

Otherwise - Unless the properties were placed into service more than 27.5 years ago and are now fully depreciated anyway, I think form 3115 is going to be needed to fix this.

Did any of the rentals result in passive activity loss limitations that are still being carried forward? That will make figuring the 481(a) adjustment a little trickier.

[TaxprepP]

When were the properties placed into service? If in an open year, you can amend those tax returns.

Otherwise - Unless the properties were placed into service more than 27.5 years ago and are now fully depreciated anyway, I think form 3115 is going to be needed to fix this.

Did any of the rentals result in passive activity loss limitations that are still being carried forward? That will make figuring the 481(a) adjustment a little trickier.

Unfortunately, the properties wereplaced in service prior to open years. Thak goodness no passive activity loss carryovers.
I seeking opinion in interpreting "method of determining depreciation" from the tax pub.

[Lion]

As you get deeper into a situation, you need to leave the tax pubs that you cannot use as substantial authority and move on to the tax code itself or other authorities that rank higher than pubs. The pub you are reading will cite the IRC, Rev Procs, Court cases, etc., that you will want to read directly along with interpretations by experts in that field. We probably have experts among us. Can you explain exactly what you are asking about "interpreting 'method of determining depreciation'"? The tax pub is already interpreting the code, but gives you no guarantee it is doing a thorough job of all the finer points that could apply in every situation. Are you just asking if it is a permissible method of depreciation?

[BHoffman]

Unfortunately, the properties wereplaced in service prior to open years. Thak goodness no passive activity loss carryovers.
I seeking opinion in interpreting "method of determining depreciation" from the tax pub.

My opinion is that the line in the Pub "method of determining depreciation" does not apply to the situation you are describing. The class life for residential rental property is 27.5 years. The prior returns have overstated the depreciation expense and, therefore, understated the tax due.

I'm voting for form 3115 with the 481(a) adjustment.

[TaxprepP]

My opinion is that the line in the Pub "method of determining depreciation" does not apply to the situation you are describing. The class life for residential rental property is 27.5 years. The prior returns have overstated the depreciation expense and, therefore, understated the tax due.

I'm voting for form 3115 with the 481(a) adjustment.

Thank you. That is what I am thinking also. I wanted to get others opinions. In recording the adjustment in the tax return for overstating depreciation (increase in income) where would be the best place to put it?