3115 Impermissible method to permissible method

[Gretel]

I am taking on a new client whose depreciation schedule is messed up beyond any imagination. I basically have three different things going on: too much depreciation on some assets, too little on other, no bonus taken (and not electing out). The first two fall into the category of impermissible but I am not sure about bonus since bonus is an election.

Unless someone tells me I cannot do this, I am planning to create one list for all assets that will show correct and wrong methods and amounts. I will struggle with defining the wrong method in some cases, since it was changed out of the blue in midstream - probably software change.

To make it short, can I file for an adjustment for all of the wrong methods with procedure described above?

[Maribeth]

Yes, I believe that you can fix all of the depreciation errors on one Form 3115. I also believe that the bonus depreciation would be okay, since you elect out of bonus depreciation. With no election, then your taxpayer should have used bonus.

[Gretel]

Thank you so much for this confirmation Maribeth. I never have seen such a mess and since it's over 200 line items quite a bit a work. First I thought I just need to pay attention to items left with depreciation but I realized that this is not true.

[Super Mom]

This must be a pretty common mistake, I have a similar mess myself. I'm still questioning the bonus depreciation not taken or opted out of, but entitled to, does the client just lose all that?

[Roland Slugg]

Before you go to all the work of preparing F-3115, figure out the correct YTD depreciation on all the assets. Then compare the grand total with the total YTD depreciation actually taken. You said that some are overdepreciated and others are underdepreciated, so there will be some offsetting. If the correct total is reasonably close to the amount actually deducted, I would NOT do a F-3115. Remember, the IRS never sees the asset-by-asset list ... just the total each year. So if one asset has $500 too much and another has $495 too little, it's no big deal. I'm sure even the IRS would concur that a one-time, all-inclusive correction, done at the taxpayer level, is preferable to the F-3115 route. The IRS doesn't want to deal with trivial matters, and neither should you.

How much is "reasonably close?" That depends on the sizes of various $$$ on the return as a whole. If depreciation is, say, $25,000, I would consider a one-time correction of $5,000 or less to be acceptable, especially if gross and net income are relatively large. If annual depreciation is, say, $5,000, I wouldn't flinch at an adjustment of $2,000 or less.

I would not remotely consider going the F-3115 route unless absolutely necessary. Remember: The IRS does not see the details. If every single asset's depreciation is wrong, but the overall YTD depreciation is correct, or nearly so, what difference does it make?

[Gretel]

Roland, I agree with this assessment. I am still waiting for the 2012 tax return. I have 2011, and between 2011 & 2013 there was a software change with almost all assets transferred wrong. A brief assessment lets me think it can be over $10,000 missed bonus depreciation on newer assets. This is a farmer who has much more income this year than the year before. Minimizing the tax liability certainly will influence my decision of filing the form 3115 or not.

Your point is well taken, I think tax return preparers especially inexperienced ones, tend to be too afraid. I am not counting myself out since there are a number of areas I feel more than uncertain and I am not saying to not follow the rules either but everything needs to make common sense when looking at the bottom line.

[MBTS]

I have a new client who has had a rental for 15 yrs. The first tax preparer was depreciating like it was suppose to (1999-2002) however clients move and got another tax preparer (2003-2013) who only took out 2003 for depreciation which is NOT the right amount. I have refigured for depreciation and the amount for the 10 yrs worth is 15320.00 and for 2003 short by 173.00. So Total amt of depreciation is 15493.00. Looks like form 3115 is needed. I have NEVER completed one before.. Ok I'm LOST.... WHAT SHOULD I DO?

seen somewhere else that if you don't correct the error now you could when building sales. Is the correct?

Without using depreciation in 2014, Net income is $10490.

[AZUKHiker]

Read RP 2015-13 and 2015-14

Have a read of the relevant parts of RPs 2015-13 and 2015-14 as well as the instructions for form 3115.

You will be using code 7. If you open the PDF version of RP 2015-14 the details for code 7 start on page 22. Note the reduced information requirements for small taxpayers in section 01.(4).

You will want to do the change for the return you are preparing rather than wait for the property to be sold because without the change you would be putting your name to an incorrect return.

[mactoolsix]

For more help, checkout:

http://brasstax.com/3115%20Booklet.htm