How to best fix this? Car for $30,000 was gifted and the vehicle is used mostly for business, Schedule C. Two mistakes were made relating to Sec. 179 - $,4000. 1. Section 179 was not allowed at all since this is gifted property. 2. If Sec.179 is used for a luxury vehicle, no MACRS depreciation is allowed until year 5, I believe. However, since 179 was not allowed in the first place the second limitation for luxury vehicles should not apply. Can I simple make a correction on the 2020 tax return for depreciation? Is this mistake deemed to be an accounting method chosen even though Sec. 179 was not allowed in the first place? Then it would require form 3115 since it is for more than one year. Any practical advise how to deal with this?
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I think 2018 needs to be amended to get rid of the non-allowed 179, and 2019 be amended if needed. I don't think 3115 applies.
This doesn't matter if you are amending to get rid of the 179, but as for your thought about "If Sec.179 is used for a luxury vehicle, no MACRS depreciation is allowed until year 5", ... sort of.
It is actually when the 100% Bonus Depreciation exceeds the Luxury Limit that is the original cause. But the IRS has an exception for that Bonus depreciation problem, but 179 voids that exception. In other words, a person could have used 179 if they had elected OUT of Bonus, and then depreciated as usual. -
It is the way you said, but it is BECAUSE of the Bonus that causes the 179 to mess things up.
What happens is that Bonus tries to take the full cost in year 1 ($30,000 in your example). But the Luxury Limits say only $18,000 can be taken, and the 'extra' $12,000 needs to be thrown after the 5 years. That leaves nothing to depreciation during years 2-5.
But because that is such a bizarre treatment, the IRS made a special exception to that rule (now that I think about it, I'm a bit unsure about their legal authority to do that) and you could depreciate things pretty close to normal (it actually is a bit different, but it is fairly close).
But that special exception that the IRS made does NOT apply if 179 was also used. So as you said, if 179 is used (and you did NOT elect out of Bonus), then no depreciation from years 2-5. But the original CAUSE of things is because the Bonus depreciation is trying to take the full amount in year 1.Comment
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As two years are affected, I think you fix using Form 3115.Comment
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The rule for 3115 isn't if two years are "affected", it is if an Accounting Method has been established, which generally means that two or more consecutive years has used the same "accounting method".
From my viewpoint, only one year used a wrong method. The second year used an incorrect Basis for depreciation, which is a "mathematical or posting error", which is NOT part of an accounting method.Comment
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