Allowed and allowable Depreciation

[Brian EA]

My client had his brother do his tax return for the last 6 years. He has Rental Income but was not claiming any depreciation. I could go back 3 years and amend the returns but what about the other 3 years . Can anything be done to fix those years

thanks

brian

[Jiggers]

Missed Depreciation

I would file a 3115 to pick up the missed depreciation in the closed years. The open years you can amend. Check the instructions for the 3115 because there is an automatic procedure to do this.

I have done this and it works.

[Brian EA]

I would file a 3115 to pick up the missed depreciation in the closed years. The open years you can amend. Check the instructions for the 3115 because there is an automatic procedure to do this.

I have done this and it works.

Thanks Jiggers. That what I thought; however can I forego the amendments and do the 3115 for all the years

brian

[Bird Legs]

Not Jiggers, however

you can do it all on the form 3115 without filing amended returns.

[Jiggers]

Amended versus 3115

you can do it all on the form 3115 without filing amended returns.

I agree with Bird Legs. However, if there is a lot of depreciation that generates a loss for SE purposes, you may want to amend the open years and reduce the SE tax on those years.

Bird Legs, how are things way up north in Austin?

[Bill Tubbs]

Rental

I agree with Bird Legs. However, if there is a lot of depreciation that generates a loss for SE purposes, you may want to amend the open years and reduce the SE tax on those years.

Increasing the expenses on a Rental property won't affect the SE tax. But, it certainly could affect the EIC (if applicable) on each of the past 3 years returns.

Also, now that you are planning on doing a 3115, do you amend 2005 tax return and attach the 3115, or just wait and add the 3115 to the 2006 return? The effect of either depends on the rest of the client's tax situation for both years.

Bill

[GCU,EA]

Se Tax

Are Income from Rental now subject to SE Tax?

[jainen]

must use Form 3115

>>do you amend 2005 tax return and attach the 3115, or just wait and add the 3115 to the 2006 return?<<

Form 3115 must be filed with a timely original return for the year of change, so the only choice is 2006. Also, you can correct depreciation by amending for the first two years only. After that you have established an accounting method and must use Form 3115.

[Bird Legs]

Jiggers,

It is still warm & dry here. All the music venues are enlarging and improving their
facilities in preparation for the South XSouthwest music festival coming up this
spring. Stubbs B-B-Q is adding an additional indoor section that will seat 1500
in addition to their outdoor setting which will seat 2000 after improvements.
Willie Nelson and his son bought and renovated a bldg. which will seat around
2,500. This will be used also for the Austin City Limits taping.
So everything is hustling and bustling around here.
As for me I am still trying to finish up the 2005 tax season and then try to
get ready for the 2006.

[Bill Tubbs]

Form 3115

Form 3115 must be filed with a timely original return for the year of change, so the only choice is 2006.

Jainen, I wasn't aware of that requirement -- could you point out that cite to me? BTW, I had amended a 2003 return to add a Form 3115 to it, and that flew thru just fine. The situation was an asset placed in service in 2000 while a Sch C; business incorporated in 2003. So, I amended the 2003 with Form 3115 to correct depreciation while it was Sch C; then waited until the next spring and added Form 3115 to 1120S to correct 2003-2004 depreciation. The basis was $15,000 so the numbers were significant.

Also, you can correct depreciation by amending for the first two years only. After that you have established an accounting method and must use Form 3115.

The Pub (946?) used to specify that 2-yr rule, but that language was removed about a year ago. Do you have any current cites? (I am genuinely interested in any other cites)


Bill

[jainen]

that flew thru just fine

>>that flew thru just fine<<

Bill, anybody that has been in this business more than a year or two can point to egregious errors that were never challenged. I appreciate that you are asking for better authority than anecdotal experience.

The basic rules for automatic consent are in Revenue Ruling 2002-9. According to Pub 946 this does not apply to tax years ending before 12-30-03, meaning you could amend 2002 and prior if they were still open. Form 3115 and its instructions were also revised in 2003 to reflect the new procedures.

To quote from the ruling:

Sec 2.01(2)
The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns...represents consistent treatment of that item.... If a taxpayer has adopted a method of accounting under these rules, the taxpayer may not change the method by amending its prior income tax return(s).

Sec .02(3)(a).... The original must be attached to the taxpayer's timely filed (including extensions) original federal income tax return for the year of change

Sec .04. Unless specifically authorized by the Commissioner, a taxpayer may not request, or otherwise make, a retroactive change in method of accounting,

[Bill Tubbs]

Pub 946

Jainen,

I will review Rev Ruling 2002-9 as soon as I can. Here is the change in Pub 946 that I eluded to before -- the 2 paragraphs below were in Pub 946 for 2003 returns, but was removed from the pub for both 2004 & 2005 versions:

Pub 946 for 2003 returns, pg 13

"Filing an Amended Return" (2nd paragraph)

"You have adopted a method of accounting for the property if you deducted an incorrect amount of depreciation for it on two or more consecutively filed tax returns for reasons other than a mathematical or posting error."


"Changing your accounting method" (1st paragraph)

"If you deducted an incorrect amount of depreciation for property on two or more consecutively filed tax returns, you have adopted a method of accounting for that property. You can claim the correct amount of depreciation only by changing your method of accounting for depreciation for that property. You then will be able to take into account any unclaimed or excess depreciation for years before the year of change. See Section 481(a) adjustment, later."


Which makes me wonder... why did the IRS remove these two paragraphs from Pub 946 effective for 2004? Was there some other change in 2004?

Bill

[jainen]

some lawyer thing

>>why did the IRS remove these two paragraphs<<

Probably some lawyer thing. You know, they aren't particularly accurate. For example, it says if you deduct an incorrect amount for two or more years, but doesn't mention that if you deduct a correct amount for a single year you have likewise established an accounting method.

That's one of the problems with using the pubs. They are only useful for general information and you can't support a tax position with them.

[fliszt]

Brian, I'm working on almost

an identical situation. Client lived on one side of duplex. Moved out in fall 2001 and put up rental sign 1/1/02. Depreciation was never set up for side 2. Now it's too late to ammend 2002 but can do ammendment for 2003, 4, & 5. Will file 3115 for 2002 on the 2006 return. Client is (what I consider) high income last 2 years. $250k + so depreciation for that period will be carried forward until he sells duplex which will be in 2007. I don't know as much as jainen, Bird Legs, Jiggers, etc, but if I can help please feel free to ask. If I don't know, I'll refer you to one of the others.
Larry M.

[jainen]

take that missed depreciation

>>I don't know as much as jainen<

Of course you do, because I wrote it all down. Now read it. Or if you prefer read my citations, RR 2002-9, Pub 946, and the instructions to Form 3115. You can't use amended returns to take that missed depreciation.