form 3115

[Possi]

I am doing the form 3115 as advised on a prior string. I have never done one before and appreciate any help I can get.

In filling it out, it is pretty simple and straight forward. Do I simply send the form in with the 8453 for the electronically filed return?

My clients lived in the house before they rented it out. They purchased it for 106,000 in 1998 and lived in it for only 2 years before converting to rental in 2000.

Basis is 100,837.
Includes land 35,000.

I'll include closing expenses into the basis for the 4797, but not when I calculate depreciation allowed. The depreciation allowed is very easy for me to figure out.

What I do not know is this: Where does the "depreciation not taken in prior years" go on the 4797???

Thanks!

[Koss]

I'm gonna answer this one off the cuff. Someone else on the board will pop me if I'm wrong...

It goes in Column E, Depreciation allowed or allowable since acquisition. The operative word is "allowable." In this context, "allowable" means "allowable but not taken."

I don't think I've ever met anyone who has attempted to deal with this particular problem...

Burton


__________________________________________
The map is not the territory...
and the instruction book is not the process.

[Possi]

misunderstood?

Maybe I wasn't clear in my question.

I know that the depreciation allowable is taken in column e.

The point of doing the 3115 is to be able to take the depreciation that was not taken in prior years. (To soften the blow of capital gains in the year of the sale.)

Just exactly how is that done? The 3115 gives me "permission" to change accounting methods and utilize the "un-taken" depreciation, but how do I do that?

[BHoffman]

It's a 481(a) adjustment and I think there's a place on the 3115 for that.

Here's a link to Treas Reg 1.446-1T. Code section 446 tells a lot about changing from an impermissable method to a permissable method for depreciation.

http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.446-1T

Good luck!

[Gretel]

Maybe I wasn't clear in my question.

I know that the depreciation allowable is taken in column e.

The point of doing the 3115 is to be able to take the depreciation that was not taken in prior years. (To soften the blow of capital gains in the year of the sale.)

Just exactly how is that done? The 3115 gives me "permission" to change accounting methods and utilize the "un-taken" depreciation, but how do I do that?

When I did the 3115 some years ago I put the depreciation on Sch. F on the line for depreciation since it came from the farm business.

[BHoffman]

I'm wondering if you can't just add the untaken depreciation to the basis and "soften the blow" that way.

[Possi]

that's what I was wondering...

I'm wondering if you can't just add the untaken depreciation to the basis and "soften the blow" that way.

Comments? Too simple??

[veritas]

From TTB pg 9-20

Section 481 Adjustment
If Form 3115 is filed to change from an incorrect depreciation
method to a correct method, an adjustment is made to account
for the difference between the depreciation actually claimed and
the depreciation that should have been claimed. This is referred
to as a Section 481 adjustment.

Depreciation claimed is less than the correct amount. If the
depreciation actually deducted is less than the amount that
would have been allowed under the correct method, the difference
is accounted for as a deduction in the year of change. This is
referred to as a “negative Section 481 adjustment,” and results in
a decrease in taxable income. A negative adjustment is taken into
account in the year of change. Report the entire negative Section
481 adjustment as “Other Expenses” on the business return.

I hate to bring this up again but I don't think this applies to you. As far as I can tell your client started with the correct method. Then made posting or mathematical errors, that is not taking the proper deductions in the ensuing years.

I believe the form 3115 would be prepared in the year of dispositon.

The property has not been sold yet correct?

[Possi]

Yes, property was sold in 07

Section 481 Adjustment
If Form 3115 is filed to change from an incorrect depreciation
method to a correct method, an adjustment is made to account
for the difference between the depreciation actually claimed and
the depreciation that should have been claimed. This is referred
to as a Section 481 adjustment.

Depreciation claimed is less than the correct amount. If the
depreciation actually deducted is less than the amount that
would have been allowed under the correct method, the difference
is accounted for as a deduction in the year of change. This is
referred to as a “negative Section 481 adjustment,” and results in
a decrease in taxable income. A negative adjustment is taken into
account in the year of change. Report the entire negative Section
481 adjustment as “Other Expenses” on the business return.

I hate to bring this up again but I don't think this applies to you. As far as I can tell your client started with the correct method. Then made posting or mathematical errors, that is not taking the proper deductions in the ensuing years.

I believe the form 3115 would be prepared in the year of dispositon.

The property has not been sold yet correct?

Yes, the property was sold in 2007.

I don't have a problem with the concept of doing the form 3115. I have the form and have read the instructions.

I swear, I still do not see where the flipping depreciation goes that was NOT taken. I hate that this has become such a rat's nest. I feel like such a loooooser.......

[taxstudent]

After explaining how to do a depreciation-related 3115 to a practitioner at reasonably sized firm in CA, he threw up his hands and paid us to do it. So don't worry about not seeing the answer.

When you file this type of Form 3115, you do two things:

(1) Calculate the difference between depreciation allowed and depreciation allowable, which flows to Other Expenses and is called the section 481(a) adjustment. I suppose that would mean line 18 of schedule E for your taxpayer. Only the Form 1120 (and maybe the 1120S) have instructions that address where to put the 481(a) adjustment. I should probably complain to the Service about this oversight.

(2) Adjust the adjusted basis of the property as of the beginning of the year of change to reflect the allowable depreciation. This really doesn't affect the 4797, since it uses the unadjusted basis IIRC.

[veritas]

A couple more things

If you efile you must use for 8453.

secondly from 3115 instructions-

Automatic change requests. A Form 3115 that is filed under the automatic change request procedures is filed in duplicate. The original must be attached to the filer's timely filed (including extensions) Federal income tax return for the year of change. A copy of the Form 3115 must be filed with the IRS National Office (see page 2) no earlier than the first day of the year of change and no later than when the original is filed with the Federal income tax return for the year of change. See also Late Application on page 2 and instructions for lines 4d and 4e on page 4.

Hope you are charging mucho dinero.

[Possi]

You betcha!

I'm charging mucho dinero! Thanks eversomuch y'all!

( btw, I always print these results for my books.)

Always learning,

~possi

[Possi]

New question from form 3115

Part 1
Question 3:
"Is the tax year of change the final year of a trade or business for which the taxpayer would be required to take the entire amount of the section 481a adjustment into account when computing taxable income?"

That would be "yes" since it was sold that year.

"If 'Yes,' the applicant is not eligible to make the change under automatic change request procedures."

To which I reply.... "what?"

Can I not do this on the automatic change request?