Level 3

Question

First-year client forgot to depreciate residential rental property placed in service in 2018

Forum|Forum|5 years ago
April 24, 2021
4 replies
35 views

A client purchased residential rental property in 2018 and did not depreciate it on his tax returns for years 2018 and 2019. It looks as though I need to file Form 3115 Application for Change in Accounting Method as he went from an impermissible accounting method (not depreciating the property at all) to a permissible accounting method (MACRS). I (think) I filled out 3115 properly.

Adding to my confusion is the Section 418(a) adjustment . It is asking for the adjustment, negative or positive, to income. Would I simply input the depreciation he missed out on for the last 2 years? It seems that my tax software has already played catchup on the missed depreciation and will average it out over the remaining life which would effectively create a double dip if I also include it as a 481(a) adjustment.

Thank you,

Lost but Hopeful

ProSeries Basic

This topic has been closed for replies.

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TaxGuyBill

Level 15

@bill6 wrote:

Would I simply input the depreciation he missed out on for the last 2 years?

It seems that my tax software has already played catchup on the missed depreciation and will average it out over the remaining life which would effectively create a double dip if I also include it as a 481(a) adjustment.

Yes. And enter that as an "other expense" on the tax return.

Because you now are 'catching up' on the depreciation, you need to enter that amount for the "prior depreciation". The software will then calculate the correct current year depreciation.

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bill6Author

Level 3

Thanks you, very much appreciated! I totally understand the second half of your response, no problems there.

I do want to clarify one thing on the first half of your response: When you say "Other Expense" do you mean place it directly on Schedule E in the Other Expense section? And would this description suffice: "2018 Depreciation catch-up - see form 481(a)"?

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TaxGuyBill

Level 15

Yes for where to put it on Schedule E, but I just label it as "481(a) Adjustment".

qbteachmt

Level 15

With all the late extenders, the carryback, the lookback, and so many changes, would it make sense to investigate amending those years?

Google:

Rev. Proc. 2020-25

Don't yell at us; we're volunteers

BobKamman

Level 15

[removed]
You could ask for an IRS audit. Revenue agents are allowed to authorize those changes, without the need of a Form 3115. See Internal Revenue Manual

4.11.6.7.5 (02-15-2017)

IRC 446(e) - Taxpayer Files Amended Return or Claim (Formal or Informal) to Make "Retroactive" Change in Accounting Method

PATAX

Level 12

👍 Bob, you hit the nail on the head about the elite of the accounting profession and excessive government regulation ..... just wondering if maybe they should remember and consider the words "common sense" ..... Just my opinion...

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Terry53029

Intuit Community Champion

@bill6 Why don't you just amend 2018, and 2019 seeing he put it in service in 2018. That seems to be the easiest way, then you don't have to worry about 3115 or 418 adjustment. Just my opinion

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TaxGuyBill

Level 15

@Terry53029 wrote:

Why don't you just amend 2018, and 2019 seeing he put it in service in 2018.

Two consecutive years of an impermissible method sets the accounting method, and amending is not allowed for changing the accounting method.

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Terry53029

Intuit Community Champion

Thanks @TaxGuyBill I did not realizes there was a two year rule. In years past I have amended two years for clients not taking deprecation but, I got lucky as, IRS never caught it. If I get one in future I will use 3115. again thanks for the info, muchly appreciated. 😁

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