Adding Prior Year Depreciation and Methods - for new client

[AndyReynolds]

This has happened to me 3 or 4 times over the past 10 years. I just picked up a client and they are using a 30 year straight line method for deprecating residential  rental property. The prior accountant did this in Excel, and at times the calculations were wrong. My plan is to attempt to add the prior year accumulated depreciation. In this example they have $50,000 of improvements on 1/1/97 using 30 yrs straight Line... I get $1,667and they used $936 and they have accumulated depreciation on 12/31/19 of $34,052... So I try to use Code 0 other (you must enter all data) So I add prior on the worksheet as 34,052 and add $1,667 Deprecation Deduction. I then get error codes so at the bottom. It forces me to use MACRS for  Depreciation , Type, asset code R, and I select SL for method, and it auto fills Year as 24 MACRS convention as MM, Recovery Period is forced (no way to change) 27.5 recovery period, and ABOVE where I had $1,667 (30 yr straight line ) it now has hard wired $3,511 as the current deprecation. I click on "History" and the current Depreciation shows as $1,818with a prior depreciation of 39,922... So what does one do to try to keep the book deprecation keep on being used on the tax return? Or how do other Pro Series preparers handle this? I have probably side stepped this in the past, but I am determined to get this right... I need help here.. Thanks

[BobKamman]

Mr Peabody and I used the Wayback Machine to remind us how tax preparers were thinking back in 1997.  (Actually, I just did a Google search for a 1997 IRS Pub 334, and it's right there online.)  Back in the good old days, straight line depreciation required a determination of salvage value.  If salvage value was less than 10%, it could be disregarded.  But what it sounds like to me is that this $50,000 item had $22,000 of salvage value, in the mind of a 1997 accountant, so only $28,000 was being depreciated.  

I don't remember worrying about salvage value with residential rental property, but maybe they were trying to minimize depreciation to avoid recapture.  What exactly was this improvement?  Are there other items on the depreciation schedule that suggest a concern about salvage value?

[TaxGuyBill · Accepted solution]

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@AndyReynolds wrote:

 So what does one do to try to keep the book deprecation keep on being used on the tax return?

  I have probably side stepped this in the past, but I am determined to get this right...

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Except for a balance sheet, there is no need to consider "book" depreciation on the tax return.  You just report the proper tax depreciation.

If you want to do it "right", you need to file Form 3115 to change from depreciating it over 30 years to depreciating it over 27.5 years.  It will shows show the depreciation that actually WAS claimed (using 30 years) and the depreciation that SHOULD have claimed (using 27.5 years).  The difference between the two will be a §481(a) adjustment on the current tax return.  Then depreciate as normal, using 27.5 years and the proper/corrected "prior depreciation".

The "sidestep" method is to just start using 27.5 years, and for the "prior depreciation" enter the GREATER of (a) the actual depreciation taken or (b) the amount of depreciation that SHOULD have been taken.

[AndyReynolds]

Thanks for the possible answer to how they got the depreciation. I don't think this other guy was brainy enough to think about salvage value... This wasn't really my issue, however... In several cases tax preparers with other tax software have either manually (in Excel for instance)  or from other formulas within the deprecation programs to come up with depreciation and accumulated depreciation. I am trying to drive a square peg though a round hole... HOW do I get Pro Series to allow me to use an unconventional method or life in the depreciation worksheets? Review my example and try to enter their data and their suggested current year deprecation, and when you have fixed the error messages on the bottom, forcing you to 27 1/2 years (and not the 30 SL in other accountant's workpapers) I CANNOT get the 30 SL to appear in the current or history files...

[TaxGuyBill]

Are you saying that you want to knowingly and intentionally continue to use the incorrect method of 30 years?

[BobKamman]

I don't see any indication that 30 years was an incorrect method. The last preparer was just not keeping good notes on what he used as salvage value.  You can assume he made a mistake, or you can assume he did it correctly and just didn't leave an audit trail.  Assuming the worst is a lot more difficult than fitting the facts to the possible.  

[TaxGuyBill]

Neither 30 years or a salvage value was allowed in 1997.

[AndyReynolds]

Thanks for the clarity  on this problem. You seem to have a "better than average"  tax reporting knowledge on this subject. I'll look at the impact of the Form  3115 (Cadillac solution) .  , but don't you need IRS approval before filing for a change in method? I'll need to look at the tax implications of my actual situation...

So what I am gathering, is that Pro Series Tax is essentially having a tax preparer comply with proper tax code approaches, rather than you be allowed  any exception to an outdated but used method of calculating and tax reporting within the software...

Thanks for this. This has always bothered me not having anyone to discuss what I probably knew would be the outcome.

[AndyReynolds]

 thanks.

[AndyReynolds]

No I never ever wish "not to comply"  with IRS tax code.. No no no...   I was airing the practical approach to what may not be considered a "material miscalculation" and if the tax software provides a way to catch up what was taken to what should currently be taken... This series of exchanges have been extremely helpful . This has always bothered me when I pick up a client who may have unintentionally been out of compliance. 

[TaxGuyBill]

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@AndyReynolds wrote:

but don't you need IRS approval before filing for a change in method? I'll need to look at the tax implications of my actual situation...

So what I am gathering, is that Pro Series Tax is essentially having a tax preparer comply with proper tax code approaches, rather than you be allowed  any exception to an outdated but used method of calculating and tax reporting within the software...

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No, this change on Form 3115 is an "automatic" change that does not require approval.  But as you pointed out, if the effects are minimal, the 'side stepped' version of just doing it correctly now could be a consideration.

Yes, unless you use manual entry or overrides, ProSeries won't let you use a non-allowable method.