How to get ProSeries asset entry form to calculate the first 5 years of depreciation for the current return when using Form 3115

[Ekhaterina]

I missed setting up my stepped-up basis for inherited farm property in 2020.  To correct that, I am filing Form 3115 "Application for Change in Accounting Method with my extended 2024 tax return.  Accordingly, I am supposed to currently expense the entire amount of depreciation for years 2020-2024 within the 2024 tax return.  I am having difficulty figuring out how to get the ProSeries software to allow me to adjust the current 2024 depreciation deduction to include the amount for all of those missed years, then to continue with the depreciation as it should be in future years.  It wants to only use the current 2024 amount for the 2024 return, and does not allow me to change that figure.  The "Asset Life History" is showing a perfect 150DB/HY depreciation schedule at this time.  I starts out with 150DB/HY convention, then switches to straight line  in the 9th year as it should; and it brings the schedule to zero at the end of the asset life as it should.  Has anyone run into this situation before, and do you know how I can get the software to show a current expense for the first several years of depreciation, but still maintaining an accurate depreciation schedule going forward?  It just occurred to me that I might just show the "prior depreciation" as an "other expense" on Schedule F.  Then I think the software will continue as it should, so long as I show that prior depreciation within the Asset Entry Worksheet.  Is this a feasible alternative that IRS would find acceptable?

[TaxGuyBill · Accepted solution]

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@Ekhaterina wrote:

I missed setting up my stepped-up basis for inherited farm property in 2020.

It just occurred to me that I might just show the "prior depreciation" as an "other expense" on Schedule F.  

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Yes, enter it as an "other expense" on the appropriate schedule.  Ideally, call it a "Section 481(a) Adjustment".

However to back up a bit ... did you not claim depreciation at all?  Or were your claiming the incorrect Basis?  If you were not claiming depreciation at all on those clients, then Form 3115 is perfect.  But if you were claiming depreciation but using an incorrect Basis, that is not something that Form 3115 would fix.

[Ekhaterina]

Hi TaxGuy Bill,

Thank you so much for you quick response.  I am very happy to have your affirmative support of this method for reporting the missed depreciation.  All asset items were fully depreciated prior to my husband's death on 12-15-2020, except for one item that had a remaining book balance of $657.00 at that time, and this item continued to depreciate fully through year 2023.  This item came to me from "joint tenancy with right of survivorship and not as tenants in common" in Kansas.  As I understand it, 50% of that depreciation would have been correct, so $328.50 of that would have been over-depreciated using the wrong basis of cost less accumulated depreciation rather than the FMV basis as it should have been done.  I was planning to correct for this by simply making a reduction to my total prior years' depreciation for that amount, then placing the difference into Form 3115.  I thought this adjustment would correct adequately and accurately for this one item.  What do you think about this?

Just for verification with you, there were two items that came to me under joint tenancy, and all the rest of the items were simply "willed" into my ownership as inheritance.  For the joint tenancy items, I used 50% of FMV at time of death, plus 50% of initial cost value less accumulated depreciation, as my new basis.  Then, for the "willed" items, I used 100% of the FMV at date of death as my new basis.  Please acknowledge if you believe I have done this correctly, or let me know if I need to make any changes.

Thanks so much for your expertise!

[TaxGuyBill]

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@Ekhaterina wrote:

For the joint tenancy items, I used 50% of FMV at time of death, plus 50% of initial cost value less accumulated depreciation, as my new basis. 

Then, for the "willed" items, I used 100% of the FMV at date of death as my new basis. 

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Assuming the year of death is a Joint return, for purposes of depreciation, you should enter the Joint Tenancy items as TWO assets.  Well, for the year of death, three assets.  That is because the Recovery Period continues for your 50%, but the Recovery Period re-starts for the 50% stepped up asset.

For the year of death, split the original asset into two, 50% assets.  Then create a new one.

• The first original 50% asset (your asset) keeps depreciating, using 50% of the original cost, 50% of the accumulated depreciation, and using the original placed in service date.  
• The second original 50% asset (the deceased asset), enter the date of death in the disposition section (leave the sales price BLANK) using 50% of the original cost, 50% of the accumulated depreciation, and using the original placed in service date.  That 'stops' the depreciation for the deceased person's asset.  This asset will not carry over to future years.
• Create a third asset, using 50% of the FMV and the Date of Death as the Placed in Service date.  This is the stepped up portion, and because of the later Placed in Service date, may be depreciated for a longer period of time than the other 50%.

For the 100% owned items, if it was a Joint return, you'll keep the old asset on the tax return during the year of death, and enter the date of death as the disposition date.  Then yes, create a new asset with the FMV and use the Date of Death as the Placed in Service date.