ASSET SET UP WRONG! 3115?

[dd4vols]

Got a new client. (don't most of our questions begin with this statement)

They bought a car wash 12/15/2022 for @$248k.

Form 1065.  The client's previous tax preparer set up $223k as building (39 yr. property).  I'm supposing the other $25k was land, but the schedule L kinda sorta maybe doesn't really reflect that.  He took $239.00 depreciation expense in 2022 for this asset.  Fast forward to about 48 hrs before the new preparer (i.e. me) needs to file the 2023 form 1065, and I learn that the proper breakdown of that purchase was Land $50k, Building $50k, and equipment $148k.

What are my remedies?  I've done a couple of 3115s for switch from to cash to accrual, but that is the extent with that process (and also several moons ago).  Is misclassification of an asset and depreciation correction something that I can do amended Form 1065 (and personal), and get by??

[Terry53029]

you should amend as you have not used a method more than two years. See link.

https://www.irs.gov/publications/p946#en_US_2023_publink1000107385

[TaxGuyBill]

As Terry mentioned, they only filed one year with an incorrect method so Form 3115 does not apply.

File the current year as it should be.  If the client is okay with amending 2022, amend that when you have time (not a super hurry).

With that being said, you may need to figure out 2022 first.  Unless they elected out of Bonus depreciation in 2022, I suspect that most or all of the equipment will have been fully depreciated in 2022 so it is likely there won't be any further depreciation in 2023.  But if they will be using Section 179 for 2022 and it creates a loss, the unused Section 179 would be carried forward to 2023.

[dd4vols]

Thanks so much to both of you!!

the way I read that is I CAN move the equipment out to its own asset at the $148K. And then, unless he meets the phase out limitation somewhere, I can use special depreciation to w/o the full $148k, and amend 2022, and just remember that I have to move forward to current with the new assets and accum  depreciation.

Thanks so much to y'all

I wish I could give you both the "SOLUTION" gesture