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3115 for understated depreciation - State return only


peggysioux5

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Taxpayer had asset set up in 2014 correctly with bonus depreciation of 50% and depreciation has been correct on the federal side for 2014 through 2018.  However, for CA return even though asset set up originally correct in 2014 for full amount of asset with no bonus depreciation, in 2015, tax preparer somehow began calculating depreciation on the basis for federal (which was 50% less) so there is missed depreciation for CA from 2015 through 2018 of over $65,000.  Would this be considered a posting or mathematical error and thus not eligible for 3115 filing for CA only?

Peggy Sioux

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I found an article from Spidell's CA Tax letter from January 2018 stating FTB issued Notice 2017-3 which states CA generally follows federal law in the area of unclaimed depreciation as long as:

1.  CA follows the underlying federal law (e.g., MACRS for personal income taxpayers and S-Corps); and

2.  The taxpayer made the same election for CA purposes as it did for federal purposes.

Letter also states CA does not have an independent automatic consent procedure in place, so if a taxpayer wants to make a change in accounting method different that the method used on the federal return, the taxpayer must request a change from the FTB.  

So after reading the info in the Spidell's CA Tax Letter, I still don't have a good understanding.  The taxpayer did make the same election for CA purposes on original tax return, but tax preparer basically adjusted basis processing the 2015 tax return.  I was hoping other tax preparers had dealt and researched this issue in the past and would be able to provide some input.  I was firstly trying to determine if the error would be considered a posting or mathematical error or a change in accounting then secondly determine if a change can be made via 3115 for CA only or request a change from the FTB.

The unfortunately thing is 2015 and 2016 were the largest deductions and amended returns can no longer be filed so I was hoping there would be another way to correct.

Peggy Sioux

 

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CA is not my specialty. But, look for a CA-3115-type form and read its instructions as a starting point. Perhaps it has cites to the CA tax code.

If there is NO CA-3115-type form, then you need a different starting point. Does Spidell give cites to the CA tax code? Does Spidell have an on-demand course? Spidell is certainly the CA expert. 

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Copied from FTB Notice 2000-8

"If a California taxpayer 1) cannot rely on a federally approved request for permission to change an accounting period or method, 2) desires to obtain a change different from the federal change, or 3) desires a change for California tax purposes only, a federal Form 3115, Application for Change in Accounting Method, or federal Form 1128, Application to Adopt, Change, or Retain a Tax Year, should be completed and submitted to the Franchise Tax Board by the due date specified in California law or, if none is specified, by the due date for a federal change request if a federal change request had been submitted to the Internal Revenue Service for that change. The federal forms must be completed using appropriate California tax information and not with federal tax information, except that the Federal Employer Identification Number (FEIN) should be used in the FEIN field. The California Corporate Number (CCN) must also be included on the top of the first page of the form. Due account should be made for differences in federal and California law. For example, Line 18 of the federal Form 3115 refers to a "User Fee." California does not charge a user fee for submitting the change request. Any references on the forms and in the forms' instructions to the Internal Revenue Code should be read as referring to the Internal Revenue Code, as applicable for California purposes, or the specific Revenue and Taxation Code section, if any, that conforms to that federal provision.

A cover letter must be attached to the front of the federal Form 3115 or Form 1128, clearly indicating that a "Change in Accounting Period" or a "Change in Accounting Method" is being requested. The name of the taxpayer requesting the change and the taxpayer's California Corporate Number must be included in the cover letter.

The appropriate federal form and cover letter should be sent to:

Franchise Tax Board
Change in Accounting Periods and Methods Coordinator
P.O. Box 1998
Sacramento, CA 95812

The Franchise Tax Board will acknowledge receipt of the request within 30 days. After the request has been reviewed, the Franchise Tax Board's Change in Accounting Periods and Methods Coordinator will notify the requestor, in writing, whether the request for an accounting period or method change has been approved or denied."

Assuming this Notice is still current, you can in fact file a 3115 for CA only.

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Thank you all for your valuable input and information; it is very much appreciated.  Would other tax preparers see this error as a "change in accounting" and eligible for 3115?  In my research, I read that posting and mathematical errors are not eligible for 3115.  Unsure if this issue would be a considered posting error or a change in accounting.

Peggy Sioux

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