Form 3115 questions

[Marie]

Client forgot some items for depreciation in 2009. We're doing 2010 planning, it is more advantageous for us to be able to use all the depreciation, 09 and 10's, for 2010. Is this possible with Form 3115? I read somewhere about a two year omission, but also about a two year waiver? I'm not clear on this? Thanks for any help.

[Edward]

If you omitted an asset for 2009 and the return has been filed, I would think that a 1040X would take care of the asset that you missed for that year. Depreciaton changes that are not accounting method changes, are made on an amended return for the year being changed. I would think this is just a POSTING ommission and not a chanage in accounting method. A change in accounting method (requiring Form 3115) would be something like a "change in the method, recovery period or convention for a depreciable or amortizable asset; a change from not claiming to claiming special (bonus) depreciation; changing from the 30% bonus to 50% bonus; removing bonus depreciation for an asset that is not qualified property; a change in treatment from non-depreciable to depreciable, or vice versa; or a Change to capitlize an asset that had previously been expensed" In your case it was just an OMISSION and thus I would think a 1040X would take care of it? Can anyone else contribute to this opinion?

[jainen]

>>it is more advantageous for us<<

Too bad, you can't. Unless you're into, like, fraud, you have to amend the 2009 return.

The instructions to Form 3115 (My link) refer repeatedly to Revenue Procedure 2008-52 (My link). Section 2.01 says "a method of accounting is not adopted in most instances without consistent treatment... in two or more consecutively filed federal income tax returns."

[Marie]

When I read the Form 3115, is says if you forgot deprec in previous years, you are allowed to take in one year. I understand that even if there are open years to amend you have the option of using the Form 3115. Does the "two or more years" mean we could recapture deprec on 2010 if we had left it off in 2008 and 2009? But leaving it off just one year means I have to amend? I've been reading examples of how people are getting their forgotten deprec on returns when they have decided to sell the property and realized the property had not been depreciated and they are having to reduce basis by deprec taken or not. I have a article about using Form 3115, and the 5 major guidlines say 1. be in the business 2. own the property in the year Form 3115 is filed 3. be using the property for their business in the year Form 3115 is filed 4. file Form 3115 before filing the current year tax return.5. claim the deprec deductions by filing a timely 1040. I understand the filing requirements for Form 3115 have changed, though. These 5 requirements don't say anything about how many years.

[jainen]

>>I have a article.... don't say anything about how many years>>

Okay, I suppose you can argue that a Revenue Procedure doesn't actually have any more authority than somebody else's opinion. But one way or another you need what Section 1.446-1(e)(2)(ii)(a) of the regs calls a "pattern of consistent treatment." I agree with the IRS, it takes more than one time to form a pattern.

[jainen]

>>I have a article.... don't say anything about how many years>>

In my experience, many articles are mostly about deducting missed depreciation when it is discovered in the year of disposition. This is because there are some more confusing issues with that, and the IRS has made special rules including waiving the 2-year minimum. There's not much question about just amending when you catch the mistake right away.

[Marie]

I understand in most cases, amending the return is the way to correct. Client(farmer) did not have a good year, built a couple of new buildings and forgot to tell me. He doesn't need to amend to help out last year's taxes at all. This year's income is better and if it is possible to use the forgotten deprec, it would help him more in 2010. The waiver of two-year rule in Rev Rul. 90-38 talks about property subject to 1.446-1(e)(2)(ii)(d) and placed in service by the taxpayer in the taxable year immediately preceding the year of change (hereinafter, this property is referred to as "1 year depreciable property") provided the additional term and condition is section 4.03 of this revenue procedure in satisfied. Alternately, the taxpayer may make the change .....by filing an amended return. Do you think I can qualify under this? Again I am new to this form and instructions. The property subject fo 1.446-1(e)...., where do I find out if my property qualifies under this. I'm not trying to do anything wrong, just trying to help my client in the most beneficial and correct way.

[jainen]

>>Rev Rul. 90-38... section 4.03 of this revenue procedure"

I didn't find your text, so I'm not sure if you have current citations or whatever. I would guess the additional condition is the Section 481 adjustment that prevents doubling up any current tax advantage, but I still think this is talking about property in the year of disposition. Other than that, it may refer to non-automatic changes.

The idea of Form 3115 is that Congress gave the IRS very broad power to accept or reject changes in accounting method. The IRS responded with very specific requirements, which it adjusts every year (e.g., a whole new form last December, as well as major changes to Rev. Proc. 2008-52 which itself superseded a lot of rules). You have to have a pretty strong position to take advantage of it.

Besides, it's a bit of a stretch to believe this taxpayer "forgot" about entire buildings. Maybe he finished them by the end of the year, but didn't get the use permit until January? Otherwise they belong to 2009. He can't save up deductions for a bigger tax break later.