Section 481(a)Adjustment

[Karen Lee]

Client brought in info for 2010 tax return with, among other things, rental income and expenses. Prior year tax return shows one rental with some depreciation. Well, it is two rentals and this error goes back to 2005 when purchased and placed in service. Both rentals were purchased in 2005.

Amount to depreciate is incorrect, date placed in service is incorrect.

I have the #'s on what it should have been and also have the #'s should be going forward. I believe I have a section 481(a) adjustment and need to fill out a Form 3115.

Then put on Sch E under other expenses "Sec 481(a) adj" with the amount and include the depreciation not taken for each property.

Form 3115 is much different and more complicated than ever before. I'll get through it but does the above sound correct.

Thanks

Karen :spaz:

[Catherine]

Client brought in info for 2010 tax return with, among other things, rental income and expenses. Prior year tax return shows one rental with some depreciation. Well, it is two rentals and this error goes back to 2005 when purchased and placed in service. Both rentals were purchased in 2005.

Amount to depreciate is incorrect, date placed in service is incorrect.

I have the #'s on what it should have been and also have the #'s should be going forward. I believe I have a section 481(a) adjustment and need to fill out a Form 3115.

Then put on Sch E under other expenses "Sec 481(a) adj" with the amount and include the depreciation not taken for each property.

Form 3115 is much different and more complicated than ever before. I'll get through it but does the above sound correct.

Thanks

Karen

Sounds like a textbook example of a return to put on extension and deal with in May!!

Seriously -- you'll need time to research treatment, and you have to go back to 2005 and work your way forward. Don't you have easier ways to hurt yourself at the end of March than trying to get this mess fixed by 4/18?

Catherine

[schirallicpa]

My former boss gave me this:

If there is a fix because of acctg method, use "Adjustment pursuant to Rev Proc 2002-9". Input this on the Sch E on the misc lines. This entry is the accumulated fix. This is a bit of a catch-all for fixing mistakes for something like depr. It saves you from having to go back and amend, and carry forward, and amend, etc.

Here's a link to info regarding: http://www.unclefed.com/Tax-Bulls/2002/rp02-09.pdf

[BulldogTom]

I think you are overthinking this one. If I remember 481 adjustments, they are for changing accounting methods. Like when the IRS forces you from cash to accrual. I don't think you need to go there with a change to correct an error. It is a simple depreciation correction that you need.

Tom

Lodi, CA

[jainen]

>> It is a simple depreciation correction that you need. <<

It is by definition a change in accounting method, since it affects the timing of the deduction. Correcting depreciation falls under the automatic consent procedures so there is no user fee, but it still requires Form 3115. Schirallicpa is on the right track but nearly a decade out of date. The current instructions are in Revenue Procedure 2011-14.

[BulldogTom]

I think I mis-phrased that response. What I meant to say is that I think there is a simple way to correct a depreciation error. I think (but I am not positive) that a 481 election is for spreading the tax over 4 years when changing accounting methods. That is not what she needs to do.

Sorry if I added to any confusion.

Tom

Lodi, CA

[schirallicpa]

>> It is a simple depreciation correction that you need. <<

It is by definition a change in accounting method, since it affects the timing of the deduction. Correcting depreciation falls under the automatic consent procedures so there is no user fee, but it still requires Form 3115. Schirallicpa is on the right track but nearly a decade out of date. The current instructions are in Revenue Procedure 2011-14.

LOL....I haven't gotten into 2011 yet!

[jainen]

>>a 481 election is for spreading the tax over 4 years when changing accounting methods<<

Yes, that's exactly what she needs to do (although she will have a NEGATIVE adjustment that is deducted in a single year.) The reason she can take this deduction is because Section 481 allows it! Your "simple way to correct a depreciation error" has a name: Section 481(a) adjustment. It is calculated on Form 3115 when you use the automatic consent procedure to change from an impermissable to a permissable accounting method, such as changing from the wrong depreciation to the right one.