481(a) adjustment, wrong depreciation taken

[LM2020]

As I understand, 481(a) adjustment can be taken over 4 tax years (with form 3115). Is there guidance/examples on the calculations?

For example, too much depreciation was taken over 10 years - 1200/year (12,000 over 10 years). The correct depreciation should have been 800/year (8,000). To correct over 4 years will the overage of 4,000 will be equally divided to 1,000/year. Since the correct regular depreciation is 800, then for next 4 years there will be no depreciation taken and there is an additional income of $200. Or is it much more complicated than that?  Appreciate any guidance or help.

[Carl]

While the 3115 is included with the program, there is practically no help or guidance provided for it. The possible uses of this form for "fixing" things is just to complex. Why TTX included it is beyond me. But for those who know what they're doing when it comes to the 3115, I guess it would benefit the company to not lose the customer.

Overall, the 3115 is not simple by any stretch, and if you don't know what you're doing when it comes to the 3115, you are highly advised to seek professional help. The math is "never" as simple as we may think. Doing the 3115 incorrectly to fix a problem, can actually be the catalyst that triggers an audit and end up costing more on the tax front in the long run.

[LM2020]

Thank you.  Unfortunately, the wrong depreciation started on the return prepared by a professional.  The land value was not accounted for and the depreciation was depreciated as a residential real estate, not commercial.   I looked at Pub 946, Instructions for 3115 and read the entire 3115.  Seems like it would be a common mistake that IRS would have an easier fix (at least for small adjustments).  Thank you again for your input. 

[M-MTax]

Might be a common mistake but form 3115 is NOT for your situation. It's when you adopt a method of accounting that isn't allowed and your case involves a basis/math error.....and basis or math errors are not "methods of accounting that are not allowed" so you don't use form 3115. You can amend the open tax years and that's about it.

[LM2020]

Thank you.  Since it was impermissible method of depreciation for over two years, I understood it as a "adoption of an accounting method".

From Pub. 946:

How Do You Correct Depreciation Deductions?

If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method , later.

Filing an Amended Return

You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

• You claimed the incorrect amount because of a mathematical error made in any year.

• You claimed the incorrect amount because of a posting error made in any year.

• You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.

• You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Adoption of accounting method defined.

Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns.

For an exception to the 2-year rule, see sections 6.01(1)(b), 6.19(1)(b), and 6.21(3)(b) of Revenue Procedure 2019-43 on page 1107 of Internal Revenue Bulletin 2019-48, available at IRS.gov/irb/2019-48_IRB#REV-PROC-2019-43.

When to file.

If an amended return is allowed, you must file it by the later of the following.

• 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.

• 2 years from the time you paid your tax for that year.

[M-MTax]

@LM2020 

You can probably get away with filing a 3115 because of the circumstances but be aware that your CPA did use a permissible method......your CPA just used the wrong method and the wrong method is not necessarily an impermissible method.....like for example if you used straight-line over something like 104 years which doesn't exist.

[LM2020]

Thank you.