Form 3115 - Part 4 - Section 481(a) Adjustment - Clarity on Question 27 and 28

[anxsa]

Hi All,

  My scenario is a bit simple but I want to make sure that I am answering this question correctly.

  Bought my house in 2019 but put up as rental only in 2019. No depreciation was taken in 2021 and incorrect depreciation(quite less) was in 2022. I am now submitting 3115 (using DCN# 7) and need clarification on 2 questions from part 4:

Question 27 - Is the applicant required to take into account in the year of change any remaining portion of a section 481(a) adjustment from a prior change (see instructions)? 

I am guessing that answer here is no, since I haven't submitted any previous 481(a) adjustments, but please confirm. 

Question 28 - Is the applicant making an election to take the entire amount of the adjustment into account in the tax year of change? 

I am guessing this is not applicable to me since my 481(a) adjustment is negative, but please confirm.

Thanks for your help.

[Rick19744]

Response to your questions:

• Question 27 - you are correct
• Question 28 - the answer depends on whether you will take the entire adjustment into account in the current year (or are eligible), or whether you will take it over multiple years as allowed.
  • Whether the adjustment is negative or positive does not always impact the response
  • A negative adjustment provides the taxpayer with a benefit, so taking the full adjustment in the year of change could be beneficial.

[anxsa]

Thanks @Rick19744. My rental income is considered as "passive", so I won't be able to get any deduction on my main income anyways. Plus the depreciation will make the passive income negative so I am thinking there is no  other route than to take this negative adjustment carryover to future years, which means I should mark Question 28 as no. What do you think?

[Rick19744]

In accordance with the instructions for form 3115 (page 9 Part IV), the general rule is that you take the full Section 481(a) adjustment into account in the year of change when there is a net negative adjustment.

There could be some exceptions, but not for this specific automatic method change.

So while you may not experience the benefit in the current year, it is the correct adjustment period and will also carry over.

So, in conclusion, the answer to the question on the form should be "yes".

[anxsa]

Thanks Again @Rick19744. In that case, what should be answer to second part of Question 28:

If “Yes,” check the box for the applicable elective provision used to make the election (see instructions). 
$50,000 de minimis election 
or
Eligible acquisition transaction election

PS: You mentioned "Page 9 Part IV", but I don't see a page 9 so I am guessing you meant Page 4, Part IV. Please confirm if this is not correct.

[DianeW777]

It depends.  A taxpayer may elect, on Form 3115, to have a one-year IRC 481(a) adjustment period, if the taxpayer’s positive IRC 481(a) adjustment is less than $50,000. You can follow the response provided by Rick19744.

Page 9, Part IV is in the instructions, and not on the form: Form 3115 Instructions

Please see the instructions or consider seeking a tax professional for assistance with this form. 

[Rick19744]

@DianeW777 is correct.

As noted in my response, I was referencing the instructions to the form 3115 when mentioning page 9.

[anxsa]

Thanks @Rick19744 , @DianeW777. I went through the 3115 instructions as well as the RP 2015-13.

They are elaborating more on the positive 481(a)  adjustment and giving option to do a 1 year or 4 year approach. However for a negative 481(1) adjustment, I only saw on line on RP 2015-13 which mentions 1 year selection (see below excerpt).

(1) In general. Except as otherwise provided in this revenue procedure, the List of Automatic Changes (in the case of an automatic change), a letter ruling to the taxpayer (in the case of a non-automatic change), or other guidance published in the IRB, the § 481(a) adjustment period is one taxable year (year of change) for a negative § 481(a) adjustment and four taxable years (year of change and next three taxable years) for a positive § 481(a) adjustment. 

This makes sense as it was also confirmed by @Rick19744 in earlier post. Now the confusion that second part of Question 28 is really applicable for positive 481(a) adjustments, (see excerpt below from RP 2015-13).

(3) Shortened adjustment periods. The four-year § 481(a) adjustment period provided in SECTION 7.03(1) for a positive § 481(a) adjustment does not apply in the following situations:

(a) Cooperatives. For a cooperative within the meaning of § 1381(a), the § 481(a) adjustment period for a positive § 481(a) adjustment generally is one taxable year (year of change). See Rev. Rul. 79–45, 1979–1 C.B. 284.

(b) Taxpayers under examination with positive § 481(a) adjustments. The § 481(a) adjustment period is two taxable years (year of change and next taxable year) for a positive § 481(a) adjustment for a change in method of accounting requested when a taxpayer is under examination, unless SECTION 8.02(1)(a) (change filed in a three-month window), 8.02(1)(b) (change filed in a 120-day window), 8.02(1)(c) (present method not before the director) or 8.02(1)(d) (new member of a consolidated group in CAP) applies.

(c) De minimis election. A taxpayer may elect a one-year § 481(a) adjustment period (year of change) for a positive § 481(a) adjustment that is less than $50,000. To make this election, the taxpayer must complete the appropriate line on the Form 3115 and take the entire § 481(a) adjustment into account in the year of change when it implements the change in method of accounting.

(d) Eligible acquisition transaction election.
....... (truncated for the sake of brevity. There were more details on procedure for positive 481(a) adjustments which is not my scenario)

Since my 481(a) adjustment is negative, this is not my scenario. Do people with negative 481(a) adjustment just leave part 2 of Question 28 blank?

[Rick19744]

@anxsa 

Either leave blank or mark N/A

[anxsa]

Thanks again. In TT Desktop (Premier), when I leave it blank, it marks an error (in red). See below screenshots.

Will it cause any issues when I print it or make any changes? I have never used TT Desktop before. 

[AmyC]

Line 28 is really asking if you are doing this in one year or over 4 years. Select the $50,000 de minimis to exclude in one year. You don't need 4 years for your situation. You want to finish it this year.

[anxsa]

Thanks @AmyC . Looks like "$50,000 de minimis" should be used if the 481(a) adjustment is negative or if the 481(a) adjustment is positive but less than $50,00. Thanks for your help!