Forms 3115 & Depreciation

For one thing generally 179, bonus special depreciation must be elected in the year you place the asset into service. You did a cost seg 2 YEARS AFTER PUTTING THE PROPERTY INTO SERVICEand now want to take them retroactively which is not allowed. 

however:

1. Section 179 Deduction:

   • The Section 179 deduction allows small businesses to immediately deduct the entire cost of qualifying equipment or other fixed assets during the first year that they are put into service for the business ¹².
   • It’s particularly useful for major purchases of property, equipment, or machinery.

2. Cost Segregation:

   • Cost segregation is a tax strategy where you reclassify certain components of a property (such as a building) into shorter depreciation periods.
   • This allows you to accelerate depreciation and potentially claim larger deductions in the earlier years.

3. Scenario:

   • You put the property into service in Year 1.
   • In Year 2, you perform a cost segregation study and identify components that would have qualified for the Section 179 deduction in Year 1.

4. Considerations:

   • If the components identified through cost segregation would have qualified for the Section 179 deduction in Year 1, you can amend your tax return for that year.
   • By doing so, you can claim the Section 179 deduction for those components in the correct year.

5. Important Points:

   • Ensure that the components meet the Section 179 eligibility criteria (e.g., tangible personal property, off-the-shelf computer software, qualified improvement property) ¹.
   • Consult with a tax professional to navigate the specifics of your situation and ensure compliance.

Thank you for your response Mr. Mike... I don't mean to disrespect your answer, but I guess I did not explain myself in my original post...

I understand the concept of Sec 179 and NO .. I did not make a Sec 179 election when I depreciated my Rental Properties a couple of years ago when I placed them in service.. They were depreciated the simple way (SL).. but later (recently actually) I found out about using a Cost Segregation Study to depreciate my rental properties much faster and since I did not apply any Bonus Depreciation in Year 1 (when I placed the properties in service); I would like to make that correction on this year's tax return BUT I DON'T KNOW WHERE TO APPLY THE CORRECTION.  I know I have to attach Form 3115 to my return, BUT THE ADJUSTMENT, ... that's my problem... where do I input the corrected (catch-up) depreciation?.. and What method do I use?...  Do I still need Form 4562?... Thank you once again for your cooperation... SEMI

You enter the "Section 481(a) Adjustment" as an "other" deduction for each rental property.

Unless you elected OUT of Bonus depreciation for the prior year, you are required to use Bonus Depreciation.

Form 4562 would not be used if the asset was "placed in service" in a prior year.

You would need to amend your prior returns to correct/reduce the Basis and depreciation of the building.

Do I really need to amend my prior years?... Can I just use form 3115 and make the adjustment on my taxes for the current year?... and if so... WHERE ON MY 1040 (and/or schedules) do I enter that adjustment amount?... 

Hey Mike,

Super helpful, thank you.

My question is where in TurboTax do I place the data I received from the Cost Segregation Study?

Side note: Purchased in 2023, Study conducted in 2023.

Please advise.

Brian

Enter the missed depreciation as a miscellaneous expense and it will show under Other Expenses. 

The Form 3115 rules changed recently so be sure to file it with your return Filing it separately now has an extra charge. 

Only the desktop version supports the form.

Thanks Amy.

Just want to confirm, this is not "missed depreciation" since it is the first year of this expense and I have not filed the return yet. Do I still need to file a 3115 if I haven't filled for the first year yet?

You also mentioned that I would add as a miscellaneous expense, but what exactly do I add?

• I have the home as an asset now with a depreciation of $2,683.  Do I remove that or keep it?
  • Cost = $375,000
  • Land Cost = $16,300
• What do I add for the Misc expense?
  • The Cost segregation has the "total included in study is equal to purchase price less land value" as $262,058.35 (73%)

Thanks in advance,

Brian

Following up.  Can someone please provide some direction on my questions above?

Best,

Brian

Let's take this one question at a time.

1. Just want to confirm, this is not "missed depreciation" since it is the first year of this expense and I have not filed the return yet. Do I still need to file a 3115 if I haven't filled for the first year yet?
   1. No, a Form 3115 is not used unless you missed depreciation in prior years and want to capture it all in one year instead of amending returns, or the amendment time frame has passed,   
2. You also mentioned that I would add as a miscellaneous expense, but what exactly do I add?
   1. This is the category you would use if you actually needed and used the Form 3115 for prior depreciation.

 @luckey22330 

Great, thank you @DianeW777 

With those answered, my original question remains.

My question is where in TurboTax do I place the data I received from the Cost Segregation Study?

• Purchased in 2023, Study conducted in 2023, first time filing for this business
• The Cost segregation has the "total included in study is equal to purchase price less land value" as $262,058.35 (73%) (15-year accelerated depreciation)

Additionally, within in TurboTax now, in Schedule C, I have the home as an asset with a depreciation of $2,683 (39.5 years).  Do I remove that or keep it once I place the accelerated appreciation in above)

• Cost = $375,000
• Land Cost = $16,300

Thanks,

Brian

Enter the assets only once.  Enter each asset at the cost indicated in the cost segregation study since this is the first year. You don't have to remove it, just change the amounts based on the study.

You have said this is the first year filing for this business so start out with the basis from the study.

@luckey22330 

@DianeW777 

Not sure that provides the end result.

House assets on schedule C automatically calculate at 39.5 years with no way of changing it in the interface. If I replace $375,000 with $262,058.35, it is still calculating the asset at 39.5 years but now at a lower purchase price, which then reduces the expense for the asset by ~$1,000.  The expense for the asset should increase with accelerated appreciation, not decrease.

Deleted.  I didn't realize the current questions were from an add-on person, rather than the original person.

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@luckey22330 wrote:

in Schedule C, I have the home as an asset with a depreciation of $2,683 (39.5 years). 

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Schedule C?  Is this home being rented out?  Are you providing "services" to the tenants (for example, maid service or meals)?  A rental generally belongs on Schedule E unless you provide "services" to the tenants.

It is not 39.5 years.  I think you mean 39 years.

@AmeliesUncle 
Sorry, yes, 39 years, thanks for the correction.

I do not have long term tenants, it is an STR.  It is occupied for less than seven days each week and I materially participate in the operations, so I qualify to leverage Schedule C versus Schedule E.

Business use properties are 39 years on a Sch C  even if it would be a 27.5 year property on a Sch E and the program is handling it correctly.  

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@luckey22330 wrote:

@AmeliesUncle 
Sorry, yes, 39 years, thanks for the correction.

I do not have long term tenants, it is an STR.  It is occupied for less than seven days each week and I materially participate in the operations, so I qualify to leverage Schedule C versus Schedule E.

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Unless you provide "services" to the tenants, it still belongs on Schedule E.  It does not belong on Schedule C.

TurboTax does not ask the proper questions for a short-term rental with Material Participation.  You will need to use the CD/downloaded version to get it to work correctly.  After entering all of the correct information as a rental on Schedule E, you'll need to go to the "Forms" in the upper right-hand corner.  The on the left side, select "Schedule E Wks" and then check box "G" (other passive exceptions).

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@luckey22330 wrote:

Sorry, yes, 39 years, thanks for the correction.

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Oh, one more thing.  When entering this in the rental section, I think you'll need to tell TurboTax that it is a commercial property (not a residential rental) in order to get it to properly depreciate it over 39 years.

Hi Amy! So I have special depreciation across 2 different cost segregations, and going to file the form 3115 and the new deprecation schedule.

Are you sure it's ok just to enter it here into Miscellaneous? Don't I somehow have to change the asset itself, and maybe show that I am changing the amount?

You do make an adjustment on Form 3115 showing the changes.  The numbers involved dictate next steps. If the adjustment is under $50,000, you can report the positive adjustment in a single year. Otherwise, you must report the adjustment over a 4 year period. It does get complicated so here is another post of mine with the adjustment showing. The 3115 also requires statements, so you will need to add that to your return. A word document works well.

@dishes_spoons 

This is a good guide on what needs to be done from a forms perspective, though figuring out exactly how to do it in turbotax still will take some work.

https://www.wealthyaccountant.com/2021/09/20/form-3115-cost-segregation-study/

Well, if cost seg is done on the firs year, seems we just skip the 3115 and enter the various categories of depreciated property (like in the example above that says "The new depreciation schedule will look like this"), then use Bonus depreciation (80% for 2023) to immediately accelerate 80% of the depreciation for everything under 20 years recovery period.

For a property put into service in an older year:
- I have seen some accountants claiming that failing to claim bonus depreciation can be corrected by filing form 3115.  So it seems to me that 3115 can be used but to split the depreciation classes and also to correct the failure to claim bonus depreciation in the first year of service.