Incorrect "Business %" on Asset Depreciation - Any way to recoup missed deductions?

s there any way to recoup my lost deprecation above and beyond only amending the past three years returns?

Actually, to correct this you really don't have any choices since it's been done incorrectly for the last ten years.  You need to file IRS Form 3115 - Change in Accounting Method with your 2020 tax return in order to fix this. While the TTX program does include the 3115, it's not simple by any stretch of the imagination. Additionally, the program provides practically no help or guidance for the 3115 either. You will need to seek professional help to ensure this is done correctly. Completing the 3115 incorrectly has the potential to be more costly in the long run. On top of that, if your state also taxes personal income, this could be a double-whammy. Please seek professional help to get this fixed and get everything back on track.

Thank you very much for the response, @Carl . I'll start to reach out to CPA's in my area.

A couple quick follow-up Q's:

(1) Is there reputable online CPA service you would recommend?

(2) When you say form 3115 will be needed to get on the right track, does "the right track" provide an opportunity to recoup lost $ from past returns due to the mistake or just going to get things corrected moving forward? I'm just hoping for some level of encouraging news as this appears to be a costly mistake. 🙂

Thanks again

I don't think that qualifies for Form 3115.  It was just a math error, not a "method" error.  So the only thing you can do is amend the past few years.

As a side note, it was YOU that must have entered 52%.  You should have entered 100% in that first year because it was 100% business use STARTING with the date you "placed it in service".

(1) Is there reputable online CPA service you would recommend?

Sorry, but no. You need to seek the services of a CPA local to your area so that you have someone whom you can hold morally responsible and fiscally accountable for doing it right.

(2) When you say form 3115 will be needed to get on the right track, does "the right track" provide an opportunity to recoup lost $ from past returns due to the mistake or just going to get things corrected moving forward? I'm just hoping for some level of encouraging news as this appears to be a costly mistake.

Probably not much if anything to recoup. Traditionally, residential rental property almost always operates at a loss on paper every year, at tax time. So there very will may be nothing to recoup immediately. You won't see any potential benifit until the tax year you sell or otherwise dispose of the property. 

Per the IRS rules, you can only amend a return for the current tax filing year and three years back. While you can amend returns more than 3 years back, if doing so results in additional refund to you, you will not receive it. The IRS has a three-year statute of limitations on that.

Your issue is, in order to get the depreciation history right, along with the expense history, you've have to amend every single tax year starting with the 2010 tax return. That will be a real pain, not to mention expense, because you have to do all the carry forwards manually for each and every tax year you amend. Remember, when you amend a tax return you can not import from the prior year tax return. So the work required on your part would be quite a bit. One top of that, the IRS says that when you have used an incorrect accounting method for 2 or more consecutive years, amending is not an option. You have to file the 3115 to make things right. By hiring a CPA for this, they very well may find a number of loopholes that are benificial to you too.

But as it stands now, you've already got some work cut out for you. If the property has been incorrectly reported as 52% business use for the last 10 years, then that means only 52% of your rental expenses were claimed/allowed on the SCH E each of those years. So you're going to need to provide the CPA more than just the printouts of all those tax returns. You'll need to make sure you provide them the "entire" tax return for each year which includes all the worksheets. It's the worksheets that will have the actual amounts you entered, as the forms filed with the IRS only show the percentage of those actual amounts. Now if you've got PDFs of the past 10 years tax returns that have everything in them, that will save you quite a bit on ink and paper, as you can just provide copies of the PDF files to the CPA.

If you don't have copies of all those past year's returns in some form or another to provide to the CPA, then they're going to have their work cut out for them. They'll be able to do it. It's just a bit more work on their part is all.

Be it the 3115 or amending, you're talking about amending 10 years of tax returns. If amending any tax return before 2017 results in a refund to you, and you will not be getting that additional refund. But on the downside, if it results in you owing more taxes to the IRS, then you do have to pay that along with interest and any penalties, fines that may be assessed. While a CPA may be able to negate or reduce penalties and fines, they can't negate or reduce any interest. While the IRS can forgive fines and penalties, by law they can't forgive interest if applicable.

Let a CPA handle this, for your own piece of mind.

I have a similar depreciation "math error" from 2015 that I just discovered for 2020.  I changed my property from personal use to rental property 9/1/2014 which 2014 return calculated Business Use 33.3%.  TT has continued the Depreciable Basis calculation at the Business Use 33.3% through 2019 return.  I don't want to go through the amended return process unless it would result in significant refunds.  Am I correct that I could only amend the past 3 of 5 years returns anyway?  Can I on the 2020 return just indicate the actual prior depreciation taken (at the 33/3% rate), change Business Use to 100% which updates the Depreciable Basis, and start using the new updated rate of depreciation on the Depreciated Basis for the remainder of the 27.5 years?  The difference in Depreciable Basis:   $40,135 (33/3%)  &  $85,525 (100%).

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@Topsy10 wrote:

Can I on the 2020 return just indicate the actual prior depreciation taken (at the 33/3% rate),

 

change Business Use to 100% which updates the Depreciable Basis, and start using the new updated rate of depreciation on the Depreciated Basis for the remainder of the 27.5 years?  

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No, you need to enter the amount of depreciation that you SHOULD have taken (if you leave it blank, the program will just assume you always did it correctly). 

Yes, on the current return enter the correct information.

Be aware that if you do not amend, any tax savings will be permanently lost.   And when you sell the property at a gain, you will pay tax on the gain due to the depreciation that you COULD have taken, even if you did not actually take it.

Thank you for helping problem solve this depreciation issue.  In past years I didn't pay much attention to the depreciation calculations relying on TTX to do the math.  I will amend 2017, 2018, & 2019 to reflect 100% Business Use.  I understand that there is no positive gain to amend 2015 & 2016 due to the 3 year IRS limitation on amending a return.  Can I use the 2020 TTX Premier to amend the other 3 years?

@Topsy10 I would file an extension for this year and discuss with some local CPAs before amending your returns.  I have done a ton of research and discussed w/ multiple CPAs and amending does not appear to be the appropriate resolution as your accounting will still be off from TTX using an erroneous Basis from the start.

The 3115 appears to be the appropriate path to get this resolved properly.  As you've seen some on this forum will claim you cannot use the 3115 because it is not a "method change", but there are MANY scenarios for the use of 3115 and there are numerous articles that state 3115 can be used for depreciation corrections.

One of the simplest is this H&R Block article that states: 

• You claimed more or less than the allowable depreciation on a depreciable asset.

https://www.hrblock.com/tax-center/income/real-estate/catch-up-depreciation-on-rental-property/

I am working with a 30 year veteran CPA who has experience with this form and she does not have any doubts that the request will be approved.

Best of luck

The Revenue Procedures are quite clear that it can only be done for a "change in method of accounting".  Using an incorrect Basis is a "mathematical or posting error", which does not qualify.

@Topsy10 You can only amend 2020 with 2020 TurboTax Premier. If you used TurboTax CD\Desktop to prepare your 2017-2019 returns, you use those programs to amend your prior year returns.

If you used TurboTax Online, you can download and install the amend software and then download your .tax file from the appropriate year to amend your returns. See How to amend (change or correct) a return you already filed.

I used TTX CD for the 2017-2019 returns.  My hard drive crashed January 2020 and I lost all the TTX pdf copies of my returns.  (I had not backed up any files)  I have paper copies.  In order to amend previous returns, will I have to also complete the 2017-2019 returns in TTX as they were originally filed then do the amended returns?

will I have to also complete the 2017-2019 returns in TTX as they were originally filed then do the amended returns?

Yes. Obviously, you'll start with the 2017 return first. When you complete the 2017 tax return you'll have to elect the option to "Print and Mail" in order for the program to "know" it's already filed. After you print it, compare the new printout to the original printout and make sure things match exactly before you start the amend process. This is important, because the critical program updates for TTX 2017 are no longer available, as TurboTax only supports their program for the current tax filing year and 3 years back. That's it. So if things don't match, either you re-entered something wrong or a critical update is needed - which you can't get. Don't know what you'll do if it's a needed update thing; other than have a professional take care of it for you.

Meanwhile, if you haven't done so already you may want to go ahead and file an extension for your 2020 taxes since it's unlikely you'll make the May 17 filing deadline.

Take note also that for the amended returns, you'll have to print, sign and mail them most likely. While you can e-file an amended 2020 tax return, I don't think you can do so with a prior year tax return.

Make sure you mail each tax year in a physically separate envelope to the address on the printed mailing instructions for that tax year also.

Finally, if a state tax return is involved here be aware that a separate page of instructions for the state return will be printed.

When using the  "Step-by-Step" method to input data from my records to create a 2017 return in TTX some of the calculations on the 2017 return in TTX match my original paper copy and some don't.  I assume the discrepancies may be due to the "critical update" issue or I re-entered something wrong.  I thought about a workaround so the data & calculations match:  Can I enter the data directly onto the "Forms" view in TTX?  Or can I correct what doesn't match using the "Forms" view?  

Can I enter the data directly onto the "Forms" view in TTX?

Certainly won't hurt to try it that way. But first, on a wild whim I did a search for "TurboTax 2017 updates download" and found the latest update for TurboTax 2017 on the TTX website at https://ttlc.intuit.com/community/updating/help/manually-update-turbotax-for-windows-software-basic-deluxe-premier-home-business/00/26041

So I would suggest you download and install that update and see if that fixes things first.If it doesn't fix things, then you most likely entered something wrong. We can work together and figure out what it is then.

I have re-entered all the 2017, 2018, 2019 original data into TTX.  I  updated each year of TTX upon being promptly.  Most of the figures calculated the same as my paper copies except for some rental depreciation sections which were off by $5-$50.  In Forms view I did an override on those figures so the totals are correct.  To start the 2017amendment process I'm having difficulty identifying/finding the section to amend.  Rental property/Schedule E is not one of the options to amend.  1099 MISC takes me to the Rental Property Step-by-Step, but I don't have any 1099 MISC forms to enter for rental property.  Am I on the right track to amend those returns?

Lets make sure you're doing this right. I doubt it, since your error goes all the way back to 2010. Most likely, you just flat out may not have the correct amount of prior year's depreciation already taken. But if you want to risk making a big mess even bigger, that's your decision. In the end, it may come back to bite you in a way that will make the cost of professional help seem like an absolute pittance in comparison.

First, you enter the 2017 tax data into TurboTax 2017 exactly as originally filed. Then you select the "print and file" option and actually print the return as originally filed. This tells the program that you have "in fact" filed the return. Compare the printout to the return you actually filed. It should match exactly. Save the .tax2017 file at this point and completely exit the program. You will "NOT" amend the return at this time.

Now fire up TurboTax 2018 and the first thing you'll do is import the data from the .tax2017 file.  This ensures your 2018 tax return will match exactly the one you actually filed. Then complete the 2018 return exactly as originally filed. Select the "Print and File" option and actually print the return. Again, this tells the program that you have in fact, filed the return. Compare the printed return to the one you actually filed. It should match exactly. Now save the .tax2018 file and exit the TurboTax 2018 program. You will NOT amend the 2018 tax return at this time.

Now fire up TurboTax 2019 and import from the .tax2018 file. As above, this will ensure the imported data will match exactly the originally filed return. Complete the 2019 tax return exactly as filed, then select the "Print and File" option and print it out. This tells the program that you have in fact, filed the return. Completely exit the TurboTax 2019 program. Compare the printout to the 2019 return actually filed. They should match exactly.

Assuming all is good at this point, you're ready to start amending.

Now fire up TurboTax 2017 anew and before you open the actual return, click the Amend button. Then go through the process to amend. You'll just work through the SCH E section as you did before, making your necessary corrections.  Once done, you have no choice but to "print and file" the amended return. The program will only print those forms you actually need to mail to the IRS, along with mailing instructions.  You will mail this 2017 amended return in it's own separate envelope from other amended returns. This will complete the amending process for the 2017 return.

Now it gets tricky, so attention to detail is important.

Fire up TurboTax 2018, and before you open the .tax2018 file click the AMEND button. Take note that when amending a tax return, you can not import from the prior year's tax return. Therefore, the "prior years depreciation" amounts are going to be WRONG. (I guarantee it, since you changed things to 100% business use on the 2017 tax return.)  So as you are working through the SCH E section of the 2018 return, you will manually change the amount in the "prior year's depreciation" box, when presented that screen.

Take special note on just how to correctly figure the prior year's depreciation here, as you will be required to do some manual math on your part.

If you'll take a look at the 2017 IRS Form 4562 that prints in landscape format, titled "Depreciation and Amortization Report" you have to add together the amounts in the "Prior years depr" column and the "current year depr" column on the 2017 form 4562, in order to get the correct total of prior years depreciation to enter on the 2018 tax return.

Carl,

I had been doing my taxes for a long time on turbo tax, but gave them to an account in 2017 due to the sale of the rental property using the "installment" method and several other changes. I have started to do my own taxes again myself now, and this is when I noticed a mistake. The mistake doesn't affect any taxes, the correct depreciation was used, it was the AMT depreciation calculation that was incorrect. I gave the accountant my prior (2016) depreciation reports, and I never noticed on the AMT Depreciation reports never had the "Prior Depreciation" amounts listed. I went back in the program and found that things done before a certain year didn't provide the prior depreciation, and that I would have to add that. This was only found by right clicking on the prior depreciation box on the asset sheet, where it states this (not obvious). It also stated I would need this prior depreciation when I sold the property. The accountant never questioned me about the lack of AMT depreciation for prior years (22 yrs), and used the AMT amount from 2016 and 2017 only. This only shows up indirectly on 2017 form 6251 line 17 for Disposition of property (difference between AMT and regular tax gain or loss) as a negative number (-$14,465). The calculations on the 2nd page of form 6251 didn't change any taxes or subject me to the AMT. I did go ahead and re-calculated the forms with the correct AMT depreciation numbers on all the forms in the background that the form 6251 references (Schedule D for AMT, Schedule D AMT Tax Worksheet, Form 6252 AMT)  and it doesn't affect the amounts or subject me to the AMT (did this for 2017 thru 2020). I had the accountant do my 2018 and 2019 taxes, and the accountant had me file form 6251(1st page without any amounts for difference between AMT) with my return, again we weren't subjected to any AMT and the 2nd page wasn't provided to show any AMT amounts. Now that I am doing the taxes, it seems that I should have a small negative amount on line 2k of form 6251 for both 2020 and 2021, it's only -$60.00. I'm waiting for form 6252 to be final, but I might have to file form 6251 and I am wondering if I should just start showing the amounts on line 2k that haven't been showing since 2018? I have noticed other posts on the intuit community forums, people say just use the same amount for AMT as the regular depreciation?? Is it a big deal, or do I just start showing the small negative amount  or continue to show no difference??

Appreciate your advice, Thank you!

Carl,

I other item, Form 8582 was never filed all the years I did my taxes with Turbo Tax, always said to keep them for my records. The accountant that did my taxes didn't produce a form 8582 for 2017 thru 2019 either. I have never had any losses on my rental property since I had owned it. Turbo tax is wanting me to file it now, do I need to file this even though I don't have any losses? Will it look odd to the IRS if I start filing it now or should I not?? Does it really make a difference, I don't have any other passive income, except the installment sale income each year.

Thank you

Is it a big deal,

It's only a big deal "IF" you are subject to AMT tax. From what I see/read in the forums, when it comes to TTX users not that many are subject to the AMT. I know I'm not and never have been. Unless I get lucky and hit the lottery (fat chance of that) I never will be either. For those reasons, I've never really paid much attention to AMT in the IRS pubs. So I'm really not knowledgeable enough on AMT to contribute anything useful on that front. I can best sum it up by saying that I know "just enough" about AMT rules and laws to be downright dangerous. 😋

I have never had any losses on my rental property since I had owned it. Turbo tax is wanting me to file it now, do I need to file this even though I don't have any losses?

You very well may have a loss, as it's not common for long term residential rental property to show a profit -  especially if there's a mortgage on it.

Due to changes with the TCJA in 2018, you can now deduct a maximum of $25K of those passive losses that exceed your passive rental income, against other ordinary income - provided of course you have the otherwise taxable other ordinary income to claim it against and deduct it from.

Take a look at the 8582. Is there an amount on line 3? If so, file the form.

Basically, if you are e-filing the return, the program will e-file all forms required by the IRS. If you elect the option to "print and mail" the return the program will print only the forms required for filing, if the program prints it, then mail it.

Will it look odd to the IRS if I start filing it now or should I not?

Humans are not perfect. If things are wrong on a tax return the IRS is not going to send down unmarked black hawk helicopters to bag and hogtie the tax filer, take them back to DC and drop them into the IRS dungeon because they made a mistake. (A bit dramatic, I know😋)

There's nothing special to be concerned about here. it's kinda like you're getting worked up about nothing. Remember, in today's world it's highly unlikely a human will ever lay eyes on your return, unless the computer that processes it has a reason to flag it for human review. Generally, those reasons pertain to honest mistakes, far more than they do intentional tax fraud. Oh, and even the computer screws up at times too!

Even with honest mistakes, it's the computer that generates the letter one gets in the mail. A human only becomes aware of it when one of two things happens.

1) If you don't respond to the letter within the time frame allotted, a human at the IRS is most likely made aware of this. What they "do" when they become aware, I really don't know.

2) The so-called "error" the computer flagged on your return is either not an error, or was incorrectly flagged as an error because of incorrect reporting on the tax filer's part. When you mail or fax your response and supporting documents to the IRS, a human has to bet involved to either agree or disagree with your respons and adjust your tax return in their computers accordingly.

Keep in mind that when the IRS computers flag tax returns for errors or whatever, it is not automatically assumed you are being malicious. In fact, it's quite the opposite and is assume to just be a mistake on the tax payer's part. Most of the time, it's a tax payer mistake. But there are a fair number of times it's an IRS mistake. You know the old saying.... STUFF HAPPENS.

Now if you're concerned, you can always buy Audit Defense for the 2021 tax return. You'll be offered that option once you complete your return, when you start the actual "filing" process.

Carl,

It was a non-residential property, never had a loss. I paid it off very early on, but I always had positive income. There is nothing on form 8582 except net income amounts, no losses