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

[mogwai]

I converted my primary residence to a rental property in June of 2010. Turbotax calculated 52% as the "Business %" used for the asset depreciation that first year. Since the first year starting 2011 the property has been rented out 100% of the time. Unfortunately, I just realized that the initial 52% business percentage has carried over each and ever year since 2010 which has had a significant negative impact on my return.

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

Thank you.

[Carl]

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.

[mogwai]

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

[AmeliesUncle]

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".

[Carl]

(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.

[Carl]

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.

[Topsy10]

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%).

[AmeliesUncle]

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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.

[Topsy10]

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?

[mogwai]

@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

[AmeliesUncle]

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.

[ErnieS0]

@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.

[Topsy10]

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?

[Carl]

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.

[Topsy10]

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?