Amend or Form 3115?

[j-ong]

Hello TurboTax Community,

Looking for some advice on what's the best thing to do with my tax situation.

It is now Feb 2024 and getting ready to file my 2023 tax return in the coming weeks.  I realized my CPA messed up my depreciation schedule for my rental properties starting with my 2021 tax return:

1.  Used the wrong basis for the Building, Equipment, Land values ($500 instead of $50,000 - randomly pulled land values in the air without doing cost seg), and Loan cost (added loan cost and items that should adjust the basis of the property).  

2.  Did not use the appropriate depreciation periods.  For example, used 7yr for Equipment (should be 5yr for Rental operation.  Although my CPA applied 100% bonus depreciation for this in 2021) and 5yr for Loan Fees (should be 30yr)

3.  Did not enter 15yr Land Improvement as part of the bonus depreciation.  But instead placed everything under 5yr Equipment for bonus depreciation.

3.  Did not adjust for bonus depreciation at the state-level tax (NJ residency) returns

4.  Depreciated the Equipment again on my 2022 returns after already applying 100% bonus depreciation in 2021.

Despite these errors, it didn't affect my 2021 returns, and immaterially affected your 2022 returns.  As the rentals are passive, the entire loss was disallowed at both the federal and NJ levels on the 2021 returns, and only an immaterial amount of loss was released on the 2022 returns.

I am thinking of filing an amendment for my 2021 and 2022 returns using TurboTax even though there is no impact on the refund amount from the IRS.  This way, the IRS would at least have a copy of my updated depreciation schedule (Form 4562, Form 8582, NJ-BUS1, NJ-BUS2, etc.) and I can have a depreciation schedule for my 2023 returns.  But I heard about the 2yr rule for depreciation.  It goes something like if you have been using the depreciation method for 2yr, then you need to file Form 3115 to correct the depreciation.  You cannot just amend it.

Questions:

1.  Would amending my 2021 and 2022 returns suffice to correct the depreciation schedule, or do I need to file Form 3115 when I file my 2023 returns to correct it?

2.  I consulted another CPA and I was advised that I could just 'prospectively' correct my returns starting 2023.  His thoughts were simple - since it did not have an impact on my 2021 returns and was immaterial for 2022 returns, there is no need to amend.  Just adjust everything in 2023.  Would this be a valid approach?  I am a bit worried about this because I plan to hold my rental properties for a long time.

Appreciate your feedback!   

[tagteam]

Two or more consecutive years equals Form 3115:

See https://www.irs.gov/publications/p946#en_US_2023_publink1000107385

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.

[j-ong]

Thanks @tagteam 

Just to clarify, my CPA used bonus depreciation as well in 2021/2022, which is the same method I plan to use for amendment.  The correct Passive Activity Loss would be much smaller since I am accounting for the correct values of the land and using more conservative depreciation based on the cost segregation studies.

Would this still require form 3115 even though my 2021 return is more presentational (did not use the passive activity loss)?

[RobertB4444]

You are not changing your depreciation methods.  You are correcting errors on the returns.  You should amend the returns and not file form 3115.  The adjustment for 2023 would be a hassle for anyone to jump through.  Go back and change both years and file them and then do 2023.

@j-ong 

[tagteam]

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@j-ong wrote:

Would this still require form 3115 even though my 2021 return is more presentational (did not use the passive activity loss)?

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No, not with the added facts.

[j-ong]

Thanks @RobertB4444 and @tagteam! 

Follow-up question.

How would you recommend filing the amendments for 2021 and 2022?

Should I file the amended for 2021 first, then wait for a couple of weeks/months (confirmation from IRS?) before filing the amended for 2022, or can I file them together or a few weeks apart?

I imagine when the IRS reviews the amendments it would have to see the amended 2021 first, then before it can make sense of the 2022 amendment.

I plan to file my 2023 returns once the IRS receives the amendments for 2021/2022.

[ThomasM125]

You should mail both of them in the same envelope. That way the agent who works on them will be able to better see what is going on. It will make the processing of them easier and less prone to delays and mistreatment.