Leasehold improvement depreciation was set up incorrectly 10-yrs ago - set at 29 years (land) instead of 15 years. Can I correct this with TT for Biz S-Corp?

[toddcrab]

I'm not necessarily interested in amending a lot of previous returns to correct previous incorrect depreciation.  I am interested, if possible, in depreciating the remaining value of these improvements over the next 5 years - thus "fixing" the basis to 15 years instead of 29 years.

Is there a process in Turbo Tax for S-Corps for "fixing" an incorrect depreciation schedule?  First: I need to fix the depreciation for basis for my improvements from 29 years to whatever the correct term is or was when I incurred the expenses (in this case 2006).

Second: I need to know if I can simply backdate the "fix" back to 2006, then, without amending previous returns, just depreciate the remaining balance over what's left of the 15 years - thus increasing significantly my depreciation of the leasehold improvements over the next several years.

[Rick19744 · Accepted solution]

I will agree with Carl in that this would be best handled by a tax professional.

You certainly can do most of this within TT, but since a significant form will need to be attached to your return, you would need to paper file your return.

In January 2015, the IRS issued two revenue procedures effectively split former Rev. Proc. 2011-14 in two parts; Rev. Proc. 2015-13 contains the general procedures for changing methods of accounting, either with IRS consent or automatically, and Rev. Proc. 2015-14 lists the automatic changes originally contained in the appendix to Rev. Proc. 2011-14.

In Rev. Proc. 2016-29, the IRS issued an updated list of automatic changes to which the automatic change procedures of Rev. Proc. 2015-13 apply. Accordingly, the new revenue procedure amplifies, modifies, and partly supersedes Rev. Proc. 2015-14.

When you file tax returns methods of accounting are adopted.  The IRS requires you to continue to follow these methods of accounting unless you seek to make a change.  These changes are handled via form 3115.  As noted above, some changes are automatically consented by the IRS and others need to be approved (a much longer process).  A change to depreciation in general is one of the automatic changes, but you still need to file a form 3115.  Typically this form is sent to the IRS National office and also attached to the tax return for the year of change. 

The change is handled in the form is what is known as a Section 481(a) adjustment; which can be favorable or unfavorable.  Yours of course will be a favorable adjustment.

As you can see, there will be a lot to complete to effect this change.  A tax professional can help you complete the form 3115 which will provide you with the Section 481(a) adjustment that will be entered on your tax return.  Or alternatively, you can just have them complete your return for the year of change.

[toddcrab]

Thanks for your answers!  Another question: what happens to undepreciated value (in this case un-depreciated leasehold improvements) if you simply move to a new location?  You're not selling your business, you're just moving to a new location.  Do you just keep depreciating the leasehold improvements from the first location, until it's fully depreciated?

[Critter]

No ... as with any asset you "sell" you can take the balance of the un-depreciated basis at the time it is removed from service.

[toddcrab]

Great . . . so in Turbo Tax for Biz does the software just ask you if you're "removing" any of your assets from service?  What is the process in TT for Biz to doing this, so you can take the remaining depreciation when you move out of your current location?

[Carl]

It's not a question really. It could be one of two things.
You may have a selection screen that asks "Did you stop using this asset in 2016?" for which you would click YES and then continue on through the screens to show the asset's disposition.
Or it could be a screen with a selection on it that reads something like "I stopped using this asset in 2016". select it, and press on to work through the asset disposition screens.

[Critter]

And since you not be taking the improvement with you, unless you sell it to the landlord, the sales price will be zero ... that way the balance of the basis is taken automatically.

[Rick19744]

Just want to make sure you understand that there is some exposure here.  I'm not saying don't do this, I just think it is important to understand that if you won the audit lottery the IRS may adjust your return.

As noted above, if you do not "take" any of the leasehold improvements, you are certainly allowed to write them off.  However, in your case based on your facts stated, you should have about 5 years of depreciation remaining and not 19 years.  The rule in depreciation is "taken or should have taken" meaning that the IRS could adjust the basis for depreciation that should have been taken but wasn't due to the incorrect life.  We don't have the information to run the numbers, but this would more likely than not reduce your allowable loss.

This is certainly a practical way to "make things whole", just not the technically correct way.  And one in which as noted above the IRS would challenge if audited.

[Critter]

Personally I think this comes under the heading of "let sleeping dogs lie" ... since you took a longer depreciation time then required I wouldn't worry about it especially if you are going to move anyway. I would just leave things be and explain it later *if* you are ever audited.

[Carl]

What you want to do is possible....just not with the TurboTax program. The program isn't designed to correct past mistakes that were not made with the program within the last three tax years. You'll need to seek the services of a CPA for this.