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Change in Method or Error Correction

Forum|Forum|3 years ago
October 3, 2022
2 replies
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Hello all-

I have two advisor CPA's which have a difference of opinion and frankly I am not sure which call is correct. On is of the opinion the issue is a method change which requires filing of a 3115 in the next current tax year. The other feels it is correction of an error, not a change in method of accounting.

Here are the facts. All knowledgeable "weigh in's" appreciated. In 2019 (still open for correction) an item which should have been capitalized as 39 yr property was instead expensed. It is not eligible for any safe harbor, 179 or bonus depn. 2020 and 2021 are being amended also so it is not an issue to correct by capitalizing and adding to depreciation as it should have been in the first place. The company has a written capitalize policy which this entry did not adhere to and is not reflected by other entries in the year. The question is for tax purposes should this be viewed as a change in method, left incorrect and untouched and corrected in the current year with a 3115, or corrected in the year of the issue and rolled forward through the following years? Thanks!

Lacerte Tax

This topic has been closed for replies.

Best answer by Terry53029

Thanks Terry. Any idea on what DCN to use? In making his case the advisor stated there was no code for an automatic change. I have looked through the codes and am not seeing a clear match for Expensed (non permissible) to capitalized. Finally are you willing to weigh in on certifying a return which contains a known issue as accurate and correct. Is it accurate and correct not because it is error free but because it conforms to IRS principal/code?

Really appreciate it.

The full list is in the 3115 instructions (https://www.irs.gov/pub/irs-pdf/i3115.pdf) at the bottom of the instructions, and there are 233 numbers. and you are looking for "Expense to Capitalize". It is definitely there, and used as a sample on page 5 of the instructions You can use form 8275 to disclose your position, if you are concerned about penalties

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Norman2001

Level 6

You're changing from an expensed asset to a depreciable asset. It seems that requires a 3115. Read §1.446-1(e)(2)(ii)(d)(2).

Additionally, a correction to require depreciation or amortization in lieu of a deduction for the cost of depreciable or amortizable assets that had been consistently treated as an expense in the year of purchase, or vice versa, is a change in method of accounting.

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ACCLIGHTAuthor

Level 3

Thanks ever so much. That was my feeling also as it involves timing and affects income. I have reviewed Treas. Reg. 1.446-1 and some case law. I guess my concern is going against the advice of a paid advisor with deep experience as a IRS auditor, revenue agent and appeals officer. I made the changes but I just couldn't shake the feeling it was not proper so I reached out to the community and really appreciate your input. Is your advice simply to amend around the error? Can I certify in signing that amended return is accurate and correct even though it is not but because it conforms to IRS code?

sjrcpa

Level 15

Norman is saying this is a change in accounting method requiring Form 3115.

The more I know the more I don’t know.

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Terry53029

Intuit Community Champion

Here is a link from "The Tax Advisor" which is easier reading, and agrees with Norman that it is a change in accounting methods, and needs 3115.

https://www.thetaxadviser.com/issues/2007/may/depreciationmethodchanges.html#:~:text=Regs.%20Sec.%201.446-1%20%28e%29%20%282%29%20%28ii%29%20%28d%29%20%282%29,nonamortizable%20to%20depreciable%20or%20amortizable%2C%20or%20vice%20versa.

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ACCLIGHTAuthor

Level 3

Thanks Terry,

That is a good article and inline with what I have gathered. Would you mind reviewing my comments in my reply to another community member above and sharing your thoughts? My only hesitation in going the 3115 route is the points the advisor has made (outlined above) and my discomfort at certifying the amendments to be true and accurate if they contain a know error that I am not in fact precluded for correcting.

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Terry53029

Intuit Community Champion

This is taken from Sec. 1.446-1(e)(2)(ii)(d)(2) "a change in the treatment of an asset from nondepreciable or nonamortizable to depreciable or amortizable, or vice versa, is a change in method of accounting".

You stated earlier that the asset was originally expensed, and should have been depreciated. The regs are quiet clear that is a change in method of accounting which requires a 3115

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