1) Yes, once you've adopted a method of accounting, even if it's an incorrect / impermissible method, a 3115 is the only technically correct way to change your method of accounting. Not every decision constitutes a method of accounting, but using the same depreciation method ("no depreciation" is a method) for the first two years an asset is placed in service constitutes adopting a method of accounting with respect to that asset.2) The client can choose to amend 2019, or not. The amount carried forward into 2020 is required to be the "as if prior returns had been prepared correctly" amount, whether the client chooses to amend 2019 or not. "Correctly" in this case includes "using the taxpayer's adopted method of accounting," so isn't a workaround for the depreciation issue.Caveat that if the client got an impermissible benefit in a prior year, you can't double-dip. So if your client had taken an impermissible rental loss in 2019, the amount carried forward to 2020 would be reduced by that impermissible loss unless the client amended 2019. @PhoebeRobertsTruly appreciate your answer, suppose:there was missed depreciation in both 2018 and 2019there was no rental loss carryover from 2018 to 2019we know that there were other errors (overstated deduction) that may or may not change rental incomeMy questions are:Are we permitted by the law to correct depreciation via form 3115 ignoring the other errors that we know?Suppose we need to amend the returns for the other errors, can we correct the depreciation at the same time or we have to use form 3115?Similarly, can we just carry forward the rental loss to 2020 as filed originally ignoring the other errors that we know?Can we choose not to file amended return for 2018 and 2019 but to use the correct rental loss amounts in 2020 as if the amended return correcting the other errors were filed?Can we mail the amended returns correcting the other errors to clients and assume they were filed and proceed with the assumption?In the other words, what are the correct options for us to take in above scenario?PS: I believe your previous answer:The amount carried forward into 2020 is required to be the "as if prior returns had been prepared correctly" amount, whether the client chooses to amend 2019 or not.is correct, but can you provide the reference document for me to study more?

Level 4

Solved

A client who self-prepared returns "forgot" to depreciate her rental. The property was placed in service in 2018. Should I amend or file Form 3115?

Forum|Forum|5 years ago
January 12, 2021
4 replies
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Best answer by puravidapto

1) Yes, once you've adopted a method of accounting, even if it's an incorrect / impermissible method, a 3115 is the only technically correct way to change your method of accounting. Not every decision constitutes a method of accounting, but using the same depreciation method ("no depreciation" is a method) for the first two years an asset is placed in service constitutes adopting a method of accounting with respect to that asset.

2) The client can choose to amend 2019, or not. The amount carried forward into 2020 is required to be the "as if prior returns had been prepared correctly" amount, whether the client chooses to amend 2019 or not. "Correctly" in this case includes "using the taxpayer's adopted method of accounting," so isn't a workaround for the depreciation issue.

Caveat that if the client got an impermissible benefit in a prior year, you can't double-dip. So if your client had taken an impermissible rental loss in 2019, the amount carried forward to 2020 would be reduced by that impermissible loss unless the client amended 2019.

@PhoebeRobertsTruly appreciate your answer, suppose:

there was missed depreciation in both 2018 and 2019
there was no rental loss carryover from 2018 to 2019
we know that there were other errors (overstated deduction) that may or may not change rental income

My questions are:

Are we permitted by the law to correct depreciation via form 3115 ignoring the other errors that we know?
Suppose we need to amend the returns for the other errors, can we correct the depreciation at the same time or we have to use form 3115?
Similarly, can we just carry forward the rental loss to 2020 as filed originally ignoring the other errors that we know?
Can we choose not to file amended return for 2018 and 2019 but to use the correct rental loss amounts in 2020 as if the amended return correcting the other errors were filed?
Can we mail the amended returns correcting the other errors to clients and assume they were filed and proceed with the assumption?

In the other words, what are the correct options for us to take in above scenario?

PS: I believe your previous answer:

The amount carried forward into 2020 is required to be the "as if prior returns had been prepared correctly" amount, whether the client chooses to amend 2019 or not.

is correct, but can you provide the reference document for me to study more?

George4Tacks

Level 15

Amend

Answers are easy. Questions are hard!

itonewbie

Level 15

I have a different take on this but I'm sure George has his reasons for the position.

If your client did not claim any depreciation on an asset, that, in itself, is an impermissible method. Since your client has used that impermissible method for two or more years (i.e. 2018 and 2019), consistent tax treatment is established and a method of accounting is deemed to have been adopted. To start claiming depreciation on the asset, your client should file a F.3115 for the change of accounting method and the catch-up depreciation will be a negative §481(a) adjustment allowable as an expense on the Sch E of the year of change (presumably 2020 in this case).

Had your client discovered the omission when the 2019 return was prepared, she could have simply filed an amended 2018 return to correct the depreciation prior to filing the 2019 return, which would then show the proper depreciation based on the amended 2018 return.

---------------------------------------------------------------------------------Still an AllStar

BobKamman

Level 15

@itonewbie

I always want to ask those who live in the fantasy world where ordinary people can understand Form 3115 or afford to hire someone who does: What's the penalty, for not filing it and just using @George4Tacks 's common-sense solution?

PhoebeRoberts

Intuit Community Champion

Being stuck with no depreciation deduction until they accept the consequences of their initial error. Preparers can't advise them to knowingly prepare an incorrect return, and can't sign the return themselves.

Plenty of people in jail for not understanding the law and not affording a lawyer to do it for them. This is just money.

IRonMaN

Level 15

Hopefully the client doesn't "forget" to pay you.

Slava Ukraini!

D

Dan Dan the Tax man

Level 2

Doo a 481a adjustment. This is an automatic fix on the 3115 change of accounting. Fairly straightforward fix.

L

laval650Author

Level 4

Thank you all for your input. I was hoping for an easier solution (amendment).

Yes, I know that technically she was supposed to file F. 3115, but I remember reading somewhere that for property placed in service in 2018 the IRS allowed to amend 2 years to correct depreciation not previously claimed (CARES Act?). However, with the strong support in favor of filing Form 3115 I am going to do just that.

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