Depreciation Catchup

Technical topics regarding tax preparation.
#1
EADave  
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Hello all!

I have a client that failed to report a rental activity on his 2017 return. The property was rented from 2017 to present. Oddly enough, he reported the rental on the 2018 return, but failed to deduct depreciation. Can I amend the 2017 and 2018 returns to take the depreciation for each year, or will I be required to file the 3115 with the 2019 return to catch it up?

Or, do we have the option to file the 3115 on a 2018 amended return?

Thank you for any guidance!
 

#2
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EADave wrote:I have a client that failed to report a rental activity on his 2017 return. The property was rented from 2017 to present. Oddly enough, he reported the rental on the 2018 return, but failed to deduct depreciation. Can I amend the 2017 and 2018 returns to take the depreciation for each year, or will I be required to file the 3115 with the 2019 return to catch it up?


2017: Since he did not report rental activity, you have no choice but to file amended return for the year, it does not make sense not to take the depreciation at the same time.

2018: If there is no other issues to fix besides the the depreciation, you are not supposed to amend the return. However since the depreciation error happened in only one year (2018) after 2017 amendment, I believe you have a choice to amend 2018 or not to amend 2018.

2019: Depends what you did with 2018. If you amended 2018, you can go ahead file 2019 based on the 2017 and 2018 amended returns. If you did not amend 2018, then you file form 3115 catching up 2018 depreciation (and 2017 and 2018 accumulated depreciation).
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#3
EADave  
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Thank you for the quick reply. So, I will have to amend 2018 because he double dipped the mortgage interest; took it on the Schedule A and the E, but I wonder, can I simply amend 2018 and file the 3115 with that return to catch up 2017 and 2018 on the 2018 amended return?

Sorry if I already asked this question but in a different way!
 

#4
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EADave wrote:Thank you for the quick reply. So, I will have to amend 2018 because he double dipped the mortgage interest; took it on the Schedule A and the E, but I wonder, can I simply amend 2018 and file the 3115 with that return to catch up 2017 and 2018 on the 2018 amended return?


You said: "client that failed to report a rental activity on his 2017 return", so you need to amend 2017 reporting the rental activity. If you amend 2017, then you should take the depreciation at the same time. If you amend 2017 due to non reporting, and 2018 due to double dipping, then I do not see a need for form 3115.

IF 2017 just misses depreciation but no other errors, and if 2018 has other errors besides missing depreciation, then I think you plan to amend 2018 and apply form 3115 will work. I have not seen form 3115 goes with an amended return, but I think it is possible. In this case, you will only catch up 2017 missed depreciation, and let 2018 depreciation runs its normal course, assuming you have not filed 2019 yet.
Please consider visiting this post where my question at the end has not been answered yet:
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#5
Coddington  
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You cannot file a Form 3115 with an amended 2018 return, since it does not appear the asset was disposed of in 2018.

As to whether a 2019 Form 3115 is required, it depends on how you look at it. If you look at the depreciation method as a sub-method of reporting the overall activity, failure to report the activity in 2017 would suggest that there was no election for the depreciation sub-method. However, the 446 regs provide the each depreciable asset is generally the item for tax accounting method change purposes. Further, the allowed or allowable rule operates regardless of whether the activity is reported or not. This would seem to suggest that after two years of no depreciation claimed on this asset, an impermissible method has been set regardless of how the tp failed to claim depreciation. If so, a Form 3115 in 2019 would be required. I see the latter position as the stronger argument.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#6
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Coddington wrote:This would seem to suggest that after two years of no depreciation claimed on this asset, an impermissible method has been set regardless of how the tp failed to claim depreciation.


(1)

At the time of making 2018 amendment, it is already two years of no depreciation, so "an impermissible method has been set" if we consider 2018 amendment as another point in time between 2018 and 2019, like 2018 1/2. For the purpose to establish the pattern, should we not to correct the depreciation in amendment, but let form 3115 to catch it up?

(2)

If we do correct the depreciation in 2018 amendment, does the statement that "an impermissible method has been set" still holds for using form 3115 for 2019? Based on what being posted, both 2017 and 2018 need to be amended to correct errors apart from the depreciation, but for the sake of argument, let us suppose 2017 does not need to be amended but 2018 does.

(3)

Suppose:

- the rental started in 2016;
- 2016 and 2017 returns are fine except the taxpayers did not take depreciation
- 2018 has error other than depreciation that needs to be amended
- 2019 has not been filed

In this case, can we amend 2018 return and file form 3115 on the amended return to catch up the depreciation from 2016 and 2017?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#7
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As Coddington mentioned, You cannot file an amended return with a 3115 except in certain situations. An incorrect accounting method is established by filing two consecutive returns, so in your case, an incorrect method it was established by filing the second tax return with no depreciation claimed.

With respect to other issues, you may need to file amended returns to correct those if that’s what the taxpayer wishes to do. I assume that there was net taxable income for the years in question, or the taxpayer was able to utilize the losses that were reported, and that these are not years where losses were generated and were fully suspended for instance by the passive activity rules, and carried forward. If the latter, and taxpayer did not utilize the net losses reported, that is a different situation where you may be able to simply true up the passive activity loss carry forward without amending...

If the taxpayer is amending returns, which will be filed with an incorrect accounting method for depreciation, that might create another issue where the taxpayer should disclose the incorrect method with an explanation of how the issue will be corrected on a future return...
 

#8
EADave  
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Sorry to reply so late. Thank you all for the explanation, it makes perfect sense and I will move forward with filing the 3115 with the timely filed 2019 return.

Thanks again!
 

#9
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EADave wrote:Sorry to reply so late. Thank you all for the explanation, it makes perfect sense and I will move forward with filing the 3115 with the timely filed 2019 return.

Hi Dave,

You had to amend 2017 and 2018 returns because they had errors besides missing depreciation, it was not reporting rental in 2017, and double dipping on mortgage interest in 2018. I have questions for you:

[1] Can you amend those two years fixing other errors without adding the depreciation?
[2] Can you amend those two years fixing other errors and at the same time adding the depreciation?
[3] If you can do [2], then there will be no need to file 3115 with 2019 return, is that right?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 


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