Part 4 was a list of indicators of a depreciation error. If it turns out there was one, how is it fixed? Many of us know the go to method for fixing tax filing errors. That method is to amend previous returns. It is natural to think that we know how to fix the tax error, just like many others -just file amendments for the years that are wrong. But we might not know what we don’t know. In many cases the correct or most correct method is not to amend previous returns. But it is also most often not correct to just start depreciating right on the next tax return. There is another path for making corrections that can apply in many situations (but not all, many are not corrected this way) and this is Form 3115 Change of Accounting Method.

There are many possible depreciation errors. Every year I think that maybe I’ve seen all the landlord ones, but someone takes that as a challenge and brings me one I haven’t seen before. For the purpose of this discussion we’ll focus on using “impermissible methods”. Depreciating land and not depreciating the rental property at all falls under this category. If there is only one year messed up, the prior year. This can be fixed by an amendment for that year. But if two or more past years have been filed incorrectly then using the Change of Accounting Method is the correct way to fix these errors. The F3115 is filed along with a timely filed tax return. If you didn’t depreciate enough in past years, the F3115 catches you up and an adjustment is added to your current filing. The adjustment is a 481(a) adjustment (“negative” in this case), named after a section of the tax code. Many people call it “catch up deprecation”. This adjustment, catching up on missed depreciation is generally helpful for the taxpayer. But if you depreciated too much then your 481(a) adjustment can increase your tax liability- I suppose you could look at it as increasing your taxable income. A positive adjustment (it may not feel positive) in some cases can be spread out over 4 years instead all applied in one year.

To reemphasize: the correct way to fix a depreciation error depends on the nature of the error and applying the tax code appropriately. But a little info in case the F3115 is necessary This is not something you just follow the software to get right (In my view nothing in tax prep should be just follow the software because software isn’t tax authority). Just reading the form instructions is also not enough to make sure you get it right. There are revenue procedures that apply -you need to reference at least one and maybe several. There are internal revenue codes sections and treasury regulations to reference and interpret. The form instructions indicate that the estimated time to complete the form for the average taxpayer is 21 hours and 3 minutes to complete this form (that doesn’t include research and other activities). That isn’t being provided to be a challenge to be faster. I am sharing all this so that if you do decide to DIY this form, which I don’t recommend, that you will know it takes considerable effort and due diligence to make sure you get it right. And hopefully you will do that if you DIY it. But don’t DIY it. Also note that not all tax professionals are familiar with the F3115.

Takeaways: depreciation errors are not all fixed the same way. It is often complicated to fix a depreciation error correctly. In most cases it is not a correct fix to just start depreciating or to change the depreciation in the current year without doing more. iWe don’t know what we don’t know. If you have a depreciation error you may have reached, or you may have passed, the DIY tax prep breaking point.

Disclaimer: This discussion on fixing depreciation errors is incomplete and should not be solely relied on for tax preparation or planning. Due diligence is required to properly understand the tax code and to properly prepare tax returns and to correct depreciation errors. That requires much more than reading a few paragraphs via the internet. Your specific tax situation may differ from those meant to be addressed above.