Question

Forms 3115 & Depreciation

Forum|Forum|2 years ago
February 22, 2024
3 replies
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Hello... I did a Cost Segregation Study on all four of my rentals recently. I have been depreciating the properties over the last two years but after doing some research, I've realized I have to use Form 3115 to claim the bonus depreciation?, but that's how much I know in this department... Since I've previously depreciated the property (normally), now I have more questions than before like: Do I have to file (create) forms 4562 for every allocated component of the Cost Segregation Study?.. Or can I just do a "Lump Sum" of the over all dollar amount the Cost Segregation Study generated?.. Or is it a "Lump Sum" per Class Year (5, 7, 15,or 20)? And last but not definitely least... which method will I be using for accelerating the depreciation?.. (Sec 179, Bonus Depreciation, Special Depreciation)?... OR DO I EVEN NEED FORM 4562 WHITH MY COST SEGREGATION STUDY? Furthermore, does the Cost Segregation Study Report needs to be submitted (attached) to my 1040? I know... too many questions.. but some how I feel they are all in one if I wanted to file Form 3115 this year with my taxes... Thank you very much and sincerely appreciate your help... SEMI

M

Mike9241

For one thing generally 179, bonus special depreciation must be elected in the year you place the asset into service. You did a cost seg 2 YEARS AFTER PUTTING THE PROPERTY INTO SERVICEand now want to take them retroactively which is not allowed.

however:

Section 179 Deduction:
- The Section 179 deduction allows small businesses to immediately deduct the entire cost of qualifying equipment or other fixed assets during the first year that they are put into service for the business ¹ ².
- It’s particularly useful for major purchases of property, equipment, or machinery.
Cost Segregation:
- Cost segregation is a tax strategy where you reclassify certain components of a property (such as a building) into shorter depreciation periods.
- This allows you to accelerate depreciation and potentially claim larger deductions in the earlier years.
Scenario:
- You put the property into service in Year 1.
- In Year 2, you perform a cost segregation study and identify components that would have qualified for the Section 179 deduction in Year 1.
Considerations:
- If the components identified through cost segregation would have qualified for the Section 179 deduction in Year 1, you can amend your tax return for that year.
- By doing so, you can claim the Section 179 deduction for those components in the correct year.
Important Points:
- Ensure that the components meet the Section 179 eligibility criteria (e.g., tangible personal property, off-the-shelf computer software, qualified improvement property) ¹.
- Consult with a tax professional to navigate the specifics of your situation and ensure compliance.

S

Semi 12Author

Thank you for your response Mr. Mike... I don't mean to disrespect your answer, but I guess I did not explain myself in my original post...

I understand the concept of Sec 179 and NO .. I did not make a Sec 179 election when I depreciated my Rental Properties a couple of years ago when I placed them in service.. They were depreciated the simple way (SL).. but later (recently actually) I found out about using a Cost Segregation Study to depreciate my rental properties much faster and since I did not apply any Bonus Depreciation in Year 1 (when I placed the properties in service); I would like to make that correction on this year's tax return BUT I DON'T KNOW WHERE TO APPLY THE CORRECTION. I know I have to attach Form 3115 to my return, BUT THE ADJUSTMENT, ... that's my problem... where do I input the corrected (catch-up) depreciation?.. and What method do I use?... Do I still need Form 4562?... Thank you once again for your cooperation... SEMI

A

AmeliesUncle

You enter the "Section 481(a) Adjustment" as an "other" deduction for each rental property.

Unless you elected OUT of Bonus depreciation for the prior year, you are required to use Bonus Depreciation.

Form 4562 would not be used if the asset was "placed in service" in a prior year.

You would need to amend your prior returns to correct/reduce the Basis and depreciation of the building.

S

Semi 12Author

Do I really need to amend my prior years?... Can I just use form 3115 and make the adjustment on my taxes for the current year?... and if so... WHERE ON MY 1040 (and/or schedules) do I enter that adjustment amount?...

AmyC

Enter the missed depreciation as a miscellaneous expense and it will show under Other Expenses.

The Form 3115 rules changed recently so be sure to file it with your return Filing it separately now has an extra charge.

Only the desktop version supports the form.

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S

stevef4571

This is a good guide on what needs to be done from a forms perspective, though figuring out exactly how to do it in turbotax still will take some work.

https://www.wealthyaccountant.com/2021/09/20/form-3115-cost-segregation-study/

Well, if cost seg is done on the firs year, seems we just skip the 3115 and enter the various categories of depreciated property (like in the example above that says "The new depreciation schedule will look like this"), then use Bonus depreciation (80% for 2023) to immediately accelerate 80% of the depreciation for everything under 20 years recovery period.

For a property put into service in an older year:
- I have seen some accountants claiming that failing to claim bonus depreciation can be corrected by filing form 3115. So it seems to me that 3115 can be used but to split the depreciation classes and also to correct the failure to claim bonus depreciation in the first year of service.