If you’ve made a depreciation error in the past, there’s no need to worry, good news is on the way. Here’s what you need to know about fixing this mistake and how it could actually benefit you.
Good News: No IRS User Fees
First, the IRS user fees which can range from $2,000 to $10,000 for certain changes don’t apply to your case. Because your depreciation change qualifies as an automatic change, you can correct this error without paying any user fees.
The Power of the Negative Section 481(a) Adjustment
Here’s where it gets exciting: since you failed to claim your correct depreciation in prior years, you’ll receive something called a negative Section 481(a) adjustment.
- What’s the benefit to you? You’ll be able to take all of the missed depreciation in one lump sum during the year you make your accounting change. This could lead to a significant tax break, as the missed depreciation amount will be deducted all at once.
- The adjustment works in your favor, giving you the opportunity to reduce your taxable income substantially in the year of correction.
Smart Tax Planning: Timing the Adjustment for Maximum Benefit
We don’t have to rush this change, you can decide which year to make the automatic change. This gives us the flexibility to plan strategically, helping you realize the maximum possible tax benefits from the missed depreciation.
What’s Next? IRS Forms and Worksheets
To make this change happen, we’ll need to fill out the IRS Form 3115, which is an eight-page document that outlines the depreciation correction. We’ll also complete a one-to-two-page Section 481(a) adjustment worksheet to calculate the exact dollar amount of your adjustment and answer some key questions from the IRS.
Once the forms are completed:
- We will attach the Form 3115 and the Section 481(a) worksheet to your tax return.
- We will also create a duplicate copy for you to file with another office of the IRS.
Don’t worry, we’ll make sure everything is clear and easy to follow.
Let’s spend some time brainstorming how to turn your missed depreciation into a substantial benefit. We can discuss this over the phone or meet in person whatever works best for you.