November 6, 2017
Depreciation is such a valuable tax deduction because unlike most deductions, it doesn’t cost you a penny more than what you’ve already spent in order to reap the benefits. In fact, you don’t have to spend anything in the current tax year to claim it (i.e., you could finance the purchase that you are depreciating).
If you simply didn’t claim depreciation on an asset, didn’t know you could take depreciation, or just flat out claimed the wrong depreciation, correcting depreciation could potentially save you thousands of dollars on this year’s tax return.
Here’s some good news on this error: First, you don’t have to pay the IRS user fees (which can vary from around $2,000 to $10,000), because your depreciation change is going to qualify as an automatic change that’s not subject to user fees.
Second, because you failed to claim your correct depreciation in prior years, you are going to have what’s called a negative Section 481(a) adjustment (negative for the government, but positive for you) equal to the total amount of your missed depreciation. This means you will take all the missed depreciation in one lump sum in the tax year when you make your automatic accounting change.
Third, with a bit of tax planning as to the year you make the automatic change, you can ensure you realize the best possible tax benefits from your missed depreciation.
To make this change, an eight-page IRS Form 3115 and a one-to-two-page Section 481(a) adjustment worksheet attachment must be filled out, in which the dollar adjustment is calculated and you answer some questions for the IRS about the depreciation adjustment.
One copy of the Form 3115 is then attached, along with the Section 481(a) worksheet, to your tax return and a duplicate copy is made to file with another office of the IRS.
With some planning, this missed deduction can turn into your good fortune.
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