Form 3115 Line-by-Line

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Form 3115 Line-by-Line

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Form 3115 Line-by-Line

• Presenter Lisa Ihm, EA

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Learning Objectives

• Identify taxpayers who will benefit by filing a
  3115
• Analyze depreciation schedules to clean-up
• Identify required sections of Form 3115
• Determine who can use Short Form 3115
• Advantages and disadvantages of filing

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Correcting DepreciationForm 3115 Line-by-Line

• By Lisa Ihm, EA

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Who will benefit by filing a 3115?
P1

• New regs Those with real estate holdings
• Individuals
• Corps
• S corps
• Partnerships
• LLCs
• Supplies and repairs rather than capitalizing
• Change your way of thinking

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How do you correct depreciation?
P2

• Form 1040X
• Mathematical error
• Posting error
• Before 12/30/03
• Less than 2 years
• Deadline later of
• 3 years from original due date, or
• 2 years from date tax was paid

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Advantages of Form3115
P2

• Eliminates statute of limitations for claiming
  refund
• Eliminates interest if tax due in prior year
• Delays payment of tax by allowing corrections to
  be spread over 4 years

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Why new regs require 3115
P2

• Established method of accounting if used 2
  years
• Must file 3115 to switch
• Even if incorrect method in past

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Clean-up Depreciation Sch in 2014
P3

• Items capitalized but repairs under new regs
• Why new rules apply to prior years
• What items? Flowchart

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P6
11
Example 1 Larry Landlord
P3

• Purchased 800 compressor
• Used to make repairs to rental
• Deduct or capitalize?

12
P6
13
Example 2 Sarah Salescompany
P3

• Purchased 38 new laptops - 450 each
• Deduct or capitalize?

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P6
15
Example 3 - Leslie Landlord
P4

• Built new 7000 garage on rental
• Repair and main were 1000
• Supplies were 3000
• Original cost 600,000 building 100,000 land
• Deduct or capitalize?

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P6
17
Example 4 Mary Multifamily Owner
P4

• Spent 17,000 on new carpet
• Also 3000 for new water heather
• How much can he deduct this year?

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P6
19
Example 5 Marty Multifamily Owner Rev 1
P4

• Expects to replace water heater every 7 years

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P6
21
Example 6 Randy Remodeler
P5

• 12,000 remodeling kitchen in rental
• How much can he deduct this year?

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P6
23
Flowchart detail
P 7 - 16
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Election to Capitalize
P16

• Applies to all repairs and maintenance that year
• Timely filed original tax return (including
  extensions)
• Irrevocable
• Most do NOT want to make this election

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Rentals and Leased Property
P17

• Costs of acquiring lease
• Amortize over lease term
• Leasehold improvements
• As if made to owned building

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General Asset Accounts
P17

• Change grouping
• Separate components
• Write-off when partial disposition

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Example
P17

• Acquired building in 2000
• Replaced roof in 2010 capitalized and
  depreciated
• No loss deducted on retirement of original roof
• Continued to depreciation original as part of
  building
• What deductions can he claim in 2014?
• Treat building and roof as separate assets
• Deduct remaining basis in original roof
• Any reasonable method to determine basis

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Common Clean-Up Items
P18

• Carpet
• Water heater
• Kitchen and/or bath remodel
• Built-in appliances
• Bathroom remodel
• Garage door replacement
• Landscaping
• Fencing, patio slab, driveway
• Replacement windows in a few rooms
• Roof shingles

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Items that must generally be capitalized
P18

• Furnace or central air conditioner
• Appliances not built-in
• Roof including structural plywood
• All windows
• Room or garage additions
• Curb and gutter and sidewalk
• Deck
• Renovations before property was placed in service

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Example
P19
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Change of Accounting Method Form 3115
P19-20

• How clean-up appears
• 481(a) adjustment
• How to calculate adjustment
• Amount already claimed vs. what should have been
  claimed
• Decrease in income All in one year
• Increase in income
• Spread over 4 years
• lt 50,000 elect to report in one year (Rev Prov
  2015-13)
• Out of business

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Change of Accounting Method Form 3115
P20

• Where to report adjustment
• Schedule C, E, F, 2106
• Fully depreciated items
• Delete from depreciation schedule
• No 481(a) adjustment
• MUST file 3115 to apply new regs to past years
• If no 3115, new regs only apply to 2014 and
  future
• Short Form 3115
• Reduces depreciation recapture at sale

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Change of Accounting Method Form 3115
P21

• Automatic change request procedures
• No fee
• No acknowledgement
• Returns under audit
• New rules in Rev Proc 2015-13

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Designated change numbers
P22
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Multiple Items and/or Multiple Businesses
P23

• All increases added together (spread over 4
  years)
• All decreases added together (deduct in current
  year)
• Each taxpayer needs only 1 3115 for new regs
• Provide detail about separate businesses

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Filing the Form 3115
P23-24

• File electronically attach as .pdf
• 2 copies Ogden address correction
• Due date
• Same as tax return
• Amendment within 6 month extension period
• No adjustment after October 15, 2015
• No acknowledgment

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P25
ALL CODES 184-193 PER NEW REGS
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P26
39
P27
SEE STATEMENT ATTACHED
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P28
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P29
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P30
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P31
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P32
45
P33
46
P34
47
P37
48
P39
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P40
50
P41
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P42
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P43
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P44
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Form 3115 Shortcuts
P45

• Use a simpler worksheet attachment
• Create a Template

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Short Form 3115
P45-46

• No 481(a) adjustment
• Identification info in Part 1
• Signature
• Part 1, line 1(a) (DCN)
• 481(a) adjustment for new regs
• Same as above, plus
• Part II
• Line 12 (info on worksheet)
• Line 13 (only if changing TO depreciating)
• Line 16 (request for conference if 3115 denied)
• Part IV
• Line 25 (481(a) adjustment
• Line 26 (election tro include all income in one
  year)
• Schedule E (only if changing TO capitalizing)

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Simplified Procedure for Small Businesses
P46

• No Form 3115 required
• Apply new regs only to 2014 and forward

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Considerations if not filing 3115
P46-47

1. No deduction for prior repairs (27.5 or 39 year
   life)
2. No deduction for prior partial dispositions
3. Additional depreciation recapture at sale
4. Required to capitalize replacements in future

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Example
P47

• Spent 10,000 to remodel kitchen in 2001,
  capitalized
• 2015 spends 25,000 to remodel kitchen again
• If 2014 3115 filed
• Deduct remaining basis in 2001 kitchen on 2014
  return
• Deduct 2015 remodel as repair
• No 2014 3115 filed
• 2015 deduct remaining basis in 2001 kitchen
• New 25,000 kitchen must be capitalized
• Carpet is another classic example

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Considerations if not filing 3115
P47

1. No audit protection
2. Applies to all changes relating to this business
3. Cannot change mind later New regs apply only to
   2014 and future years

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Considerations if not filing 3115
P48

• Some receive no or limited benefit
• Very low or 0 tax bracket (but NOL created)
• Passive losses gt25,000 (suspended passive loss)
• Income too high to deduct passive losses
• NOL that would be reduced even if taxable income
  is 0
• Safe Harbors can be used in future
• Taxpayers choice Not preparers

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Example 1 New Regs
P48

• Connie Conservative
• Paid 12,000 for carpet in 2011, capitalized
• Expects to last 4 years (but 27.5 year life!)
• Depreciated in 2011, 2012, 2013
• Does nothing in 2014, expects to replace soon
• File 3115 in 2014 to deduct remaining basis
• Amended return by Oct 15, 2015

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P49
Sample Completed Short-Form 3115
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P50
Some questions answered automatically by software.
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P51
Pages 4 8 are blank if filing a Short-Form 3115.
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P52
Since no depreciation detail is required for
changes because of the 2014 regs, many assets can
be included on one form.
66
P53
Template of Short-Form 3115 Input for Lacerte
Software
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P54
Thats it! 11 entries!
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Example 2 Missed Deduction
P55

• Wanda Widow new client in 2014
• Errors discovered before 2014 return prepared
• Rental property fully depreciated
• Husband died in 2008
• Step-up basis was overlooked
• File Form 3115. Statute of limitations does not
  apply.

69
P55
Sample Completed Full 3115
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P56
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P57
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P58
Pages 5, 6, 7 would be blank
73
P59
Schedule E is reqd for changes not related to
the 2014 regs
74
P60
Depreciation detail is reqd, so a separate
worksheet is needed for each item changed (but
usually just 1 change.)
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Example 3
P61

• Larry Landlord
• Owns 20 unit residential rental building
• Purchased for 1.4M in 2004
• Depreciated entire cost Did not take out land
• Land was 84,000
• 3115 corrects back to 2004 No statute

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P61
Form 3115 same as Wanda Widows
77
P62
Spread income over 4 years, unless elect to
report currently (lt50,000)
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CA Conformity?
P63

• Conformity for most taxpayers
• Possible nonconformity for corporations
• No CA Form 3115
• Create separate CA worksheet and attach
• Adj on Schedule CA

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Summary
P63

• Clients need new accounting procedures
• Elect safe harbors
• Templates and worksheets simplify 3115 filing

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P64
An Excel version is available at www.LisaIhm.com
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(No Transcript)
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Questions?
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