How Do You Correct Depreciation Deductions?(p14)

If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return, next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.

You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

• You claimed the incorrect amount because of a mathematical error made in any year.
• You claimed the incorrect amount because of a posting error made in any year.
• You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.
• You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns.

For an exception to this 2-year rule, see Revenue Procedure 2008-52, on page 587 of Internal Revenue Bulletin 2008-36, available at www.irs.gov/pub/irs-irbs/irb08-36.pdf, as modified by Revenue Procedure 2009-39 on page 371 of Internal Revenue Bulletin 2009-38, available at www.irs.gov/pub/irs-irbs/irb09-38.pdf . (Note. Revenue Procedures 2008-52 and 2009-39 are amplified, clarified, modified, and superseded in part by Revenue Procedure 2011-14. For more information, see Revenue Procedure 2011-14 on page 330 of Internal Revenue Bulletin 2011-14, available at www.irs.gov/pub/irs-irbs/irb11-04.pdf.)

For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www.irs.gov/pub/irs-irbs/irb07-29.pdf.

If an amended return is allowed, you must file it by the later of the following.

• 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.
• 2 years from the time you paid your tax for that year.

Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

• A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
• A change in the depreciation method, period of recovery, or convention of a depreciable asset.
• A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.
• A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

• An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
• A change in use of an asset in the hands of the same taxpayer.
• Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.
• Any change in the placed in service date of a depreciable asset.

See section 1.446-1(e)(2)(ii)(d) of the regulations for more information and examples.

In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2008-52. If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C.B. 680. Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes.

For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2008-52, on page 587 of Internal Revenue Bulletin 2008-36, available at www.irs.gov/pub/irs-irbs/irb08-36.pdf, as modified by Revenue Procedure 2009-39 on page 371 of Internal Revenue Bulletin 2009-39, available at www.irs.gov/pub/irs-irbs/irb09-39.pdf. (Note. Revenue Procedures 2008-52 and 2009-39 are amplified, clarified, modified, and superseded in part by Revenue Procedure 2011-14. For more information see Revenue Procedure 2011-14 on page 330 of Internal Revenue Bulletin 2011-4, available at www.irs.gov/pub/irs-irbs/irb11-04.pdf.)

For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www.irs.gov/pub/irs-irbs/irb07-29.pdf.

If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as "other expenses." A positive section 481(a) adjustment results in an increase in taxable income. It is generally taken into account over 4 tax years and is reported on your business tax returns as "other income." However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Make the election by completing the appropriate line on
Form 3115.

If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero.