1 Form 3115 Line-by-Line All audio is streamed through your computer speakers. There will be several attendance verification questions during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE. Today’s webinar will begin at 2:00pm EDT Please note: You will not hear any sound until the webinar begins.

Form 3115 Line-by-Line Presenter: Lisa Ihm, EA

3 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

Correcting Depreciation Form 3115 Line-by-Line By: Lisa Ihm, EA

Who will benefit by filing a 3115? New regs – Those with real estate holdings –Individuals –Corps –S corps –Partnerships –LLCs Supplies and repairs rather than capitalizing Change your way of thinking P1

How do you correct depreciation? 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 P2

Advantages of Form Eliminates statute of limitations for claiming refund 2.Eliminates interest if tax due in prior year 3.Delays payment of tax by allowing corrections to be spread over 4 years P2

Why new regs require 3115 Established “method of accounting” if used 2 years Must file 3115 to switch Even if incorrect method in past P2

Clean-up Depreciation Sch in 2014 Items capitalized but repairs under new regs Why new rules apply to prior years What items? Flowchart P3

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Example 1 – Larry Landlord Purchased $800 compressor Used to make repairs to rental Deduct or capitalize? P3

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Example 2 – Sarah Salescompany Purchased 38 new laptops - $450 each Deduct or capitalize? P3

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Example 3 - Leslie Landlord 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? P4

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Example 4 – Mary Multifamily Owner Spent $17,000 on new carpet Also $3000 for new water heather How much can he deduct this year? P4

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Example 5 – Marty Multifamily Owner Rev #1 Expects to replace water heater every 7 years P4

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Example 6 – Randy Remodeler $12,000 remodeling kitchen in rental How much can he deduct this year? P5

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Flowchart detail P

Election to Capitalize Applies to all repairs and maintenance that year Timely filed original tax return (including extensions) Irrevocable Most do NOT want to make this election P16

Rentals and Leased Property Costs of acquiring lease –Amortize over lease term Leasehold improvements –As if made to owned building P17

General Asset Accounts Change grouping Separate components Write-off when partial disposition P17

Example 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 P17

Common “Clean-Up” Items 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 P18

Items that must generally be capitalized 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 P18

Example P19

Change of Accounting Method – Form 3115 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 < $50,000 elect to report in one year (Rev Prov ) –Out of business P19-20

Change of Accounting Method – Form 3115 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 P20

Change of Accounting Method – Form 3115 Automatic change request procedures –No fee –No acknowledgement Returns under audit –New rules in Rev Proc P21

Designated change numbers P22

Multiple Items and/or Multiple Businesses 1.All increases added together (spread over 4 years) 2.All decreases added together (deduct in current year) Each taxpayer needs only for new regs Provide detail about separate businesses P23

Filing the Form 3115 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 P23-24

P25 ALL CODES PER NEW REGS

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P27 SEE STATEMENT ATTACHED

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Form 3115 Shortcuts Use a simpler worksheet attachment Create a “Template” P45

Short Form 3115 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) P45-46

Simplified Procedure for Small Businesses No Form 3115 required Apply new regs only to 2014 and forward P46

Considerations if not filing 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 P46-47

Example Spent $10,000 to remodel kitchen in 2001, capitalized 2015 spends $25,000 to remodel kitchen again o If filed o Deduct remaining basis in 2001 kitchen on 2014 return o Deduct 2015 remodel as repair o No filed o 2015 deduct remaining basis in 2001 kitchen o New $25,000 kitchen must be capitalized o Carpet is another classic example P47

Considerations if not filing No audit protection 6.Applies to all changes relating to this business 7.Cannot change mind later – New regs apply only to 2014 and future years P47

Considerations if not filing 3115 Some receive no or limited benefit 1.Very low or 0% tax bracket (but NOL created) 2.Passive losses >$25,000 (suspended passive loss) 3.Income too high to deduct passive losses 4.NOL that would be reduced even if taxable income is $0 Safe Harbors can be used in future Taxpayer’s choice – Not preparer’s P48

Example 1 – New Regs 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 P48

Sample Completed Short-Form 3115 P49

P50 Some questions answered automatically by software.

P51 Pages 4 – 8 are blank if filing a Short-Form 3115.

P52 Since no depreciation detail is required for changes because of the 2014 regs, many assets can be included on one form.

P53 Template of Short- Form 3115 Input for Lacerte Software

P54 That’s it! 11 entries!

Example 2 – Missed Deduction 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 Statute of limitations does not apply. P55

Sample Completed Full 3115 P55

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P58 Pages 5, 6, & 7 would be blank

P59 Schedule E is req’d for changes not related to the 2014 regs

P60 Depreciation detail is req’d, so a separate worksheet is needed for each item changed (but usually just 1 change.)

Example 3 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, corrects back to 2004 – No statute P61

Form 3115 same as Wanda Widow’s…

P62 Spread income over 4 years, unless elect to report currently (<$50,000)

CA Conformity? Conformity for most taxpayers Possible nonconformity for corporations No CA Form 3115 –Create separate CA worksheet and attach –Adj on Schedule CA P63

Summary Clients need new accounting procedures Elect safe harbors Templates and worksheets simplify 3115 filing P63

P64 An Excel version is available at

Questions? 82

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