Form 3115 Line-by-Line
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Form 3115 Line-by-Line
Presenter: Lisa Ihm, EA
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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P1
Who will benefit by filing a 3115?
• New regs – Those with real estate holdings
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Individuals
Corps
S corps
Partnerships
LLCs
• Supplies and repairs rather than capitalizing
• Change your way of thinking
P2
How do you correct depreciation?
• Form 1040X
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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 Form3115
1. 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
P3
Clean-up Depreciation Sch in 2014
• Items capitalized but repairs under new regs
• Why new rules apply to prior years
• What items? Flowchart
P6
P3
Example 1 – Larry Landlord
• Purchased $800 compressor
• Used to make repairs to rental
• Deduct or capitalize?
P6
P3
Example 2 – Sarah Salescompany
• Purchased 38 new laptops - $450 each
• Deduct or capitalize?
P6
P4
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?
P6
P4
Example 4 – Mary Multifamily Owner
• Spent $17,000 on new carpet
• Also $3000 for new water heather
• How much can he deduct this year?
P6
P4
Example 5 – Marty Multifamily Owner Rev #1
• Expects to replace water heater every 7 years
P6
P5
Example 6 – Randy Remodeler
• $12,000 remodeling kitchen in rental
• How much can he deduct this year?
P6
P 7 - 16
Flowchart detail
P16
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
P17
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
P18
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
P19
Example
P19-20
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 2015-13)
– Out of business
P20
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
P21
Change of Accounting Method – Form 3115
• Automatic change request procedures
– No fee
– No acknowledgement
• Returns under audit
– New rules in Rev Proc 2015-13
Designated change numbers
P22
P23
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 1 3115 for new regs
• Provide detail about separate businesses
P23-24
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
P25
ALL CODES 184-193 PER NEW REGS
P26
P27
SEE STATEMENT ATTACHED
P28
P29
P30
P31
P32
P33
P34
P37
P39
P40
P41
P42
P43
P44
P45
Form 3115 Shortcuts
• Use a simpler worksheet attachment
• Create a “Template”
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
P46
Simplified Procedure for Small Businesses
• No Form 3115 required
• Apply new regs only to 2014 and forward
P46-47
Considerations if not filing 3115
1.
2.
3.
4.
No deduction for prior repairs (27.5 or 39 year life)
No deduction for prior partial dispositions
Additional depreciation recapture at sale
Required to capitalize replacements in future
P47
Example
• Spent $10,000 to remodel kitchen in 2001, capitalized
• 2015 spends $25,000 to remodel kitchen again
o If 2014 3115 filed
o Deduct remaining basis in 2001 kitchen on 2014 return
o Deduct 2015 remodel as repair
o No 2014 3115 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 3115
5. 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
P48
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
P49
Sample
Completed
Short-Form
3115
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 ShortForm 3115 Input
for Lacerte
Software
P54
That’s it!
11 entries!
P55
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 3115. Statute of limitations does not apply.
P55
Sample
Completed
Full 3115
P56
P57
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.)
P61
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 $84,000
• 3115 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)
P63
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
P64
An Excel version is
available at
www.LisaIhm.com
Questions?
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