Discussion:Office-in-Home Depreciation Wrong

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Discussion Forum Index --> Basic Tax Questions --> Office-in-Home Depreciation Wrong


Discussion Forum Index --> Tax Questions --> Office-in-Home Depreciation Wrong

Bell (talk|edits) said:

17 February 2014
Got a TP that has done his own return for 10 years. Originally set the office depreciation up incorrectly. Used FMV of home and did not take out the land value. When I get returns like this, I do not change depreciation that was previously set up. Not had one this far off. Should I just continue? I would have to get IRS permission to change this, right? Not sure how to proceed.

Captcook (talk|edits) said:

17 February 2014
File a 3115. Several discussions on how to use this form to change from impermissible method to permissible method. I just did one for a client who never began depreciating their building from 14 years ago.

Bell (talk|edits) said:

17 February 2014
Wondering what problems this would cause since too much depreciation has been taken in 10 previous years. UGH!

Doug M (talk|edits) said:

17 February 2014
What the $$ amount of each years error.

One thought.

OIH depreciation has to be recaptured upon sale.

Bell (talk|edits) said:

17 February 2014
Excess dep taken each year is about 160. I think it best left as is. Agree?

Taxaway (talk|edits) said:

17 February 2014
You'd be intentionally continuing an error, not a good practice would you agree? Inform the client (whether you fall under Circular 230 or not) of the error and his obligation to correct it. At the least prepare with the proper depreciable basis going forward and make sure the accumulated depreciation is correct in your software.

Doug M (talk|edits) said:

17 February 2014
Taxaway-I believe it is a given that Bell will start taking the correct depreciation going forward.

We are just trying to discuss how to handle the 10 years of excess. 7 of which are probably closed under the SOL.

Allowed or allowable says recapture the error upon sale. I agree with Bell.

Taxaway (talk|edits) said:

17 February 2014
okay, in that case, I agree also, recapture will eventually take care of it.

Harry Boscoe (talk|edits) said:

17 February 2014
I always thought that "allowed or allowable" caused the adjusted basis of the depreciated property to be reduced by the depreciation taken, in a situation like this. If there's going to be "recapture" I wonder how much of the depreciation taken will be "recaptured," *and* under what rule that will happen...

Captcook (talk|edits) said:

17 February 2014
At $160/yr, I'd update accumulated depreciation to what it should have been so my recapture calculates correctly and move on.

Ckenefick (talk|edits) said:

18 February 2014
If there's going to be "recapture" I wonder how much of the depreciation taken will be "recaptured," *and* under what rule that will happen...

If we've depreciated land as if it were a building, we wonder if IRS, based on some duty of consistency, would invoke Unrecaptured Section 1250...on the correct amount of depreciation taken + the incorrect amount of depreciation taken.

Harry Boscoe (talk|edits) said:

18 February 2014
Very insightful. Could they get to Section 1245 or Section 1250, which are, after all, the *recapture* provisions. Unrecaptured Section 1250 Gain is, we know, *Un*recaptured, *not* recapture.

Bell (talk|edits) said:

18 February 2014
Thanks to all. It turns out that I am going to amend 3 years due to multiple errors. I will correct the basis, remove cable TV deducted from F8829 and fix double deductions for house tax (once on the F8829, with personal flowing to Sch A and again on Sch A) The little box gives answers no matter what you plug in. The saver is the SE tax was charged to the TP, not the spouse. I guess they didn't check the spouse box on Sch C. In this case, the spouse already paid in max SS, but the TP did not. A lot to work, though, but they will come out OK. The Sch C income is large.
When I show prior depreciation, ........which was my original concern here.....I am to update to what is correct for all 10 years. Not what was actually taken....... I think that is what Captcook stated.  Many, many thanks.

Joan TB (talk|edits) said:

18 February 2014
But if you show prior depreciation as what it should have been instead of what it was... doesn't that skew your answer upon sale when you calculate recapture? The only time it works that way (changing accumulated for prior unamended returns) is when depreciation ISN'T taken but should have been, as the rules apply to allowed or allowable. Seems like this in case, the prior years were ALLOWED to deduct too much (cuz the IRS didn't catch the mistake) so that is what ultimately may have to be recaptured.

Somebody please enlighten me if I am looking at this incorrectly. Thanks.

Coddington (talk|edits) said:

18 February 2014
Bell: You have to show the accumulated depreciation that was actually taken, not what should have been taken. The "allowed or allowable" rule applies to the greater of allowed (taken) or allowable (permissible). In my mind, I can decompose the fix to this problem into two steps: 1) re-allocate basis from the depreciable home office account to the non-depreciable land and personal-use home accounts using a Form 3115 in the current year (which fixes the accumulated depreciation), and 2) fixing the bases of the land and personal use home accounts from FMV down to cost on a non-accounting method change basis. The only problem is that I don't know if that is a proper approach. It may be that fixing the adjusted basis (but not the accumulated depreciation) in the earliest open year is the correct solution. If it was my client, I'd probably end up calling Chief Counsel on a no-name basis to see if: a) they agree with the characterization of the problem as an accounting method change and b) that it is an automatic.

Tax Writer (talk|edits) said:

18 February 2014
This is obviously not fraud or intentional (just lack of knowledge), so I would just correct and move forward. I agree with CaptCook that I would just update accumulated depreciation to what it should have been so the recapture calculates correctly and move on. You don't need prior IRS approval for the correction of a depreciation error.

Coddington (talk|edits) said:

18 February 2014
There were ten years. How would you fix accumulated depreciation except through a section 481(a) adjustment?

Allowed or allowable and recapture being calculated correctly would include the depreciation that was actually taken, not just what should have been taken.

Harry Boscoe (talk|edits) said:

18 February 2014
Don't touch the accumulated depreciation. The basis of the property gets reduced by the amount of depreciation that was taken, right or wrong, in this scenario, and you have to have the numbers from the ten "bad" years - and use them! - when the property is sold. If you change the accumulated depreciation to "what it should have been" you are making a mistake, as you are very likely to understate<u> the taxable gain</u> on the property when it's sold.

[You can mess with the three "open" years of depreciation if you really want to but it's probably not worth the trouble unless you're not already on overtime, now during busy season... Let sleeping dogs lie.]

Whether there's "recapture" of depreciation when this place is sold is another question entirely on which I've already said enough.

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