Nov 18, 2024 Accounting Methods Webinar November 2024

Alex Bagne, JD, CPA, MBA, CCSP, recently hosted a webinar on accounting methods in November 2024. Accounting methods are the rules used to report income and expenses for tax purposes. A change in accounting method includes any adjustment to a taxpayer’s overall method of accounting. The IRS requires taxpayers to adopt an accounting method that accurately reflects their income and to consistently apply it year after year. As a tax planning tool, accounting methods help taxpayers implement cost segregation studies and energy efficiency incentives, adopt beneficial provisions of the Tangible Property Regulations, and numerous other tax minimization strategies. The webinar drew an audience of over 1,000 participants, and we are now contributing our expertise by publishing answers to your accounting methods questions.

1. If a taxpayer had a rental property and never claimed depreciation can he file 3115 on a late filed return?
A taxpayer can only make an accounting method change by filing Form 3115 on an original return (note that if a taxpayer files a superseding return, that becomes an original return). I am unaware of any provisions that would prohibit filing a Form 3115 on a late return if it was an original return.

2. Does a Taxpayer who file Form 3115 Change in Accounting Methods, need to send the documents to Internal Revenue Service Ogden, UT 84201 Attn: M/S 6111?
This address is correct for both an automatic accounting method change sent by mail (as opposed to sent by a private delivery service). For me, I recommend faxing the Form 3115. Please see page two of the Form 3115 instructions, which provides address and fax information.

3. To be sure do you have to own the building or buying. Not renting?
Presuming this question relates to either cost segregation or the 179D Energy Efficient Commercial Building Deduction, a tenant will be able to take advantage of these strategies if the tenant incurred significant costs for improvements. We have done plenty of studies like this for tenants.

4. Can accounting treatment be different for book and tax treatment? For example repair costs capitalized for book purposes and not capitalized for tax purposes?
Absolutely yes. The Tangible Property Regulations and GAAP are separate. We often have clients depreciate an expenditure for book purposes and treat it as a 1-year asset for tax purposes, signifying that the expenditure should be treated as an expense.

5. For 179D, can the client get energy efficient credit on the top of deductions?
The 179D Energy Efficient Commercial Building Deduction can be taken on top of credits, such as the Low Income Housing Tax Credit, the Investment Tax Credit for renewable energy, or the 45L Energy Efficient Home Credit if we are dealing with a residential building for stories or more. We do not recommend taking the 179D Deduction in combination with the Historical Tax Credit, as it reduces the basis eligible for the HTC.

6. If you write off the asset in that year of the event that’s not an accounting change correct?
Correct. An accounting method change is not required. If, for example, you demolished tenant improvements several years ago and you would like to take an abandonment loss on those assets, an accounting method is required.

7. We have a client that did not take depreciation on an asset for 10 years. Can we do an accounting change from an improper method to a proper method and claim the depreciation in one year.
This is normally rectified by amending. However, the three-year statute of limitations for amending has passed. You may be able to correct this by claiming that the taxpayer was treating the asset as non-depreciable land, and then reclassify it to the correct asset life or lives by doing an accounting method change for depreciation, DCN 7.

8. Is cost segregation study required for accounting method change for residential rental property where components were not segregated between 5 yr/15 yr/ and 27.5 year property?
It is not required but it is HIGHLY recommended in the event of an audit.

9. A cabin was bought 12/23 to be a STR. No income until 24 and STR permit was active only in 2024. Is a 3115 needed for 2024 taxes?
It seems like the placed in service date for the short-term rental would be in 2024. Thus, no 3115 would be required because the placed in service date and the initial accounting method chosen are in the same tax year.

10. Have client that has built a new manu facility; don’t know the spend; is there a threshold for which you would recommend a cost seg?
We have a program specifically for smaller residential single family and multifamily homes that is cost effective for properties with $250,000 or more of real property. For a manufacturing center, it likely makes sense when there is $500,000 or more in real property. I’d welcome having a call to discuss.

11. If a real estate investor added a Pickleball court or a sports court to their rental property, where would it fall on a cost segregation study?
It would be viewed as a land improvement, which is depreciable over 15-years and is bonus eligible.

12. For example, A couple own a rental property in MA. The husband died in March 1, 2021. A FMV ( higher than the cost basis) reported in 706. However, the step-up basis never reported in 2020 form 1040. in 2023, the rental property was sold. Should the 3115 be used to report the step up basis or amend the 2021 return?
I would consider DCN 107, Impermissible to permissible method of accounting for depreciation or amortization for disposed depreciable or amortizable property. I did this accounting method change for a taxpayer who sold a property having never taken depreciation. This may apply to your facts.

13. What will happens if a audit finds that a Company change their Accounting Method but don’t filed out Form 3115?
There is potential for interest and penalties if the IRS recalculated income using the original method and determined a tax liability. If the accounting method is permissible, there likely would be an opportunity for negotiation with the IRS agent.

14. What would you say is the best trigger for an accounting change?
Most of the accounting method changes that we handle relate to depreciation.

15. What is the source of slide 33?
This slide has lists which parts and sections of the Form 3115 are required. The tables are found on page 5 of the Form 3115 instructions.

16. In claiming depreciation for several prior years in which depreciation was not claimed, is it necessary to calculate each prior year’s depreciation or can you just add the total unclaimed depreciation in the current year’s tax return?
In this situation, amending is the best method. If the statute of limitations has run, you may be able to do an accounting method change where you are changing the asset from non-depreciable land to a depreciation asset. This would be DCN 7 for depreciation.

17. Is the 481(a) catchup depreciation automatic?
The 481(a) adjustment is for both automatic and non-automatic accounting method changes.

18. What line does it flow through to on 1040? Anywhere special?
It would be treated as an ‘Other Deduction’.

19. If you filed a 3115 with a 2023 return but need to amend because the 481(a) was done incorrectly, can you file an amended tax return and 3115.
Yes. Amending an incorrectly prepared Form 3115 is allowed. Amending to make an accounting method change is not.

20. If you filed a 1120-s September 15th with a 3115, and then find a problem and need to amend, are there any issues with filing an amended return since the original had the 3115?
Yes. Amending an incorrectly prepared Form 3115 is allowed. Amending to make an accounting method change is not.

21. How soon after the e-filing of the return must the duplicate be sent?
The Form 3115 instructions provides: “File a copy of the signed Form 3115 (duplicate copy) with the IRS National Office at the address provided in the Address Chart for Form 3115, later, no earlier than the first day of the year of change and no later than the date the original is filed with the federal income tax return for the year of change.”

22. Would you recommend a cost segregation study for a residential complex that was inherited because of death of the original owner?
I would recommend performing a cost segregation as soon as the taxpayer has or knows when they will be in need of additional tax deductions. This can be particularly beneficial if there is a step-up in basis. If the new owner plans to sell the complex within a few years, I generally would not recommend performing a cost segregation study.

» Contact ICS to receive a copy of the Accounting Methods 2024 presentation