Incorrect Amount of Depreciation Deducted

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

Basis adjustment. Even if you do not claim depreciation you are entitled to deduct, you must reduce the basis of the property by the full amount of depreciation you were entitled to deduct. If you deduct more depreciation than you should, you must decrease your basis by any amount deducted from which you received a tax benefit.

Amended Return

If you deducted an incorrect amount of depreciation, you can file an amended return to correct the following.

• A mathematical error made in any year.
• A posting error made in any year.
• The amount of depreciation for property for which you have not adopted a method of accounting.

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.
• 2 years from the time you paid your tax for that year.

A return filed early is considered filed on the due date.

If you deducted an incorrect amount of depreciation for the property on two or more consecutively filed tax returns, you have adopted a method of accounting for that property. If you have adopted a method of accounting, you cannot change the method by filing amended returns. See Changing Your Accounting Method, next.

Changing Your Accounting Method

If you deducted an incorrect amount of depreciation for property on two or more consecutively filed tax returns, you have adopted a method of accounting for that property. You can claim the correct amount of depreciation only by changing your method of accounting for depreciation for that property. You will then be able to take into account any unclaimed or excess depreciation from years before the year of change.

Approval required. You must get IRS approval to change your method of accounting. File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for the depreciation. Revenue Procedure 97-27 in Cumulative Bulletin 1997-1 gives general instructions for getting approval. Cumulative Bulletins are available at many libraries and IRS offices.

Automatic approval. You may be able to get automatic approval from the IRS to change your method of accounting if you used an unallowable method of accounting for depreciation in at least the 2 years immediately before the year of change and the property for which you are changing the method meets all the following conditions.

1. It is property for which, under your unallowable method of accounting, you claimed either no depreciation or an incorrect amount.
2. It is property for which you figured depreciation using one of the following.
   1. Pre-1981 rules.
   2. Accelerated Cost Recovery (ACRS).
   3. Modified Accelerated Cost Recovery System (MACRS).

3. It is property you owned at the beginning of the year of change.

File Form 3115 to request a change to a permissible method of accounting for depreciation. Revenue Procedure 99-49 and section 2.01 of its Appendix in Internal Revenue Bulletin No. 1999-52 has instructions for getting automatic approval and lists exceptions to the automatic approval procedures.

Exceptions. You generally cannot use the automatic approval procedure in any of the following situations.

• You are under examination.
• You are before a federal court or an appeals office for any income tax issue and the method of accounting for depreciation to be changed is an issue under consideration by the federal court or appeals office.
• During the last five years (including the year of change), you changed the same method of accounting for depreciation (with or without obtaining IRS approval).
• During the last five years (including the year of change) you filed a Form 3115 to change the same method of accounting for depreciation but did not make the change because the Form 3115 was withdrawn, not perfected, denied, or not granted.

See other exceptions listed in section 4.02 and section 2.01(2)(b) of the Appendix of Revenue Procedure 99-49.

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