1 form 3115 line-by-line all audio is streamed through your computer speakers. there will be several...

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Form 3115 Line-by-Line

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Form 3115 Line-by-Line

Presenter: Lisa Ihm, EA

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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

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 Form3115

1. Eliminates statute of limitations for claiming refund

2. Eliminates interest if tax due in prior year3. 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

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Example 1 – Larry Landlord

•Purchased $800 compressor•Used to make repairs to rental•Deduct or capitalize?

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Example 2 – Sarah Salescompany

•Purchased 38 new laptops - $450 each•Deduct or capitalize?

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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?

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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?

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Example 5 – Marty Multifamily Owner Rev #1

•Expects to replace water heater every 7 years

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Example 6 – Randy Remodeler

•$12,000 remodeling kitchen in rental•How much can he deduct this year?

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Flowchart detail

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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 2015-13)

– 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 2015-13

P21

Designated change numbers P22

Multiple Items and/or Multiple Businesses1. 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

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

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ALL CODES 184-193 PER NEW REGS

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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 3115

1. No deduction for prior repairs (27.5 or 39 year life)

2. No deduction for prior partial dispositions3. Additional depreciation recapture at sale4. Required to capitalize replacements in future

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Example

•Spent $10,000 to remodel kitchen in 2001, capitalized

•2015 spends $25,000 to remodel kitchen againo If 2014 3115 filed

o Deduct remaining basis in 2001 kitchen on 2014 returno Deduct 2015 remodel as repair

o No 2014 3115 filedo 2015 deduct remaining basis in 2001 kitcheno New $25,000 kitchen must be capitalized

oCarpet is another classic example

P47

Considerations if not filing 3115

5. No audit protection6. Applies to all changes relating to this business7. Cannot change mind later – New regs apply only

to 2014 and future years

P47

Considerations if not filing 3115

Some receive no or limited benefit1.Very low or 0% tax bracket (but NOL created)2.Passive losses >$25,000 (suspended passive loss)3.Income too high to deduct passive losses4.NOL that would be reduced even if taxable income is $0

Safe Harbors can be used in futureTaxpayer’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

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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 3115. Statute of limitations does not

apply.

P55

Sample Completed Full 3115

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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 $84,000•3115 corrects back to 2004 – No statute

P61

P61Form 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

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An Excel version is available at

www.LisaIhm.com

Questions?

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