BHT&D Certified Public Accountants Blog

How to Correct a Prior Year Depreciation Deduction Error

Posted by Dwayne Houghton on Tue, Aug 06, 2013 @ 09:00 AM

Depreciation DeductionFrom time to time when we pick up new clients we find that the depreciation deduction that was taken for a client is incorrect. This can result from using an incorrect life or method of depreciation for a particular asset or group of assets, or from an asset never being depreciated. In addition to the obvious loss of a deduction, it can also have negative results when you sell an asset that was used in your trade of business.

In determining the gain or loss on the sale of an asset used in a trade or business, the Internal Revenue Code requires that you subtract from the original purchase price the depreciation deduction allowed or allowable. In effect, in calculating your gain or loss, you are going to complete your calculation factoring in your depreciation deduction, whether you actually took it in the correct amount or any at all.

How do I correct the error? Before the issuance of Revenue Procedure 2002-9, a taxpayer could make a correction to the prior depreciation deduction by filing Form 3115, Application for Change in Account Method, but the change was not automatic and needed approval from the IRS. Beginning with Re. Proc. 2002-9, the IRS provided a procedure whereby a taxpayer could request an automatic change in accounting method by filing Form 3115 to catch up in a single year all prior depreciation not taken. This could be done while the taxpayer still owned the affected asset(s).

One limitation with the Rev. Proc. 2002-9 and subsequent updates was that it did not apply to assets that had been sold. However, the IRS recently issued Rev. Proc. 2011-14 which now allows a taxpayer to file a request for change in accounting method to catch up depreciation on an asset that has been sold. This procedure change is only applicable if applied in the year in which the affected asset is sold.

If you want a review of your depreciation records to assure you have taken the proper depreciation deduction on all trade or business assets, get started with a complimentary consultation.

Tags: Tax Deductions, Depreciation Deduction