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Many CPAs likely come across clients who have historically mis- or over-capitalized expenditures, particularly in real estate, retail or manufacturing. Fortunately, tax preparers don’t need to amend years of returns to correct these issues. The IRS offers a fix for this with Form 3115 (Application for Change in Accounting Method) and it can be a game-changer for helping clients’ tax liability.
Many taxpayers mistakenly capitalize:
- Building acquisition and improvement costs over longer recovery periods
- Repair and maintenance costs that should have been expensed
- Materials and supplies
- Routine maintenance costs
The good news is that IRS allows CPAs and tax preparers to correct these issues and catch-up missed deductions on a client’s current year tax return.
What is Form 3115?
Form 3115 serves as a formal request to the IRS for permission to change how taxpayers report items of income and expenses for tax purposes. The IRS has a listing of automatic method changes that can be used when completed Form 3115 in which the IRS does not require advance consent. The latest listing of designated automatic accounting method changes (DCN) can be found in Revenue Procedure 2024-23.
Common Automatic Method Change Options
|
Change
|
DCN
|
What to Look For
|
Action
|
|---|---|---|---|
|
Depreciation Method Correction |
7 |
Wrong recovery period, convention, or missed bonus. Cost Segregation Study performed on prior year Building asset |
Adjust to correct MACRS method |
|
Qualified Improvement Property Method Correction |
244 |
Wrong recovery period, convention, or missed bonus for Qualified Improvement Property placed in service after 12/31/2017 |
Adjust to correct MACRS method |
|
Repairs vs. Improvements |
184 |
Capitalized repairs that don't materially improve the property |
Reclassify and deduct |
|
Routine Maintenance Safe Harbor |
184 |
Recurring maintenance that was capitalized |
Expense under safe harbor |
|
Materials and Supplies |
192 |
Incidental tools or supplies capitalized |
Reclassify and deduct |
Steps to Prepare and File Form 3115
- Identify appropriate DCN(s) from Rev. Proc. 2024-23
- Calculate the §481(a) Adjustment: Net of present method vs. new proposed method. Use KBKG’s §481(a) Calculator to determine appropriate catch-up deduction.
- Prepare Form 3115 and draft narrative explanation on Form 3115 attachment.
- File Form 3115 with IRS national office in Ogden, UT
- Attach date-stamped copy of Form 3115 filed with IRS with you timely filed tax return (with extension if needed).
- Retain supporting documents: fixed asset reports, capitalization memos, or Cost Segregation report
KBKG Resources for Filing Form 3115
You can access numerous templates and guides to help with preparing IRS Form 3115 in KBKG’s exclusive Resource Library.
Conclusion
Form 3115 is more than just a compliance tool. It can be a strategic planning tool for maximizing deductions, correcting impermissible methods, and enhancing your advisory role with your clients. KBKG can work with you to identify missed expenditures, prepare full 3115 packages and calculate required §481(a) adjustments.