Can You Amend a Tax Return to Take Bonus Depreciation?

Let's face it, no one wants to pay more taxes than they absolutely have to, especially when every dollar counts towards your business's growth and stability. One often-overlooked tax savings opportunity is bonus depreciation, an IRS-approved tax strategy that allows you to deduct a large portion of asset costs in the first year. If you've acquired eligible assets in previous years but didn't take bonus depreciation at the time, you may be wondering if you can go back and claim it. 

The good news is that bonus depreciation is still within your reach. In fact, you are required to take it. Bonus depreciation is mandatory unless you elect out. While it is possible to amend a tax return to take bonus depreciation, the IRS also has a streamlined process in place for changing accounting methods: filing Form 3115. Read on as we explore this alternative, which could be your ticket to significant tax savings without the pitfalls of amending your return.

What Is Bonus Depreciation?

In the world of real estate investment, understanding your property's “cost basis” is crucial. Cost basis refers to the original purchase price of the property. However, it's important to note that the cost basis only includes elements that are depreciable—meaning the value of the land is excluded, as land itself is not depreciable.

Depreciation is the method that allows you to recover your cost or capital outlay over a designated period. It spreads the cost of your depreciable assets over a number of years, providing tax relief in the form of deductions.

However, the Tax Cuts and Jobs Act (TCJA) of 2017 dramatically shifted the landscape of depreciation. This law amplified the concept of bonus depreciation, a powerful tool that accelerates tax benefits by allowing businesses to write off a percentage of the cost of qualified assets in the first year they're placed in service.

It's important to note that bonus depreciation is currently being phased out. Unless there are legislative changes, the following bonus depreciation schedule applies:

September 27, 2017 through December 31, 2022: 100%

Year Bonus Depreciation Amount
2023 80%
2024 60%
2025 40%
2026 20%
2027 0%

Cost Segregation vs Bonus Depreciation

In this specific segment from “The Fundication Show,” tax expert Kim Lochridge dives into the topic of Cost Segregation vs. Bonus Depreciation.

Which Assets Qualify?

Generally, tangible property like machinery, equipment and office furniture, as well as certain software, can qualify. However, to truly leverage this tax benefit, you need to delve into the nuances of different asset categories defined by the IRS: Section 1245, Section 1250 and Qualified Improvement Property (QIP).

Section 1245 vs. Section 1250

  • Section 1245 property: This includes depreciable personal property like equipment and specific types of real property, such as storage tanks. To qualify for bonus depreciation, your gains up to the amount of prior depreciation taken will be taxed as ordinary income.
  • Section 1250 property: This generally consists of buildings and their structural components. If sold, gains are taxed differently based on depreciation methods used and the property's service date.

Each of these asset types, particularly if held in an entity other than a C-Corporation, can be subject to varying tax rates and conditions upon sale.

Qualified Improvement Property (QIP)

QIP refers to improvements made to nonresidential buildings. Thanks to changes in tax laws, QIP also qualified for 100% bonus depreciation until 2022, reducing to 80% in 2023 and phasing out by 2027. The eligible improvements primarily relate to the interior of nonresidential properties, excluding expenditures for enlargement or structural framework.

Why Not Just Amend Your Return?

When it comes to retroactively claiming bonus depreciation, amending returns can be more than just a minor inconvenience. While the IRS does not specifically recommend one method over the other, Form 3115 is often your better option. Here’s why:

  • Filing Form 3115 eliminates the need to amend previous tax returns, a process that could require you to file multiple state income tax returns in addition to your federal return. This is especially important for real estate investors who have properties in different states.
  • Generally, Form 3115 involves less paperwork than amending multiple years of tax returns, streamlining the process and reducing administrative burden.
  • Amended returns are more likely to be audited by the IRS. On the other hand, Form 3115s are less frequently subjected to IRS review.

What You Need to Know for Filing Form 3115

When filing Form 3115, be prepared to provide specifics like the property you're claiming bonus depreciation for, the original depreciation amount claimed and the calculated adjustment for bonus depreciation. Navigating the labyrinth of the IRS's accounting method change rules can be complex; consulting a tax professional is often the wisest route.

How ETS Can Help You Navigate Bonus Depreciation

When it comes to something as intricate as amending tax returns for bonus depreciation, it's critical to have experts by your side. Engineered Tax Services specializes in understanding the complex web of tax laws and regulations. We offer a full suite of tax credit and incentive services, including cost segregation. Our broad spectrum of specialization equips us to manage even the most complicated scenarios related to bonus depreciation.

Tax laws and IRS publications can be daunting to decipher, and inaccurate or incomplete understanding of these documents could lead to financial consequences. Our seasoned tax professionals are well-versed in IRS requirements and are highly skilled at translating complex tax jargon into actionable strategies for your business. 

Next Steps

If you think you’ve missed out on bonus depreciation, now’s the time to act. Reach out to Engineered Tax Services today to ensure you’re making the most out of your assets and minimizing your tax liability.

Author

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Julio Gonzalez

Founder and CEO | Engineered Tax Services

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