When implementing a Cost Segregation study retroactively to claim missed depreciation from prior years, you should typically use IRS Form 3115 (Application for Change in Accounting Method) instead of amending your prior tax returns. Form 3115 is the preferred method because it allows you to claim all missed depreciation from past years in a single lump-sum adjustment on your current tax return.
This process, often referred to as an “automatic change of accounting,” is simpler, faster, and avoids the hassle of amending multiple years of returns, making it especially useful if you have owned the property for a while. Amending your tax return is generally only necessary in cases where there were errors related to depreciation that need correction, rather than a planned accounting method change like Cost Segregation.
Form 3115 vs. Amending Returns: The Key Differences
Form 3115 (Recommended):
- Purpose: Allows you to claim missed depreciation from prior years in a single adjustment on your current tax return.
- Benefit: It is simpler, faster, and avoids the need to go back and redo past tax filings.
- Technical Name: Automatic Change of Accounting Method.
Amending Returns (Rarely Necessary):
- Purpose: Only necessary for correcting errors related to depreciation that occurred on a previously filed return.
- Disadvantage: Involves the hassle of amending multiple years of returns if you've owned the property for a while.
