Incorrect depreciation for LLC that dissolved in 2011

[David]

H & W LLC filed the final return for 2011. It was determined that depreciation for one asset was incorrect through the years and approximately an additional $80K of depreciation should have been taken.

I thought we could correct the depreciation by filing form 3115 requesting an automatic change in accounting method. However, the instructions for form 3115 says that the automatic change is not allowed in the year of dissolution. I don't understand why an adjustment can't be made in the year of dissolution, but I know there is no logic in the tax code.

What is the best way to handle this so that all depreciation through 2011 is taken for the TP?

If I amend the 2010 tax return to take all of the depreciation that should have been taken through 2010, then the TP will not have the benefit of taking the correct 2011 depreciation.

Thanks for your help.

[OldJack]

However, the instructions for form 3115 says that the automatic change is not allowed in the year of dissolution. I don't understand why an adjustment can't be made in the year of dissolution, but I know there is no logic in the tax code.

The odds are it makes no difference if/when the asset is sold as any gain is going to probably be ordinary income/loss unless the asset is sold for more than the original cost. Depr is recaptured up to any gain as ordinary income on form 4797.

[David]

That is correct regarding the gain and depreciation recapture. However, the client is concerned that he never got the full depreciation deduction throughout the years.

The asset was purchased for $122K and should have been fully depreciated. However, because the incorrect asset classification was used, only $40K was depreciated.

Since the nbv of the asset for purposes of the gain calculation is zero (because the depreciation allowed was the full $122K), the TP hasn't had the benefit of taking the full depreciation deduction on his tax returns.

The TP wants the additional $80K+ depreciation that he is allowed. I am trying to figure out how best to accomplish that. I thought we could file form 3115 and take the additional depreciation in 2011. If I amend 2010 and file form 3115 to catch up the depreciation through 2010, then the TP does not get the last year (2011) full depreciation amount.

Is my only option to amend 2010 and file form 3115 to catch up depreciation through 2010 and then amend 2011 to take the correct depreciation for 2011?

Thanks.

[jainen]

>>amend the 2010 tax return<<

You could only have used an amended return for the first two years after starting depreciation. After that you must file Form 3115. As you note, this particular situation is not eligible for automatic consent procedures, and it seems too late for advance consent. Looks like you need a Private Letter Ruling. Back it with thorough accounting and legal research. But first, call your E&O agent.

[David]

Yes, I know that automatic approval with Form 3115 isn't available for the 2011 tax year since it is the year of dissolution. However, can't the 2010 tax return be amended and Form 3115 filed for the 2010 tax year?

Thanks.

[kcjenkins]

No, you can not amend the 2010 return to add the 3115. It can only be added to a current return. So he's just going to have to live with the fact that he never noticed the problem before.