Depreciation Change and 3115

[jasdlm]

Clients have various family-run businesses that all have different ownership structures (with some common owners).  Entity one bought equipment in 2019 and leased it to Entity two.  I have seen the purchase receipts, lease document, etc.  I prepared the return for entity 1.  The preparer for entity two depreciated all the equipment and took an interest deduction (backing into an amortization schedule) rather than taking a lease payment deduction.  (To be fair, this possibility was discussed before the purchase was made, but the lease method was eventually agreed upon.)  There was several hundred thousand in bonus depreciation, which entity one correctly took, and entity two elected out of (unbeknownst to the owners) when recording capital asset purchases instead of lease payments.  The equipment isn't titled, but I feel confident in the evidence chain I have that entity one purchased, paid for, and leased the equipment to entity 2.

I have been practicing for several years, and I have never had to file form 3115, but I am now being asked to prepare the return for entity 2.  I feel that I must (of course) amend 2019 for Entity 2, which I think is going to require form 3115.  2 questions:

1)  Am I correct about the 3115?  I can find many articles on using 3115 for failure to depreciate, but I can't find anything for 'whoops, we depreciated assets we don't actually own'.

2)  Do I have to wait for an IRS response/approval (I hope not) before I can prepare 2020 entity return without the capital assets and showing the correct lease payments?

Thanks much!

[DANRVAN]

There is no reason to file 3115 in that situation.  Just amend 2019 and go forward.

 

[Lee B]

Since this happened in 2019, you would amend the 2019 tax return. This situation doesn't meet the requirements for a "Change in Accounting Method."

Question - what kind of lease was this, operating lease or financing lease?

[jasdlm]

You are the best.  This board is the best!  Thanks so much!