Alright...I'm tackling Form 3115 now and I'm unsure what to do here.
I am claiming rental property depreciation for 2013 and 2014. I have selected DCN 7:
Depreciation or amortization (impermissible to permissible) (sections 56, 167, 168, 197, 280F, 1400I, 1400L, 1400N,
and former section 168)—from an impermissible method to a permissible method for changes allowed under Regulations
section 1.446-1(e)(2)(ii)(d), and for depreciable property owned at the beginning of the year of change. Complete Schedule E of
Form 3115. An applicant changing its method of accounting for depreciation because of a change described in designated
automatic accounting method change number 10 (sale or lease transactions) must file Form 3115 according to the designated
change number 10. Additionally, a qualified small taxpayer qualifies for a reduced Form 3115 filing requirement. See section
6.01 of Rev. Proc. 2015-14.
I am stuck on Box 14. I selected 'No' to Box 13 ("Is the applicant requesting to change its overall method of accounting"), which I think is correct...? Now for 14, it's asking for this:
14 If the applicant is either (i) not changing its overall method of accounting, or (ii) changing its overall method of
accounting and changing to a special method of accounting for one or more items, attach a detailed and
complete description for each of the following (see instructions):
a The item(s) being changed.
b The applicant’s present method for the item(s) being changed.
c The applicant’s proposed method for the item(s) being changed.
d The applicant’s present overall method of accounting (cash, accrual, or hybrid).
15 a Attach a detailed and complete description of the applicant’s trade(s) or business
Do I just include a letter saying I rented rooms in my house and didn't claim depreciation for 2013 and 2014? I don't have a present method for changing items...I just didn't claim depreciation. To my knowledge, I'm not using cash, accrual, or hybrid accounting either.
I did find this:
https://www.irs.gov/pub/irs-drop/rp-15-14.pdf; would I phrase my letter to state that I claimed no depreciation and am requesting a change to claim the allowable depreciation?
(b) Statements required. A taxpayer (including a qualified small taxpayer
as defined in section 6.01(4)(b) of this revenue procedure) must provide the following
statements, if applicable, and attach them to the completed Form 3115:
(i) a detailed description of the present and proposed methods of
accounting. A general description of these methods of accounting is unacceptable (for
example, MACRS to MACRS, erroneous method to proper method, claiming less than
the depreciation allowable to claiming the depreciation allowable);
(ii) to the extent not provided elsewhere on the Form 3115, a
statement describing the taxpayer’s business or income-producing activities. Also, if the
taxpayer has more than one business or income-producing activity, a statement
describing the taxpayer’s business or income-producing activity in which the item of
property at issue is primarily used by the taxpayer;
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(iii) to the extent not provided elsewhere on the Form 3115, a
statement of the facts and law supporting the proposed method of accounting, new
classification of the item of property, and new asset class in, as appropriate, Rev. Proc.
87-56 or Rev. Proc. 83-35. If the taxpayer is the owner and lessor of the item of
property at issue, the statement of the facts and law supporting the new asset class also
must describe the business or income-producing activity in which that item of property is
primarily used by the lessee;
(iv) to the extent not provided elsewhere on the Form 3115, a
statement identifying the year in which the item of property was placed in service by the
taxpayer;
Box 17: Will the proposed method of accounting be used for the applicant’s books and records and financial statements?
I...don't have "books and records and financial statements" -- by this do they mean "are you going to continue to depreciate your rental property in the future"? I'm inclined to check 'yes' but I'm not sure.
Box 26:
Enter the section 481(a) adjustment. Indicate whether the adjustment is an increase (+) or a decrease (-) in
income. ▶ Attach a summary of the computation and an explanation of the methodology
used to determine the section 481(a) adjustment. If it is based on more than one component, show the
computation for each component. If more than one applicant is applying for the method change on the
application, attach a list of the (a) name, (b) identification number, and (c) the amount of the section 481(a)
adjustment attributable to each applicant.
For this, do they just want math showing how I came up with my numbers, e.g.:
$112k depreciable property put in service in 2013
Rented 11% of the square footage for 6 months in 2013
$112k property over 27.5 years is $4072/yr or $339.39/mo, 11% of that x6 is $224
2015 comes to $355, so depending how much tax liability I had for 2013 and 2014 I could potentially end up with an extra $579? Or just not pay tax on $579, so a refund of $144?
If any CPA wants to review this and the accompanying Schedule E's to make sure I don't fuck it up, I'd be happy to send some Paypal your way.