Help – I Forgot to Take Depreciation

Many times we will be reviewing a farmer’s tax records and notice that the farmer forgot to take depreciation on an asset they placed in service several years ago.  If they sell the asset, the Tax Code may force them to pretend that they took depreciation on the asset and report gain even though they got no benefit for the deduction.  This can be an unpleasant situation.

However, there is help for the farmer in this situation.  The farmer is allowed to calculate the amount of depreciation they should have taken since the asset was placed in service and then file a Form 3115 and deduct the depreciation on their current year tax return.  If the asset has not been sold, the designated change number (DCN) will be #7 (on Form 3115); if the asset is sold during the year of change it will be code # 10.

Let’s look at an example:

Farmer Sue purchased a used tractor in 2012 for $125,000 and did not take any depreciation on the tractor.  When preparing the 2016 tax return, she notices this error.  Her tax preparer calculates the amount of depreciation that should have been claimed for 2012-2015 to be $71,400.  Sue can claim this as an additional deduction on her 2016 tax return and then continue to depreciate the remaining tax basis of the tractor.

Sue is only allowed to claim regular depreciation on the tractor.   She would be unable to claim Section 179 or elect out of bonus depreciation (2012 is a closed tax year).

If you might be in this situation, don’t despair.  There is an option to fix it.

Paul Neiffer, CPA

CliftonLarsonAllen, LLP