Section 481(a) adjustments in detail

The purpose

Section 481(a) exists so that changing methods does not let income or deductions fall through a crack or get counted twice. It computes the cumulative effect of the change as if the new method had always been used.

The direction

A negative adjustment decreases taxable income — you under-claimed under the old method. Taken entirely in the year of change.

A positive adjustment increases taxable income — you over-claimed. Generally spread rateably over four taxable years beginning with the year of change, which softens the impact.

Cost segregation look-backs produce negative adjustments, because the old method under-claimed. That asymmetry is deliberate and taxpayer-favourable.

What goes into the computation

Depreciation actually claimed on the old method for every year from the placed-in-service date. Depreciation that would have been claimed on the correct method for those same years, applying the rules in effect in each year — including the bonus depreciation percentage applicable to the placed-in-service year, which changed repeatedly between 2017 and 2025.

That last point is why look-back computations are more involved than they look. A property placed in service in 2019 gets 100% bonus on its reclassified basis; one placed in service in 2024 gets 60%. The recomputation has to respect the law of each year.

Small adjustment election

Where a positive adjustment is below a de minimis threshold, an election is available to take the whole amount in the year of change rather than spreading it. Rarely relevant to cost segregation, but worth knowing.

Audit protection

Filing a proper method change under the automatic procedures generally provides audit protection for prior years with respect to the item changed — the Service will not require a change to the same item for a prior year. That is a meaningful benefit of doing this correctly rather than quietly starting to depreciate differently.

There are exceptions, including where the taxpayer is under examination at the time of filing without meeting a window requirement.

Where it goes on the return

The adjustment is reported as an 'other' income or deduction item, with Form 3115 attached and the supporting computation available. Your preparer will place it; our schedules give them the number and the backup.