Form 3115 · Section 481(a)
Catch up years of missed depreciation on one return
You bought it in 2014. Nobody ever ran a study. Every year since, deductions you were entitled to went unclaimed. You do not amend eleven returns to fix that — you file one form.
What a section 481(a) adjustment actually does
When you change from one method of accounting to another, the Code requires a computation that prevents amounts from being duplicated or omitted. That computation is the section 481(a) adjustment: the cumulative difference between the depreciation you took and the depreciation you would have taken had the correct method been in place from the start.
Applied to cost segregation, it means this. We run the study as of the original placed-in-service date. We compute what depreciation would have been on the reclassified schedule for every year since. We subtract what you actually claimed. The difference is the adjustment, and because it is taxpayer-favourable, you take all of it in the year of change.
Why this is a method change and not an error
The distinction matters. An error — a transposed figure, a missed asset — is corrected by amending. A method of accounting, once used on two or more consecutive returns, is corrected prospectively through a change in method.
Depreciation is explicitly treated this way. Using an impermissible recovery period for two consecutive years establishes a method, and the fix is Form 3115. That is not a loophole; it is the mechanism the regulations prescribe, and it is why cost segregation look-backs work at all.
What we prepare
- The engineering study establishing the correct classification as of the placed-in-service date
- The year-by-year recomputation of depreciation under the correct method
- The section 481(a) adjustment calculation with supporting schedules
- Form 3115 completed, including the designated automatic change number and required statements
- The attachment describing the present and proposed methods and the property affected
- Filing instructions covering both the copy filed with the return and the separate copy
- Direct support for your preparer through filing, at no additional charge
The detail, if you want it
An error — a transposed figure, a missed asset — is fixed by amending. But depreciation on an impermissible method, once used on two or more consecutive returns, is a method of accounting, and methods are corrected prospectively on Form 3115.
That's not a loophole; it's the mechanism the regulations prescribe, and it's why cost segregation look-backs work at all.
An automatic method change is filed with a timely-filed original return, including extensions — so most calendar-year taxpayers have until 15 September or 15 October, by entity type. In practice the study needs to be done several weeks earlier, which is why we push look-backs in spring, not the week before the deadline.
One hard boundary: the property must still be owned. Sell it and the schedule closes.
- Qualified improvement property on 39 years — very common for 2018–2019 improvements. See the QIP guide.
- Land improvements swept into the building — paving and site work at 39 years instead of 15.
- Missed bonus depreciation where an election-out was made or the property was misclassified as ineligible.
- Components long since replaced still depreciating, where a partial asset disposition election may apply.
- Incorrect placed-in-service dates or the wrong convention applied at acquisition.
Questions
Do I need to amend my prior returns?
No — and in most cases you cannot. Depreciation claimed on an impermissible method for two or more consecutive years is a method of accounting, and methods are corrected by filing Form 3115, not by amending. The entire cumulative difference comes forward as a section 481(a) adjustment on the current return.
How far back can the catch-up go?
To the date you placed the property in service, provided that is after 1986 and you still own it. A property placed in service in 2012 and depreciated straight-line ever since carries thirteen years of missed acceleration, all of which lands in the current year.
Is this an automatic change or does it need IRS consent?
Changing from an impermissible to a permissible method of depreciation is generally an automatic change under the current list of automatic changes, usually designated change number 7. Automatic changes do not require advance consent or a user fee, but the Form 3115 must be filed with the return and a copy sent to the IRS as the revenue procedure directs. We prepare both.
What if the adjustment is negative?
A negative section 481(a) adjustment — a taxpayer-favourable one, meaning additional deductions — is taken entirely in the year of change. A positive adjustment, meaning additional income, is generally spread over four years. Cost segregation look-backs almost always produce the favourable kind.
Can I do a look-back on a property I have already sold?
No. The method change applies to property you still own and are still depreciating. Once the asset is disposed of, the schedule closes and the opportunity closes with it. This is the single most common reason an owner misses out — they intend to run a study eventually and sell before eventually arrives.
Does the same process fix qualified improvement property depreciated over 39 years?
Yes, and it is a very common fix. QIP placed in service in 2018 or 2019 was widely depreciated over 39 years before the CARES Act retroactively corrected the recovery period to 15 years. Correcting it is a method change on Form 3115 with the catch-up in the current year.
The study is one piece. We can handle the rest of the return.
Deprecio is part of the Shurek Accounting & Tax family of brands. If you want the study and the tax work under one roof — the return, the Form 3115, entity structure, quarterly estimates, multi-state filings — that is a single engagement, not a hand-off between two firms.
Related topics
No-cost feasibility review
Find out what your building is hiding.
A feasibility review is free and takes about twenty minutes. Bring the closing statement and the depreciation schedule; we will tell you plainly whether a study pays for itself.