When a tax method change occurs, whether it is from cost segregation, the Tangible Property Regulations, or any other tax method changes (for which the cutoff method cannot be used), a 481a adjustment must be used.
Suppose income for any taxable year is under a different method of accounting from the method used in the previous taxable year. In that case, the adjustment to income created by the method change must be applied retroactively to the original date the asset was put in service.
This income adjustment, called a §481a adjustment, is done to prevent income or expenses from being duplicated or omitted in the current tax year.
The §481a “method” must be used if the original method was used for the two taxable years preceding the year of the change, and the increase or decrease in taxable income for the year of the change, which resulted ONLY from the change of accounting method, exceeds $3,000.
A negative §481a adjustment is the difference between depreciation or repair deductions, creating a REDUCTION in income. This is the result of an increase from depreciation or expensed expenditures (which were incorrectly depreciated).
A positive §481a adjustment from a tax method change creates an INCREASE in income. This adjustment is reported on IRS Form 3115 and cannot be done by amending prior year tax returns.
How to Get a §481a Adjustment
Contact TPTM and ask for a no-cost analysis of your property or properties. If TPTM finds an opportunity for cost segregation or the Tangible Property Regulations, we will create the §-481a and include it in the Form 3115. TPTM is the only cost segregation firm that will complete AND SIGN the 3115. If you use any other firm, be prepared to pay your CPA to do the 3115 or be ready to sign the 3115, which means YOU will be responsible for the calculations.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.