Marta Corp has been in business as an S Corp for the past 3 years. When meeting with their new tax accountant for year end tax planning, it was discovered that business equipment purchased for approx. $820K was misclassified on the Balance Sheet as "Other Asset." These assets were not recorded and depreciation was not factored into the prior year tax returns. Please explain to your client, in a way they will understand, what options are available to them to remedy this oversight of prior year returns and needed change in accounting method?
Certainly! When business equipment is misclassified on the balance sheet and depreciation has not been taken in prior years, there are steps we can take to correct this and potentially reduce your taxable income. Firstly, we need to file an amended tax return for each year the depreciation was missed. This will involve recalculating your taxable income for those years with the correct depreciation deductions. The IRS allows businesses to amend returns within three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. Secondly, since this also involves a change in accounting method (from not depreciating the asset to starting to depreciate it), we will need to file Form 3115, Application for Change in Accounting Method, with the IRS. This form allows us to request a change in accounting method and to catch up on the depreciation that was missed in prior years through a Section 481(a) adjustment. This adjustment essentially allows you to take the total amount of missed depreciation in one year, which can significantly reduce your taxable income for the year you make the change. It's important to work with a tax professional to ensure that these forms are filled out correctly and that you're taking the maximum benefit allowed under the law. Rest assured, these kinds of errors happen, and the IRS has procedures in place to correct them. We'll work together to get your tax situation sorted out.
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