Regs. Sec. 1.446-1(e)(2)(ii)(d)(2) retains the rules in the temporary regulations providing that changes in depreciation constitute accounting-method changes under Sec. 446(e). These include a change in the treatment of an asset from nondepreciable or nonamortizable to depreciable or amortizable, or vice versa. Additionally, a correction to require depreciation in lieu of a deduction for the cost of depreciable or amortizable assets that had been consistently treated as an expense in the year of purchase (or vice versa) is an accounting-method change. There may be significant application of this rule as a result of the recently issued rules on capitalization of tangible property and rotating spare parts. Show
Changes in computing depreciation generally are accounting-method changes, including a change in depreciation method, recovery period or convention of a depreciable or amortizable asset and, under certain circumstances, a change to or from claiming additional first-year depreciation. Depreciation changes due to posting or mathematical errors or changes in underlying facts are not accounting-method changes. Not Accounting-Method ChangesRegs. Sec. 1.446-1(e)(2)(ii)(d)(3)(i) retains the rule from the temporary regulations that an accounting-method change does not include an adjustment in the useful life of a depreciable or amortizable asset for which depreciation is determined, unless the taxpayer is changing to or from a useful life (or recovery or amortization period) specifically assigned by the Code, the regulations or other guidance published in the Internal Revenue Bulletin. Regs. Sec. 1.446-1(e)(2)(ii)(d)(5)(iv) also retains the rules as to when an adjustment in useful life that is not an accounting-method change is implemented; these rules apply regardless of whether the adjustment is initiated by the IRS or the taxpayer. Further, when implementing an adjustment in useful life that is not an accounting-method change, a Sec. 481(a) adjustment is neither required nor permitted. Regs. Sec. 1.446-1(e)(2)(ii)(d)(3)(iii) retains the rule that a late depreciation election or revocation of a timely, valid depreciation election is not an accounting-method change. Under Sec. 179 and its regulations, a late Sec.179 election generally is made by submitting a ruling request. However, for tax years beginning after 2002 and before 2010, a taxpayer may make a Sec. 179 election by filing an amended return. Regs. Sec. 1.446-1(e)(2)(ii)(d)(3)(v) retains the rule that any change in the placed-in-service date of a depreciable or amortizable asset is generally not treated as an accounting-method change. Further, a change in the convention of a depreciable or amortizable asset is not a change in the asset’s placed-in-service date and, thus, is not an accounting-method change. Additionally, the final regulations provide examples of a change in a placed-in-service date. Because a change in a placed-in-service date is not an accounting-method change, a Sec. 481(a) adjustment is neither required nor permitted. Rev. Proc. 2007-16The IRS issued Rev. Proc. 2007-16 to accompany the regulations. It supersedes Rev. Proc. 2004-11 and modifies Rev. Proc. 2002-9, which guided taxpayers on how to obtain automatic consent to change an accounting method under Sec. 446 for certain changes in depreciation or amortization. Change in Two-Year RuleIn general, if a taxpayer uses an impermissible accounting method in two or more consecutively filed Federal tax returns, it has adopted that accounting method; see Rev. Rul. 90-38. The Service and Treasury felt that the two-year rule could increase administrative and compliance costs, because many taxpayers changing from an impermissible to a permissible accounting method for depreciation used the impermissible method for depreciable properties placed in service in the tax year immediately preceding the change year. Accordingly, the IRS and Treasury have decided to waive the two-year rule for a change in depreciation. Mergers and Other Carryover-Basis TransactionsIf depreciable property is transferred in a transaction in which the transferee is treated as the transferor for purposes of computing the property’s depreciation allowance with respect to so much of the basis in the transferee’s hands as does not exceed adjusted depreciable basis in the transferor’s hands, the transferee, under most circumstances, could file Form 3115, Application for Change in Ac-counting Method, to change from an impermissible accounting method adopted by the transferor. The Sec. 481(a) adjustment will include any needed adjustments since the property’s placed-in-service date by the transferor. Property DispositionsRev. Proc. 2007-16 was extended to allow taxpayers to file Form 3115 with an original Federal return for the tax year in which depreciable property was disposed of by a tax-payer who claimed less than the depreciation allowable. While the total depreciation and gain or loss on disposition should be the same, the character could change (i.e., more or less capital gain versus ordinary income recapture). Change vs. ErrorSection 4.01 was added to clarify that a change from an impermissible method of determining depreciation for depreciable property in two or more consecutively filed Federal tax returns is an accounting-method change under Sec. 446(e) and Regs. Sec. 1.446-1(e). Sec. 179Rev. Proc. 2007-16 does not apply to any (1) property for which a taxpayer is revoking a timely, valid election or making a late election under Sec. 179 or (2) accounting-method change involving a change from capitalizing and depreciating the cost or other basis of any property to deducting it as an expense. The guidance presents opportunities for taxpayers to consider depreciation-method changes to provide immediate tax benefits if a favorable (i.e., a negative Sec. 481(a)) adjustment results, or to avoid audit exposure when an unfavorable adjustment results. Can depreciation method be changed?A change in the method of computing depreciation is generally a change in accounting method that requires the consent of the IRS and the filing of Form 3115 ( Reg. §1.167(e)-1).
Does a company have to use the same depreciation method?Definition of Depreciation Methods
There are various methods of depreciating assets that are used in a business. It is acceptable and common for companies to use two or more of the methods of depreciation.
Can you switch from straight line to accelerated depreciation?A company may decide to change the depreciation method it applies to a fixed asset. For example, if an asset loses much of its value early on, a company might switch from straight-line to accelerated depreciation.
Can a company manipulate depreciation?How it can be manipulated. Depreciation can be used to manipulate earnings. By increasing the useful life or the residual value (the expected price at the end of its useful life), annual depreciation can be reduced to minimise its effect on net income.
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