Depreciation Schedules - Yours and Your Competitors'
Los Angeles, CA - At this morning's SFV CSEA breakfast meeting, an interesting and not so unusual problem came up.
Someone had a new client who owned several residential rental properties. The previous tax preparer was a CPA. He had not included the detailed depreciation schedules.
Not the end of the world. Knowing that the client used to have 3 pages of depreciation detail when he had been with a previous accountant, (3 or 4 years earlier) the EA requested the schedules. Instead of providing a printout of the 4562 detail, the CPA sent the client ONE SINGLE NUMBER.
This single number was meant to be the depreciation for all 4 properties. After further pestering the CPA for more details, the client finally received a one-page sheet of paper with a single number for each property for 2005 and 2006.
Note: For 2007, the CPA had advised the client to put all 4 properties into on LLC and had lumped them all together, instead of preparing a separate schedule for each property. He noted that there was depreciation, leasehold depreciation and Sec 179 depreciation, with no detail.
Incidentally, somewhere it was learned that the CPA had used 31.5 years - for residential property. It should be 27.5 years.
It's pretty obvious that the CPA had never actually entered all 3-4 pages of assets into his tax software's asset entry system. Nor had he entered each set of annual improvements and assets to each property into the system. If he had, he'd have been able to sit down at his computer and generate a detailed printout in 5 minutes or less. (Assuming, of course, he knew how to use his software...) Clearly, the detail was never in the system and he must have been using some off-the-top-of head number with no support.
OK, this degree of incompetance is unique. I doubt that anyone in your office takes short cuts like this.
But let's address what we are, or should be doing, with respect to depreciation schedules.
1) When you get a new client, enter ALL the detail, including fully depreciated assets. (Yes, you can lump together same class batches of fully depreciated assets in a given year. Just keep a copy of the original schedule in your client's permanent file.)
2) If you find errors when enter prior year depreciation, make sure they're not errors on your end, or in your software. If they are just rounding errors, then round to match the previously filed returns. After all, the client will need ALL the information when they sell or exchange the property.
3)For actual errors, where the total is significant, you don't have to amend all the prior years. You can make the correction in the year you find the error. Use Form 3115 to report the net adjustment - negative or positive. Attach the before and after workpapers and a note to explain the correction. There are some notes in Tax Quip #281, including a link to the IRS Revenue Procedure 2004-11 that explains how to fix such errors.
4)While there is no requirement to transmit the detailed depreciation schedule with the tax return when you file it, that doesn't mean you shouldn't give the clients a copy, when you give them their copy of the tax return. In fact, most tax software will let you print out this year's depreciation detail, next year's and the AMT depreciation, as well. Giving your client next year's schedule helps them make journal entries throughout the year.
If you would prefer not to, for whatever reason, at least keep the client's data file handy so you can pull it up should they ever need it. After all, many of our clients don't keep formal, double-entry books on their rentals. They usually have some single-entry spreadsheet or tool to track expenses by category. So, they don't need or care about booking the depreciation.
5) Make sure to note differences between IRS and state depreciation. Remember not all states complied with IRS rules for Sec 179 and the various bonus depreciation.You may find the client has different bases for their IRS and state assets. And don't forget Alternative Minimum Tax basis. That may be different as well.
With all this, when was the last time you checked your client's depreciation records? Are you suddenly starting to feel insecure or queasy? Have you been overriding the state differences when they came up because you didn't understand what was wrong?
Well, it's time to review your depreciation schedules, isn't it? Who knows, you may find errors in your clients' favor and end up being a hero?
Note: Due the extreme nature of this CPAs lack of cooperating, it's likely that he will be reported to the California Society of CPAs, AICPA, IRS's Office of Professional Responsibility, the Better Business Bureau - and the American Board of Forensic Accountants (yes, can you believe this guy gives expert witness in court?).
The new EA will have to manually reconstruct all the years of depreciation, entering the old assets and identifying the new purchases since 2004 and entering them into the new depreciation schedules. Due to the time, computation and research, it will cost thousands of dollars to reconstruct all the data. So, the CPA can expect a invitiation to Court, as well, to pay for the reconstruction.
Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.