Tax Shop
Tax Shop
Charles Trautman, EA · Since 1969

Footnotes · for the preparer’s desk

Depreciation Decisions, and Fixing the Missed Ones

Depreciation is not optional. The code says ‘allowed or allowable,’ and allowable is the one that counts.

A rental never depreciated is still treated as depreciated when it sells.

There is a form that gives those years back. Most preparers have never filed it.

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Three decisions arrive with every new asset: expense it under §179, take bonus depreciation, or depreciate it over its MACRS life. Each has an election, a deadline, and a different effect on state tax, on the QBI deduction, and on the year the asset is sold. The 2025 act restored 100% bonus depreciation permanently for property acquired after January 19, 2025, which simplifies the choice for most clients and makes the election out the decision that matters.

The second half of this page is the repair job: the rental property that was never depreciated, the vehicle that was expensed in the wrong year, the building depreciated over 27.5 years when 39 was right. The law treats depreciation as taken whether or not it was, so the basis is gone either way. Form 3115, filed under the automatic procedures, recovers every missed year in one return. It is the most valuable form on this page and the least used.

On this page

  1. Step 1: §179, Bonus, or MACRS What each does and when each wins
  2. Step 2: The Elections and Their Deadlines Electing out of bonus; §179 on an amended return; the de minimis safe harbor
  3. Step 3: Vehicles and Listed Property Luxury limits, the 6,000-pound line, and the 50% business-use cliff
  4. Step 4: Allowed or Allowable Why skipping depreciation costs basis anyway
  5. Step 5: Fixing It: Amend or Form 3115 One year vs. two or more; the automatic change; the §481(a) adjustment
  6. Step 6: Preparing the Form 3115 DCN 7, the statement, where it goes, and the duplicate copy
  7. Step 7: Depreciation at Sale §1245 and §1250 recapture, and the 3115 before the sale
  8. A Worked Example A rental never depreciated for nine years
  9. Colorado Conforms, with no bonus or §179 decoupling
  10. Questions at the desk
  11. Authority
  12. Checklist

Step 1: §179, Bonus, or MACRS

§179 expensingBonus depreciation (§168(k))Regular MACRS
2026 amountUp to $2,560,000; phases out dollar for dollar above $4,090,000 of property placed in service100% for property acquired after Jan. 19, 2025 (permanent under the 2025 act); 40% for property acquired before that date but placed in service in 2026 (verify transition rule)Full cost over the recovery period
PropertyTangible personal property; off-the-shelf software; qualified improvement property; roofs, HVAC, fire and security systems in nonresidential buildingsNew or used property with a recovery period of 20 years or less; QIP; not buildingsEverything, including buildings (27.5 / 39 years)
LimitsCannot exceed business taxable income (carryforward of the excess); SUVs capped at $32,000No income limit; can create or increase a lossNone
ElectionElect in, asset by asset, any amount up to cost; revocableAutomatic; must elect out by classDefault when neither applies
PartialYes, any dollar amountNo: all or nothing by class per yearn/a
RecaptureOrdinary income on sale (§1245); also recaptured if business use drops to 50% or lessOrdinary income on sale (§1245); listed property recapture if use drops§1245 on personal property; unrecaptured §1250 at 25% on buildings

When each wins. Bonus for a profitable business buying equipment: no income limit, simplest. §179 for precision: a client who wants to expense exactly enough to land at the top of the 12% bracket, or who wants to expense a roof on a commercial building (which bonus can’t touch), or whose state decouples from bonus (Colorado doesn’t). Regular MACRS when the client expects higher brackets later, when the deduction would be wasted against a standard deduction, when the asset will be sold soon (recapture at ordinary rates on a deduction that saved little), or when QBI matters: expensing reduces QBI and, above the thresholds, the UBIA of the asset still counts in full for the 2.5% limit regardless of how fast it was depreciated.

A loss year is the time to not expense. A $60,000 truck expensed in a year with a $40,000 loss adds to an NOL deductible at 80% in later years; depreciated over five years, it lands in profitable years at full value.

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Step 2: The Elections and Their Deadlines

  • Electing out of bonus (§168(k)(7)): by class of property (all 5-year property, all 7-year, etc.), by attaching a statement to a timely filed return including extensions. Missed, it can be made on an amended return within six months of the original due date under the automatic §301.9100-2 rule; after that, a letter ruling. Revoking an election out also requires consent. The software’s default is bonus; a return filed with bonus taken when the client didn’t want it is an election that wasn’t made, and the six months is the window.
  • Electing §179: on Form 4562 Part I, on an original or amended return for any open year (§179(c)(2), since 2008 made permanent); can be revoked on an amended return. The most flexible election in the code.
  • De minimis safe harbor (Reg. §1.263(a)-1(f)): expense items costing up to $2,500 per invoice or item ($5,000 with an applicable financial statement) as supplies, no depreciation, no recapture. Requires an annual election statement attached to a timely filed return and, for the $2,500 level, a written accounting policy in place at the beginning of the year is recommended though only required at the $5,000 level. Not retroactive.
  • Routine maintenance safe harbor and small taxpayer safe harbor for buildings (Reg. §1.263(a)-3(h): buildings with an unadjusted basis of $1,000,000 or less, total repairs and improvements for the year not exceeding the lesser of $10,000 or 2% of the building’s basis): annual election statement for the small-taxpayer harbor.
  • Partial disposition election (Reg. §1.168(i)-8(d)): when a roof is replaced, write off the remaining basis of the old roof; made on the return for the year of replacement by reporting the loss. Otherwise the old roof keeps depreciating inside the building for the rest of its 27.5 years.
  • Half-year vs. mid-quarter convention: if more than 40% of the year’s personal property is placed in service in the fourth quarter, mid-quarter applies to all of it; §179 property is excluded from the test, which is a reason to use §179 on a December purchase.
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Step 3: Vehicles and Listed Property

  • Passenger automobiles (GVWR 6,000 pounds or less): §280F caps. 2026 first-year limit $20,400 with bonus / $12,400 without (verify Rev. Proc. 2026 auto limits); later years capped too; the cost above the caps is recovered after the recovery period at the year-6 cap. Business use must exceed 50% for MACRS and §179; below, straight-line ADS and no §179.
  • Heavy SUVs, trucks and vans (GVWR over 6,000 pounds): no §280F caps; §179 limited to $32,000 for SUVs (not for pickups with a 6-foot bed or vans without rear seating); bonus unlimited. A $90,000 SUV at 100% business use: $32,000 §179 plus 100% bonus on the remaining $58,000 = fully expensed in year one, or with no bonus elected, $32,000 plus 20% MACRS on the rest.
  • Mileage vs. actual: standard mileage (72.5¢ business for 2026 (verify)) includes depreciation; switching from actual to mileage is barred after accelerated depreciation or §179 has been taken on that vehicle. Choosing mileage in year one preserves the choice.
  • The 50% cliff: if business use of listed property drops to 50% or below in a later year, §179 and bonus are recaptured (the excess over what straight-line would have allowed) as ordinary income in that year (§280F(b)(2)). The client who expensed the truck and then semi-retired owes the deduction back.
  • Substantiation (§274(d)): a contemporaneous mileage log for every vehicle. No log, no deduction, however real the use.
  • Employer-provided vehicles to S corporation shareholders: personal use is a taxable fringe on the W-2 (annual lease value or cents-per-mile); the corporation deducts the full cost. Without the W-2 inclusion, the personal-use portion is nondeductible and the shareholder has a constructive distribution.
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Step 4: Allowed or Allowable

Basis is reduced by the greater of the depreciation allowed (actually deducted) or allowable (the amount that could have been deducted under the method chosen, or straight-line if none was) (§1016(a)(2); Reg. §1.1016-3). A rental never depreciated for nine years has had nine years of straight-line depreciation removed from its basis anyway. On sale, the gain is computed from the reduced basis, and the unrecaptured §1250 gain at 25% is measured by the depreciation allowable. The client pays tax on deductions never taken. The only remedy is to take them, and the form that does that is below.

Two exceptions that help: if no depreciation method was ever adopted (the asset was never on a return at all), the allowable amount is computed under the straight-line method over the ADS life, which is slower and leaves more basis; and the §1016 reduction is limited to the amount that produced a tax benefit only in the narrow §1016(a)(2)(B) pre-1952 rule, which doesn’t help anyone now.

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Step 5: Fixing It: Amend or Form 3115

SituationFixWhy
Wrong depreciation on one return (the asset’s first year, or a single-year error such as a mis-entered date)Amend that yearOne year of treatment is a mathematical or posting error, not a method (Rev. Proc. 2015-13 §2.01; Reg. §1.446-1(e)(2)(ii)(d)(3)(i))
Wrong or no depreciation on two or more consecutive returnsForm 3115, automatic change, DCN 7 (impermissible to permissible method), with a §481(a) adjustmentTwo years of consistent treatment establishes a method of accounting, even an impermissible one; changing it requires consent, granted automatically for this change
Wrong recovery period (27.5 vs. 39) or convention for two or more yearsForm 3115, DCN 7Same
Asset on the books that was disposed of years agoForm 3115, DCN 7 (late disposition) (verify DCN)Writes off the remaining basis
Missed bonus election-out, within six monthsAmended return under §301.9100-2An election, not a method
Missed §179Amended return, any open year§179(c)(2)
Property placed in service in a closed year, never depreciatedForm 3115The §481(a) adjustment reaches back through closed years; that is the point

The §481(a) adjustment is the cumulative difference between depreciation actually taken and depreciation allowable under the correct method, through the beginning of the year of change. A negative adjustment (taxpayer-favorable, more depreciation owed to the taxpayer) is deducted in full in the year of change. A positive adjustment (taxpayer took too much) is spread over four years, or taken in one year if under $50,000 by election. For the never-depreciated rental, the adjustment is nine years of depreciation deducted on this year’s Schedule E, which often produces a loss, subject to the passive rules.

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Step 6: Preparing the Form 3115

  • Automatic change procedures: Rev. Proc. 2015-13 (procedures) and the current list of automatic changes, Rev. Proc. 2025-23 or its successor (verify current list revenue procedure); depreciation changes are in section 6, DCN 7 for impermissible-to-permissible.
  • No user fee for automatic changes.
  • Two copies: the original attached to the timely filed (including extensions) return for the year of change; a duplicate sent to the IRS in Ogden (address in the instructions; fax or mail) no later than the date the return is filed. Both required; the Ogden copy is the one preparers forget.
  • Form 3115: Part I (DCN 7), Part II (questions, including the under-examination questions), Part IV (§481(a) adjustment and the year-of-change computation), Schedule E (depreciation: a description of each asset or class, the impermissible method, the permissible method, placed-in-service dates, the computation).
  • Attach a statement showing the §481(a) computation asset by asset: cost, placed-in-service date, allowable depreciation by year under the correct method, depreciation actually taken, cumulative difference.
  • One Form 3115 can cover multiple assets and multiple errors of the same type; a change in recovery period and a change from no depreciation to depreciation can go on one form with separate schedules.
  • Eligibility limits: not available for an asset in the year it is disposed of (make the change the year before the sale, or in the year of sale only under the specific provisions that allow it (verify Rev. Proc. 2025-23 §6 disposition-year rules)); not available if the same change was made in the prior five years for the same item; restrictions if under examination (the three-month and 120-day windows).
  • After the change, the asset is depreciated under the correct method from the year of change forward as if it had always been; the §481(a) adjustment catches up the past.
  • An S corporation or partnership files the 3115 at the entity level; the §481(a) adjustment flows through the K-1. A Schedule E rental owned individually files with the 1040.

Where it goes wrong

  • Amending three years to add depreciation that was never taken. The third-prior year is closed, the two open years are only two-thirds of the fix, and an amended return changing a method without consent is itself improper. One Form 3115 does all of it.
  • The rental sells, the preparer computes recapture on “allowed” (zero), and the IRS computes it on “allowable.”
  • The Ogden duplicate never sent; the change is invalid.
  • The 3115 filed in the year of the sale after the sale.
  • Bonus taken by default in a loss year, feeding an NOL limited to 80%, when the client needed the deductions in 2028.
  • Land included in the depreciable basis of a rental, or a 39-year building depreciated over 27.5.
  • A $90,000 SUV expensed in full with a 55% business-use log; two years later the use is 40% and the recapture is ordinary income.
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Step 7: Depreciation at Sale

  • §1245 property (equipment, vehicles, furniture, QIP and other §179/bonus property): gain up to the depreciation taken (including §179 and bonus) is ordinary income; the rest is §1231 gain. Form 4797 Part III.
  • §1250 property (buildings): straight-line depreciation after 1986 produces no §1250 ordinary recapture, but the unrecaptured §1250 gain (allowed or allowable) is taxed at a maximum 25% for individuals; the rest at capital gains rates. Also Form 4797 Part III, flowing to the Schedule D worksheet.
  • Installment sales do not defer §1245 or §1250 ordinary recapture; it is all recognized in the year of sale (§453(i)), even if no cash was received. Tell the client before the contract is signed.
  • A §1031 exchange defers recapture along with the gain, but §1245 property exchanged for §1250 property (equipment traded as part of a real estate deal) triggers recapture on the §1245 portion; post-2017 exchanges cover real property only.
  • The §1231 five-year lookback recharacterizes current §1231 gain as ordinary to the extent of §1231 losses deducted in the prior five years.
  • Before any sale of long-held depreciable property: pull the depreciation schedule, confirm it is complete and correct, and if it isn’t, file the 3115 in the year before the sale. In the year of sale it is generally too late.
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A Worked Example

Priya’s condo, converted to a rental in 2017, never depreciated; she plans to sell in 2027

Basis at conversion (lower of cost or FMV, less land): $220,000 building. Allowable straight-line depreciation, 27.5 years, mid-month: $8,000 a year; through the end of 2025, nine years, about $70,000 (first year prorated). The prior preparer never put it on Schedule E.

If nothing is done and she sells in 2027 for $450,000: adjusted basis is $220,000 + land less $86,000 allowable through 2027 (the IRS counts it whether taken or not). Unrecaptured §1250 gain of $86,000 at 25% = $21,500 of tax on deductions she never received, plus Colorado.

Form 3115 on the 2026 return (DCN 7): §481(a) adjustment = $70,000 of missed depreciation through 2025, deducted in full on the 2026 Schedule E. The rental shows a $62,000 loss for 2026; she materially participates in nothing and her AGI is $120,000, so the $25,000 allowance covers part of it (phased down at $120,000 to $15,000) and the rest is a passive carryforward, released in full when she sells in 2027 (§469(g)). 2026 depreciation of $8,000 is taken normally. Duplicate 3115 to Ogden the day the return is e-filed.

Result: the $86,000 of depreciation is deducted (2026 and 2027) at her ordinary rate, about 24%, and recaptured at 25% on the sale. Net cost of the recapture is about 1%, instead of 25% on deductions never taken: a difference of roughly $20,000 of federal tax, plus Colorado’s 4.40% on $86,000. Had she come in after the 2027 sale closed, the 3115 route would have been unavailable for the year of sale and the $21,500 would be owed.

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Colorado

Colorado conforms to federal depreciation in full: no add-back for bonus depreciation, no separate §179 limit, no separate depreciation schedule, unlike many states. The §481(a) adjustment and the recapture flow through federal taxable income at 4.40%. The one Colorado item near this topic is the business personal property tax, a county assessor matter rather than income tax: equipment, furniture and vehicles not registered are listed annually (DS 056) by April 15, with a state exemption for taxpayers whose total actual value of personal property in the county is $52,000 or less (2025–2026, indexed (verify)). It is paid to the county, deducted as a business expense, and routinely forgotten by new businesses until the assessor’s estimate arrives.

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Questions at the desk

The client never depreciated the rental for eight years. Do we amend eight returns?

No. Two or more years of not depreciating is an impermissible method; the fix is one Form 3115 under the automatic procedures (DCN 7) on the current return, with a §481(a) adjustment that deducts all eight years at once. Amending reaches only open years and is the wrong procedure for a method.

The client wants to sell the rental this year. Can we still file the 3115?

Generally not in the year of the sale for the asset being sold. File it on the prior year’s return if that return hasn’t been filed yet (on extension), or accept the recapture on the allowable depreciation. This is why the schedule should be reviewed before the listing, not after the closing.

We took 100% bonus on everything last year and the client now has a big NOL. Can we undo it?

Within six months of the original due date, yes: amend and attach the election out under §301.9100-2. After that, the election out requires a private letter ruling. §179, by contrast, can be revoked or changed on an amended return for any open year, which is one reason to prefer it when the choice is close.

Is depreciation really required? The client would rather not have the recapture.

The recapture happens either way, because basis is reduced by allowable depreciation whether or not it was claimed. Skipping depreciation means paying 25% recapture on a deduction that was never taken. Take it.

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Authority

  • §167, §168(b), (d) (conventions), (k) (bonus; (k)(7) election out) as amended by the 2025 act (100% for property acquired after Jan. 19, 2025); §179(b) (2026: $2,560,000 / $4,090,000 / $32,000 SUV), (c)(2) (election on amended return), (d)(10) (recapture); §280F (luxury auto limits; listed property; 50% test; (b)(2) recapture); §274(d) (substantiation)
  • §1016(a)(2); Reg. §1.1016-3 (allowed or allowable); §1245; §1250; §1(h)(6) (unrecaptured §1250 gain); §453(i) (recapture on installment sales); §1231(c) (lookback)
  • Reg. §1.263(a)-1(f) (de minimis safe harbor), -3(h) (small taxpayer building safe harbor), -3(i) (routine maintenance); Reg. §1.168(i)-8(d) (partial disposition election)
  • §446(e); Reg. §1.446-1(e)(2)(ii)(d) (depreciation changes as method changes; one-year errors excluded); §481(a); Rev. Proc. 2015-13 (automatic change procedures; §481(a) spread rules; eligibility; duplicate copy); Rev. Proc. 2025-23 or current list of automatic changes, section 6 (depreciation), DCN 7 (verify); Form 3115 and instructions; Rev. Proc. 2026-xx (annual auto depreciation limits) (verify)
  • Reg. §301.9100-2 (six-month automatic extension for regulatory elections including §168(k)(7)); Reg. §301.9100-3
  • Pub 946; Pub 527 (residential rental depreciation); Form 4562 and instructions; Form 4797 and instructions
  • Colorado: full conformity (C.R.S. 39-22-104, no depreciation modifications); business personal property: C.R.S. 39-3-119.5 exemption threshold (verify); DS 056

Checklist: new assets, and old assets that were handled wrong

Print this page; the header and footer drop out

  • Each new asset: §179, bonus, or MACRS decided against this year’s bracket, next year’s, QBI, the loss/NOL position, and expected holding period; decision noted
  • Bonus election-out statement attached by class if bonus is not wanted; six-month amended-return window noted if missed
  • De minimis safe harbor election attached annually; written policy on file; items under $2,500 expensed as supplies
  • Small-taxpayer building safe harbor and partial disposition considered for every roof, HVAC, or major repair
  • Mid-quarter convention tested when fourth-quarter purchases exceed 40%
  • Vehicles: GVWR confirmed; §280F caps or $32,000 SUV limit applied; contemporaneous log in file; business-use percentage tracked year to year for the 50% cliff; personal use of company vehicles on the W-2
  • Depreciation schedule reviewed for every client with a rental or business asset: land excluded, correct life (27.5 / 39), correct convention, every asset present, disposed assets removed
  • Any asset with two or more years of wrong or no depreciation: Form 3115, DCN 7, §481(a) computed asset by asset; original with the return, duplicate to Ogden
  • One-year errors amended instead; missed §179 amended; missed bonus election-out amended within six months
  • Before any sale of depreciable property: schedule verified and 3115 filed in the prior year if needed; §1245 / unrecaptured §1250 recapture estimated for the client; installment-sale recapture explained
  • Colorado business personal property declaration filed by April 15 where required
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Written for the Tax Shop desk; figures are for the 2026 tax year as currently published. Items marked (verify) are to be confirmed against primary sources before the figures freeze in December. Last updated October 16, 2026.