When it comes to maximizing tax efficiency, understanding the tools available to you is critical. One of the most powerful yet underutilized tools in the tax strategy toolbox is IRS Form 3115, Application for Change in Accounting Method. If you’re a property owner, real estate investor, or business taking advantage of strategies like cost segregation, Form 3115 could unlock significant tax benefits.
In this blog, we’ll cover what Form 3115 is, how and when to use it, the benefits it offers—especially when paired with cost segregation or energy-efficiency upgrades—and key tips to ensure you take full advantage.
What Is IRS Form 3115?
Form 3115 is used to request a change in either an overall accounting method or the accounting treatment of a specific item, such as depreciation. The IRS requires this form to be filed when switching from one accepted accounting method to another, ensuring consistency and transparency in financial reporting.
Common reasons to file Form 3115 include changing from cash to accrual accounting, correcting depreciation methods, applying a cost segregation study retroactively to accelerate depreciation, or changing the treatment of certain deductions or expenses.
Why It’s a Game Changer: Retroactive Deductions
The most impactful use of Form 3115, particularly in the real estate world, is to retroactively catch up on missed depreciation. This is known as a Section 481(a) adjustment, which allows you to take the full amount of previously unclaimed depreciation in the current year—without amending past returns.
Let’s say you’ve owned a commercial building for seven years but only used straight-line depreciation. If you now decide to apply cost segregation, you can break the property into shorter-lived assets (like 5, 7, or 15-year property) and claim all the depreciation you should have taken in those prior years—immediately. That’s where Form 3115 comes in.
How to File Form 3115
Filing Form 3115 can be a bit technical, especially when it involves depreciation or cost segregation. Here’s the general process:
- Complete the Form
There are multiple sections, but focus on:
- Part I: Basic information (name, EIN, etc.)
- Part II: Type of change (automatic or non-automatic)
- Part IV: Specific method changes (e.g., depreciation correction)
- Section 481(a) adjustment: This is where you calculate and report the cumulative adjustment.
- Attach the Statement of Facts
The IRS requires a detailed explanation of the current method, the proposed method, and the reasons for the change.
- Include with Tax Return
For most automatic changes, Form 3115 is filed with your timely filed tax return (including extensions) and a copy is also sent to the IRS national office in Ogden, UT.
- Work with a Tax Pro or Engineering Firm
If you’re applying a cost segregation study, that study will guide the new depreciation schedules and support the 481(a) adjustment.
Common Uses for Real Estate Owners
- Cost Segregation Studies
Reclassify building components to shorter asset lives (5, 7, 15 years), unlocking front-loaded depreciation deductions.
- 179D Energy Deduction Alignment
If energy-efficient upgrades (lighting, HVAC, envelope) were installed in previous years, Form 3115 can help correct the accounting method to reflect the 179D deduction.
- Correcting Depreciation Errors
Missed bonus depreciation? Incorrect property classification? Form 3115 helps fix it without triggering amended returns.
The Benefits of Using Form 3115
Form 3115 can deliver substantial benefits to taxpayers:
- Immediate Tax Savings – With the Section 481(a) catch-up, you can take all the missed deductions in the current year.
- Avoid Amending Returns – Save time and reduce IRS scrutiny by applying changes prospectively.
- Audit Trail and Compliance – Form 3115 creates a clean paper trail with the IRS, supporting long-term compliance.
- Maximize ROI on Cost Seg Studies – When paired with engineering-based studies, Form 3115 ensures you actually realize the benefits of your accelerated depreciation.
Final Thoughts
Form 3115 is one of the most powerful—but often misunderstood—forms in the IRS arsenal. When used correctly, especially in conjunction with cost segregation or Section 179D deductions, it can produce immediate, tangible tax savings.
The key is accuracy and expertise. This isn’t a form you want to tackle alone unless you’re highly experienced. Working with specialists who understand the intersection of tax regulation and real estate—like CSSI—can ensure you maximize your benefits while staying fully compliant.
Need Help Unlocking Hidden Deductions?
CSSI has completed over 50,000 engineering-based cost segregation studies, all without a single audit. Let us help you determine if Form 3115 could save you thousands (or more) on your next return.
