If you’ve owned commercial property for several years without performing a cost segregation study, there’s a good chance you’ve left significant depreciation deductions on the table. The good news is that it’s not too late to claim them. Form 3115 is the IRS mechanism that allows property owners to go back and capture those missed deductions without filing amended returns.
Here’s what you need to know.
What Is Form 3115?
Form 3115, officially titled the “Application for Change in Accounting Method,” is used to change either an entity’s overall accounting method or the treatment of a specific item. Common examples include switching to the accrual method, accelerating depreciation, or expensing a previously capitalized item under §263(a). For property owners, it’s most commonly used to apply a cost segregation study retroactively and recover depreciation that wasn’t taken in prior years.
Automatic vs. Non-Automatic Changes
The first thing to understand when filing Form 3115 is whether the change you’re making is automatic or non-automatic. This is determined by the Designated Change Number (DCN), which appears on the first page of the form.
If a DCN exists for your specific change, it’s an automatic change, meaning no IRS pre-approval and no fee. The typical DCN used for cost segregation studies is DCN 7. A full list of Designated Change Numbers is available at irs.gov.
If no DCN applies, the change is non-automatic. In that case, the taxpayer must petition the IRS for permission and pay a filing fee before the form can be submitted. The IRS typically sends an acknowledgment within 60 days, and the deadline to file is the end of the current tax year.
Who Can File Form 3115?
The filer is generally the applicant, meaning the entity, person, or distinct trade or business whose accounting method is being changed. For a consolidated group, the common parent files on behalf of itself or any member. A single Form 3115 can cover identical changes for multiple entities, including members of a consolidated group, separate trades or businesses such as Q-Subs and SMLLCs, and partnerships wholly owned within a consolidated group.
A couple of special considerations: when filing on behalf of an applicant, the filer’s information goes on line one and the applicant’s on line four. For partnerships, the form must be signed by a general partner or LLC member with personal knowledge of the facts and authority to sign.
Understanding the Section 481(a) Adjustment
One of the most valuable aspects of filing Form 3115 for cost segregation is the Section 481(a) adjustment. When you apply a retroactive cost segregation study, the cumulative depreciation you missed in prior years doesn’t have to be spread out over time. In most cases, it can be taken as a single deduction in the current tax year.
If the adjustment is negative (meaning additional depreciation is owed to you), it can generally be claimed all at once. If the adjustment is positive, it is spread over four years. For property owners who have held a building for several years without a cost segregation study, the catch-up can be substantial. Property owners often see tax savings of $55,000 to $100,000 per million dollars of building cost basis when implementing these strategies correctly.
How to File Form 3115
Form 3115 must be filed in duplicate for automatic changes. Attach the original to your timely filed tax return for the year of change (the original does not need to be signed), and send a signed copy to the IRS in Ogden, UT no earlier than the first day of the year of change and no later than the date you file your federal return.
Filing deadlines are strict. Extensions are rarely granted outside of unusual circumstances, so starting the process well before year-end matters.
Key Takeaways
- Cost segregation changes (DCN 7) are automatic, no IRS pre-approval and no fee required
- File in duplicate: one copy with your tax return, one signed copy to the IRS in Ogden, UT
- The Section 481(a) adjustment typically allows the full depreciation catch-up in a single tax year
- Deadlines are firm, so don’t wait until the last minute
Ready to Find Out What You’ve Missed?
CSSI has completed over 60,000 cost segregation studies nationwide and regularly helps property owners recover missed deductions through the Form 3115 process. Our engineering-based studies are fully IRS-compliant and come with audit defense at no additional cost.
Contact CSSI today for a free analysis of your property’s cost segregation potential.
Frequently Asked Questions
What is audit protection on Form 3115?
Audit protection on Form 3115 means the IRS will generally not audit prior years for the same accounting method change once the form is filed correctly. CSSI helps ensure your Form 3115 is properly completed so you can benefit from audit protection and avoid potential IRS scrutiny.
How to prepare form 3115
To prepare Form 3115, gather details about your accounting method change, including property and depreciation data, then complete the relevant sections and attach supporting documents. CSSI assists businesses in preparing Form 3115 accurately to ensure IRS compliance and proper cost segregation adjustments.
How to fill out Form 3115 for a cost segregation study?
When completing Form 3115 for a cost segregation study, you’ll need to report a change in accounting method to adjust depreciation. Include property details, the applicable sections, and the Section 481(a) adjustment. Attach the form to your tax return and send a copy to the IRS as required. CSSI can help prepare and file Form 3115 accurately, ensuring compliance with IRS guidelines and maximizing your depreciation benefits.
How to complete Form 3115?
To complete Form 3115, you’ll need to provide details about your business, describe the accounting method change, and explain why the change is being made. Include any supporting schedules and attach the form to your current year’s tax return. It’s often recommended to work with a tax professional like CSSI, as errors or missing information can delay approval from the IRS.
Does Form 3115 need a wet signature?
No, Form 3115 does not require a wet signature if it is filed electronically with your tax return. However, if you are submitting a paper copy, it must be signed by the taxpayer or an authorized representative before mailing to the IRS.
Can Form 3115 be filed with an amended return?
No, Form 3115 generally cannot be filed with an amended return. It must be filed with a timely original return for the year of the accounting method change, along with a duplicate copy sent to the IRS office specified in the instructions.
Can Form 3115 be filed electronically?
Yes, Form 3115 can be filed electronically if it’s attached to an electronically filed tax return. However, if you’re submitting the duplicate copy required by the IRS, that portion must still be mailed to the appropriate IRS office as stated in the form’s instructions.
Where do I mail Form 3115?
Form 3115 should generally be mailed to the IRS office in Ogden, Utah, if you’re filing it separately from your tax return. If you’re submitting it along with your current tax return, send it to the address where you normally file your return. Always check the most recent Form 3115 instructions on the IRS website to confirm the correct mailing address before sending.
how to fill out form 3115 for missed depreciation
To fix missed depreciation, file IRS Form 3115 to request a change in accounting method. This allows you to claim a one-time Section 481(a) adjustment for previously unclaimed depreciation without amending past returns. Include property details, service dates, and the correct depreciation method. CSSI assists businesses in filing Form 3115 accurately to recover missed deductions and stay compliant with IRS rules.
