Understanding Section 481 Catch-Up
Section 481 allows taxpayers to claim missed depreciation from prior years without amending returns. When cost segregation identifies components that should have been depreciated on accelerated schedules, the cumulative unclaimed depreciation can be captured in a single current-year adjustment.
Office buildings acquired in prior years remain eligible for cost segregation and Section 481 treatment. There is no cutoff date preventing studies on older properties—buildings held for years may still generate significant tax benefits through the catch-up mechanism.
The adjustment captures all previously unclaimed accelerated depreciation in one tax year. For properties held multiple years, this can create substantial current-year deductions representing several years of accelerated depreciation that would otherwise have been claimed annually.
No amended returns are required for Section 481 adjustments. The IRS approved procedure allows claiming the adjustment on the current year return with Form 3115, simplifying compliance compared to multi-year return amendments.
Calculating the Section 481 Adjustment
The adjustment equals the difference between depreciation actually claimed and depreciation that should have been claimed under the new method. For cost segregation, this compares straight-line building depreciation to accelerated component depreciation.
Cost segregation studies for existing properties must calculate the cumulative adjustment. Engineering firms experienced in look-back studies understand how to compute adjustments reflecting accelerated depreciation from acquisition through the current year.
Bonus depreciation rules affect adjustment calculations. If bonus depreciation was available when the property was placed in service, the Section 481 adjustment includes bonus depreciation that should have been claimed in the acquisition year.
The calculation must be documented and supportable. IRS examination of Section 481 adjustments may review the underlying cost segregation study and the mathematical accuracy of adjustment calculations.
Procedural Requirements
Form 3115, Application for Change in Accounting Method, must be filed with the tax return claiming the adjustment. This form documents the change from straight-line building depreciation to accelerated component depreciation identified through cost segregation.
The change of accounting method must be properly designated. Cost segregation studies involve changes from incorrect depreciation methods, and the Form 3115 must identify the proper change category and designations.
Duplicate filings with the IRS National Office may be required. Depending on the specific change requested, copies of Form 3115 may need to be filed separately from the tax return according to IRS procedures.
Timing of the change matters for certain compliance aspects. Understanding the appropriate tax year for initiating the change ensures proper procedural compliance and maximum benefit capture.
How Goodlane Group Helps with Section 481 Adjustments
Goodlane Group helps office property owners capture prior-year benefits through proper Section 481 procedures. We coordinate between cost segregation engineers and your tax advisors to ensure studies and filings work together for maximum benefit.
Our preliminary analysis for existing properties includes projection of Section 481 adjustment amounts. Understanding potential catch-up benefits helps prioritize properties for study based on value and holding period.
We ensure cost segregation firms produce studies with proper Section 481 calculations. Not all firms have equal experience with look-back studies, and connecting you with experienced practitioners improves accuracy.
Coordination with your tax preparers ensures Form 3115 is properly completed and filed. The procedural requirements can be complex, and proper coordination between study preparers and return preparers prevents compliance issues.