Correcting depreciation errors.

• Author: Hackney, Jeffrey A.

The IRS recently issued Rev. Proc. 96-31 which allows a taxpayer that has claimed less than the allowable depreciation or amortization to change its method of accounting to claim the allowable amount. Presently, depreciable basis for any asset is reduced by depreciation allowed or allowable. Failure to claim the proper depreciation does not prevent a reduction in basis for depreciation allowable but not claimed. This revenue procedure permits a taxpayer to deduct currently allowable depreciation that had not been deducted in prior years.

In general, this automatic consent procedure applies to any taxpayer changing to a permissible method of accounting for depreciation for any item of property that: 1. Under the taxpayers present method of accounting, the taxpayer has not taken into account any depreciation allowance or has taken less than the depreciation allowable; 2. Is subject to Sec. 167, 168, 197 or 168 (prior to its amendment in (1986); and 3. Is held by the taxpayer as of the beginning of die year of change.

The automatic consent procedure does not allow a change in depreciation for die following types of property: 1. Property held by an exempt organization. 2. Intangible property, other than the following property generally acquired after Aug. 10, 1993: * Computer software. * Purchased mortgage servicing rights. * Certain other Interests or rights acquired separately, such as an interest in films, sound recordings, patents, copyrights, etc. 3. Property acquired prior to 1981, for which the taxpayer is changing only the estimated useful life. Such changes must be made on a prospective basis only. 4. Property that changes use but continues to be owned by the same taxpayer. 5. Property on which the taxpayer has claimed depreciation in excess of the amount otherwise allowable. 6. Any accounting method change involving die direct expensing of depreciable assets to a method requiring capitalization and depreciation. 7. Any accounting method change from one permissible method to another permissible method. This provision prevents taxpayers from retroactively changing from an acceptable accelerated method to an otherwise allowable straight-line method. 8. Any change in method of accounting for an item other than depreciation, even if the present method may have resulted in the taxpayer claiming less than the depreciation allowable. As an example, this may involve a change in the treatment of inventory costs, or the recharacterization of a...