What to Do If You’ve Made Errors in Depreciation Calculations on Past Tax Returns

Depreciation is a crucial aspect of tax planning for businesses and individuals with income-generating assets. However, mistakes in calculating depreciation can lead to overpaid or underpaid taxes, potentially triggering IRS scrutiny or financial inefficiencies. If you’ve discovered an error in your past tax returns related to depreciation, here’s how to address it effectively.

Step 1: Identify the Nature and Scope of the Error

Before taking corrective action, determine the specifics of the mistake. Common depreciation errors include:

Using an incorrect useful life or recovery period
Misapplying depreciation methods (e.g., straight-line vs. accelerated depreciation)
Omitting assets that should have been depreciated
Overstating or understating asset cost basis
Failing to account for Section 179 deductions or bonus depreciation properly

Step 2: Assess the Impact on Prior Returns

Once the error is identified, evaluate its impact on previous tax filings. This includes reviewing how the miscalculation affected taxable income, deductions, and tax liabilities. If the error spans multiple years, you may need to amend several returns or file an accounting method change.

Step 3: Determine the Best Correction Method

There are two primary ways to correct depreciation errors:

Filing an Amended Return (Form 1040-X, 1120-X, etc.) – If the error occurred in a recent tax year (typically within the last three years), you can file an amended return to correct the mistake and claim any refund or pay additional tax owed.
Requesting an Accounting Method Change (Form 3115) – If the error spans multiple years or involves an improper method of depreciation, the IRS allows businesses to correct the mistake prospectively using Form 3115, Application for Change in Accounting Method. This approach prevents the need to amend multiple years of returns and can allow for a one-time adjustment under Section 481(a).

Step 4: File the Necessary Forms and Pay Any Adjustments

If you’re eligible to file an amended return, submit the correct forms along with any additional tax due. For significant depreciation errors, filing Form 3115 can streamline the correction process while avoiding potential penalties. Depending on the nature of the error, you may also qualify for a catch-up depreciation deduction in the current year.

Step 5: Review Internal Processes to Prevent Future Errors

To avoid recurrence, consider implementing stronger controls over depreciation calculations:

Use reliable accounting software or fixed asset management tools
Conduct periodic reviews of asset records and depreciation schedules
Consult a tax professional or CPA for complex asset classifications

Final Thoughts

Timely correction of depreciation errors can help businesses maintain compliance and optimize tax efficiency. If you suspect an issue with your past depreciation calculations, working with a CPA can ensure that corrections are handled correctly while minimizing potential risks and penalties. Contact Hock Tax Services today for a comprehensive review and tailored tax solutions.