How to Report Changes in Depreciation

The Internal Revenue Service allows businesses to make changes to certain methods of depreciation. Businesses may make some minor changes regarding the basis, in-service date and life of an asset simply by changing the method on future tax returns without notifying the IRS. In most instances, however, the business must first file Form 3115 (Application for Change in Accounting Method). Form 3115 is used for both depreciation method changes for which the IRS gives automatic approval and method changes the IRS must approve first.

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Instructions

- 1
  
  Determine whether the business must file Form 3115 to report the change in an accounting method related to depreciation. The IRS lists the changes in accounting methods for which the taxpayer does not need to file Form 3115 in the form's instructions. In general, these include specific elections (formal selections of tax methods) and revocations of elections, the in-service date or the salvage value. Businesses that do not need to complete the remaining steps or file Form 3115 may change the depreciation characteristics of the depreciable assets and do not need to report the changes to the IRS.
- 2
  
  Determine whether your change in depreciation method requires IRS approval. The IRS lists the changes in accounting method for which a taxpayer does not need its approval in the Form 3115's instructions. IRS approval requirements are very specific to usage and industry type.
- 3
  
  Complete Form 3115. If you have determined, in Step 2, that you do not need IRS approval, you only need to complete Parts I, II and IV of the form, as well as any schedules specified in the form's instructions.
- 4
  
  File Form 3115 with the IRS. Specific filing directions are given in the form's instructions. Unlike many IRS forms, a 3115 is generally not filed along with the business's income tax return.

Tips & Warnings

A change in the accounting method related to depreciation may be filed by an business entity, including sole proprietorships filing on Schedule C of Form 1040 (U.S. Individual Income Tax Return).
Form 3115 is a very complicated form and contains substantial technical terminology. Most businesses filing this form will need a tax professional to assist in its preparation.

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How to Report Changes in Depreciation

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