Taxpayer purchased a rental property in $2009$ for $$1\mathrm{.}6$ million and another property in $2016$ for $$2\mathrm{.}7$ million. The purchase price for the $2009$ property was allocated $$400,000$ to land and $$1\mathrm{.}2$ million to building. The purchase price for the $2016$ property was allocated $$28,000$ to land and $$2\mathrm{.}672$ million to $5$ year Distributive trade and services property. Taxpayer claimed depreciation on the property beginning in the year of acquisition.

Taxpayer's $2018$ income tax return was audited by the IRS. The IRS determined that $$1\mathrm{.}4$ million of the $2009$ acquisition purchase price should have been allocated to land and the balance to building $($the property was a small beachfront house on a highly desirable beach$).$ Further, it determined that $$300,000$ of the $2016$ acquisition purchase price should have been allocated to land and $$2\mathrm{.}4$ million to building. It was determined that depreciation claimed was an improper method of accounting.

The audit resulted in an overstatement of depreciation deductions in $2018$ of $$456,000.$ In addition, the IRS determined the difference between depreciation claimed and depreciation allowed after the change in life for all years prior to $2018$ as follows:

Claimed As Adjusted

$2009$ $ $30,000$ $ $5,000$

$2010$ $ $30,000$ $ $5,000$

$2011$ $ $30,000$ $ $5,000$

$2012$ $ $30,000$ $ $5,000$

$2013$ $ $30,000$ $ $5,000$

$2014$ $ $30,000$ $ $5,000$

$2015$ $ $30,000$ $ $5,000$

$2016$ $ $565,000$ $ $285\mathrm{.}000$

$2017$ $$1,030,000$ $ $285,000$

Total $$1,805,000$ $ $605,000$

A$.$ What is the amount of the $481($a$)$ adjustment and the year of change? Will it increase or decrease taxable income in the year of change?

B$.$ When will the $481($a$)$ adjustment be recognized by Taxpayer?

C$.$ When would the $481($a$)$ adjustment be recognized if Taxpayer had voluntarily changed its method of accounting in $2018$ before being notified of the audit?

D$.$ What other factors should Taxpayer have considered regarding the filing of a request for a voluntary change in accounting method vs$.$ waiting for the IRS to identify it on examination?

Answer rating: 100% (QA)

A The amount of the 481a adjustment and the year of change The 481a adjustment is the correction to the depreciation deductions that were claimed impr... View the full answer