A client brings you an engineering study on a building placed in service in 2022. It says $990,000 of basis belongs in 5- and 15-year classes. Your fixed asset system has the whole building on a 39-year line. The bridge between those two facts is Form 3115, and doing it well is mostly a workpaper problem, not a form problem.
The short answer
- A cost segregation catch-up is a change from an impermissible to a permissible method of accounting for depreciation, filed as an automatic change. No user fee, no advance consent.
- Form 3115 is filed in duplicate: one copy with the timely filed return for the year of change, including extensions, and one copy to the IRS national office under current procedures.
- The §481(a) adjustment is computed as of the first day of the year of change, and a negative adjustment is taken 100% in that year.
Two more points frame everything below. A method is adopted only after use on two consecutively filed returns, so a single filed return means an amended return rather than a Form 3115. And the audit protection a properly filed automatic change carries attaches to the method, not to the allocation behind it.
Why This Is a Method Change and Not an Error
Depreciating property using an incorrect recovery period, over more than one filed return, is a method of accounting. That framing is what makes the look-back strategy work: a method is corrected prospectively under §446 and §481, not by reopening closed years. The taxpayer picks up the cumulative difference in the current year and moves on. This is why the three-year refund window is irrelevant and why a look-back study can reach any prior placed-in-service year.
The change is on the automatic change list, so consent is deemed granted when the form is filed correctly. Advance consent, with its user fee and its deadline of the last day of the year of change, is reserved for changes not on that list. Confirm the designated change number against the current revenue procedure when you file; that list gets updated.
The Two-Year Adoption Rule
State this to the client before anyone spends money.
A method of accounting is adopted once used on two consecutively filed returns. If your client acquired the building in 2025 and has filed exactly one return, no method has been adopted and there is nothing to change. The fix is a superseding or amended return putting the study results on the original schedule. Get this backwards and you file a 3115 for a method that was never adopted.
Which Parts of the Form Actually Matter
Most of Form 3115 is inapplicable to a depreciation change, so four areas carry the whole filing. Verify the part references against the form revision you actually file.
Start with the automatic change section, where the designated change number goes. Enter the wrong number and the automatic change is invalid. The general information section then captures the present and proposed methods, the year of change, and whether the taxpayer is under examination. The §481(a) adjustment section reports the net amount as an increase or decrease to income, and the depreciation schedule sets out the property description, the present and proposed recovery periods and conventions, and the statutory authority for the proposed method.
Then attach the asset detail. The form asks for a number; the examiner asks how you got it.
Worked Example: A 2022 Office Building, Year of Change 2026
Example: a $5.4M office/flex building placed in service March 2022 Land allocated at $900,000, leaving $4,500,000 of depreciable basis on a 39-year line. The study reclassifies 22%: $594,000 to 5-year property and $396,000 to 15-year land improvements, leaving $3,510,000 in the structure. Because the property was placed in service in 2022, the reclassified property carries 100% bonus.
| Depreciation through December 31, 2025 | Amount |
|---|---|
| Claimed under 39-year method | $437,500 |
| Allowable under corrected method (incl. $990,000 bonus in 2022) | $1,331,250 |
| Net §481(a) adjustment (negative, decrease in income) | $(893,750) |
The full $893,750 is deducted on the 2026 return, with no amended returns and no four-year spread. The client's actual benefit depends on their marginal rate, passive activity position, and the excess business loss limitation. See the §481(a) computation in detail for the year-by-year build.
Eight Places These Filings Go Wrong
| Item | Requirement | Common failure |
|---|---|---|
| Change type | Automatic; current designated change number | A stale number from a superseded rev. proc. |
| Copy 1 | With the timely filed return for the year of change, including extensions | Filed with a late return |
| Copy 2 | To the IRS national office per current procedures | Never sent, invalidating the automatic change |
| §481(a) amount | As of the first day of the year of change | Computed as of the study date or year-end |
| Sign of adjustment | Negative amounts deducted in full in the year of change | Erroneously spread over four years |
| Asset schedule | Description, class life, convention, in-service date, bonus applied | A one-line summary with no support |
| Bonus rate | Fixed by original placed-in-service year | Applying today's 100% rate to a 2023 or 2024 building |
| Dispositions | Consider a partial asset disposition election for replaced components | Missed in the year it must be made |
Filing the Form Proves Nothing About the Numbers Behind It
A Form 3115 with a poorly supported §481(a) computation is worse than no Form 3115 at all. It is a signed, dated document telling the IRS exactly which asset schedule to examine and how much deduction depends on it.
The audit protection that comes with a properly filed automatic change covers the method. It does not bless the numbers. If the allocation came from a spreadsheet with no engineering basis, no reconciliation to actual total cost, and no documented land allocation, the protection is thin. The IRS Audit Techniques Guide tells examiners exactly what to look for.
Ask the engineering provider for the §481(a) workpaper itself: original schedule, corrected schedule, difference by year, cumulative total, tied to asset detail. If they cannot produce it, you are signing behind a number you cannot reconstruct. Our guide for CPAs lists what to require up front.
Frequently Asked Questions
Can we file Form 3115 if the client is under examination?
There are restrictions, and the form asks about examination status directly. A taxpayer under exam faces limits on filing an automatic change, with windows and exceptions that depend on the current procedures. Check the operative revenue procedure before committing to the filing.
Does the client need a separate 3115 for each property?
Multiple properties can often be combined on a single Form 3115 when they are the same change for the same taxpayer. Keep the asset schedules separate and clearly labeled regardless.
What if we discover the study is wrong after filing?
The method change stands, but the amount does not become correct by virtue of having been filed. A materially wrong §481(a) figure carries forward into every subsequent year's depreciation. Review the engineering before the return goes out, not after.
A Cost Seg Partner Your Firm Can Stand Behind
Precision Cost Segregation works alongside CPA firms, not around them. We deliver the engineering, the asset detail schedule, the §481(a) computation, and the Form 3115 workpapers your team needs, in a format that drops straight into your fixed asset system. Your client relationship stays yours.
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This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.