What are the catch-up depreciation rules?

November 29, 2004

Subject:  catch-up depreciation
Date:  Sun, 10 Oct 2004
From:  Ellen

My client bought a business in 1994, which included about $400,000 of goodwill. I did not amortize the goodwill for 1994 - 1996 and did amortize the goodwill for the years after that until he abandoned the business in 2002. In 2002, I took the abandonment loss as $400,000 less the actual accumulated amortization. He is under audit for 2002 and the tax auditor is reducing his basis by the amortization allowable.

I think the catch-up depreciation rules apply, but under what revenue procedure? Do I file a Form 3115 for 2002? Is that the year of change?

Your reply would be greatly appreciated


Date:  Wed, 24 Nov

Hello Ellen,

I think your situation happened a year too early to remedy. Revenue Procedure 2004-11 allows a "catch up" election for unclaimed depreciation and amortization in the year of sale effective for years ending on or after December 30, 2003. The previous applicable Revenue Procedure was 2002-9. Under Revenue Procedure 2002-9, a change won't be allowed when the item has been raised as an issue in a tax audit. Your professional liability carrier may have some input to help you. Give them a call.

Good luck!
Mike Gray

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