How QPP Is Claimed (Form 3115 and Tax Filing)

Form 3115 is the IRS application for change in accounting method used when a taxpayer needs to correct or change the depreciation treatment for property. In the QPP context, Form 3115 allows property owners to switch from the standard 39-year nonresidential real property recovery period to the 20-year QPP recovery period for eligible manufacturing buildings that were initially depreciated incorrectly.

Understanding how to claim QPP depends on whether the property is newly acquired or already placed in service. For new property, QPP treatment is elected on the initial tax return by reporting the building with a 20-year life on Form 4562. For property already being depreciated over 39 years, Form 3115 provides the mechanism to correct the depreciation method and claim the accelerated treatment going forward.

For background on QPP eligibility requirements, refer to the Qualified Production Property hub. For broader depreciation strategies, see the cost segregation overview. This article focuses specifically on the QPP accounting method change process and Form 3115 filing requirements.

Form 3115 is required when changing the depreciation method for property already placed in service. If a manufacturing building was initially depreciated over 39 years but actually qualifies for 20-year QPP treatment, the property owner must file Form 3115 to change to the correct method. This commonly occurs when QPP eligibility was not identified at the time the property was placed in service, or when operational changes cause the building to meet QPP requirements.

The form is not required for newly acquired or newly constructed property. When a taxpayer acquires QPP- eligible property, the QPP depreciation election is made on the original tax return by reporting the asset with a 20-year recovery period on Form 4562. Form 3115 is only necessary to change from an incorrect method to the correct QPP treatment for property with depreciation history under the wrong method.

Situations Requiring Form 3115

• Incorrect Initial Treatment: Property was depreciated as 39-year nonresidential real property when it qualified for 20-year QPP treatment.
• Changed Use: Building use changed to qualify for QPP after initial placed-in-service date.
• Discovered Eligibility: QPP qualification discovered in later years after property was placed in service.
• Correction of Prior Error: Previous tax professional or taxpayer incorrectly applied 39-year life to QPP-eligible property.

The Qualified Production Property tax filing process for Form 3115 requires filing the form with the federal tax return for the year of change. The taxpayer must identify the property, the current depreciation method, the proposed QPP method, and calculate the Section 481(a) adjustment representing the cumulative difference in depreciation between the two methods.

The year of change is the first tax year for which the new QPP method applies. Once filed, the taxpayer must continue using the new method for all subsequent years unless another accounting method change is approved. The timing of filing Form 3115 requires coordination with the overall tax return preparation to ensure the depreciation adjustment is properly reflected in the year of change.

The IRS provides two procedures for accounting method changes: automatic and non-automatic. Many QPP method changes qualify for automatic change procedures under Revenue Procedure guidance, which allows filing Form 3115 with the tax return without advance IRS approval. Automatic changes have specific eligibility requirements and must follow the procedures outlined in the applicable revenue procedure.

Non-automatic changes require advance consent from the IRS, filed at least 180 days before the end of the year of change. The IRS reviews the request and issues a letter ruling approving or denying the change. Non-automatic procedures apply when the change does not qualify for automatic treatment or when the taxpayer is under audit for issues related to the accounting method change.

Automatic vs Non-Automatic Comparison

• Automatic Procedure: No advance consent, filed with return, follows specific revenue procedure requirements, generally available for QPP corrections.
• Non-Automatic Procedure: Requires advance IRS approval, filed separately from return, user fee required, 6-12 month approval timeline.
• QPP Qualification: Most QPP depreciation corrections qualify for automatic procedures, but certain circumstances require non-automatic treatment.
• Under Examination: Taxpayers under audit may be restricted from automatic procedures for method changes related to examination issues.

The Section 481(a) adjustment is the cumulative effect of changing from the incorrect depreciation method to the correct QPP method. It represents the difference between the depreciation that was claimed under the 39-year life and the depreciation that should have been claimed under the 20-year QPP treatment for all prior years the property was in service.

For QPP changes, the Section 481(a) adjustment is typically positive, meaning the taxpayer is entitled to additional depreciation deductions to catch up for the difference. This adjustment is generally spread over four years, with a portion claimed in the year of change and the remaining portions in the three subsequent years. The computation requires detailed depreciation schedules comparing the actual depreciation claimed with the depreciation that would have been allowable under QPP treatment.

IRS filing requirements for QPP include comprehensive documentation supporting the accounting method change. Form 3115 requires detailed schedules showing the property description, basis, prior depreciation claimed, proposed depreciation method, and Section 481(a) adjustment computation. Supporting documentation must demonstrate that the property meets QPP eligibility requirements.

Engineering or architectural analysis demonstrating structural integration, production use percentage calculations, building plans, operational documentation, and prior-year depreciation schedules are typically required. The documentation must be sufficient to allow the IRS to verify QPP eligibility and audit the Section 481(a) adjustment calculation if necessary.

Required Documentation Package

• Form 3115: Completed application with all required schedules and attachments.
• Property Description: Detailed description of the building, location, and use in manufacturing operations.
• Eligibility Analysis: Engineering or architectural support demonstrating QPP qualification.
• Depreciation Schedules: Prior-year depreciation under incorrect method and allowable depreciation under QPP method.
• Section 481(a) Computation: Detailed calculation of the cumulative adjustment and multi-year spread.
• Building Plans: Architectural or site plans showing production areas and structural features.
• Operational Documentation: Evidence of manufacturing activities and production use.

The most common scenario is correcting prior depreciation for a manufacturing building that qualified for QPP at the time it was placed in service but was incorrectly depreciated over 39 years. This occurs when the taxpayer or tax professional was unaware of QPP treatment or mistakenly believed the building did not qualify. Form 3115 allows correction of this error and acceleration of remaining depreciation.

Another scenario involves buildings where use changed after the placed-in-service date. If a building was originally used for general commercial purposes but later converted to manufacturing use that meets QPP requirements, Form 3115 can be filed to change the depreciation method prospectively. The Section 481(a) adjustment reflects only the period during which the building actually qualified for QPP treatment.

For guidance on overall QPP strategy and how Form 3115 fits into tax planning, see the article on Common QPP Mistakes and Misconceptions. That article addresses common implementation issues and compliance considerations for Qualified Production Property.