Rev. Proc. 2002-19

Where this comes from

Any time you change an accounting method, the tax law requires you to account for the difference between what you did under the old method and what you would have done under the new method. The IRS calls this reconciliation a Section 481(a) adjustment.

The question is when you take it. Rev. Proc. 2002-19 answered that with a direction-based rule: which way does the adjustment run?

What it established

The rule is straightforward. If the adjustment is negative, meaning it is a deduction that lowers your taxes, you take it all in the year you file the method change. One hundred percent in year one.

If the adjustment is positive, meaning it adds income and increases what you owe, you spread it over four tax years.

For cost segregation, the adjustment almost always runs in the taxpayer's favor. You are moving components from slow 39-year depreciation to fast 5- or 7-year depreciation. The catch-up is a deduction.

How it shows up in a study

Say you have owned a building for five years and are now doing a look-back study. The study finds $100,000 of components that should have been on a 5-year schedule. You have claimed about $13,000 in depreciation on those components under the 39-year schedule. Under the 5-year schedule, you should have claimed about $95,000.

The difference, roughly $82,000, is your Section 481(a) catch-up. Under the rule this procedure established, you take all $82,000 in the year you file Form 3115. Not spread over five years. All of it, now.

This rule is absorbed into Rev. Proc. 2015-13 and is still in effect today.

What it does not mean

This specific procedure is superseded. The operative authority today is Rev. Proc. 2015-13.

The rule it established remains in force. But when citing authority for a current filing, you cite the current procedure, not this one.