The IRS has released guidance that allows partnerships to amend their tax returns and take advantage of retroactive relief provided by the CARES Act. For some, this could be an effective strategy for increasing cash flow.
Key insights
- The CARES Act brings benefits for many organizations, including partnerships looking to generate additional cash flow.
- Eligible taxpayers can file an amended tax return to claim refunds for certain retroactive provisions.
- Prior to Revenue Procedure 2020-23, many partnerships were ineligible for immediate relief.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes provisions designed to generate cash now by allowing taxpayers to file amended returns and claim tax refunds for certain retroactive provisions — but many partnerships were ineligible. The IRS quickly corrected the problem by releasing guidance (Revenue Procedure 2020-23) that allows partnerships to take advantage of these CARES Act provisions.
CARES Act brings a technical correction
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The key provision applicable to partnerships is the long-awaited technical correction for qualified improvement property (QIP). Under tax reform, QIP was supposed to have a 15-year cost recovery period and be eligible for 100% bonus depreciation. However, a drafting error caused QIP to have a 39-year cost recovery period, which meant QIP was ineligible for bonus depreciation.
The CARES Act retroactively corrects the drafting error for QIP acquired and placed in service on or after January 1, 2018. The correction presents a significant opportunity for taxpayers to file amended returns to generate a refund from the additional depreciation.
Changes to how partnerships correct tax returns
Prior to the release of Revenue Procedure 2020-23, audit rules governing how partnerships could correct previously filed returns prevented partnerships and their partners from immediately taking advantage of the refund opportunities in the CARES Act. Revenue Procedure 2020-23 changes that.
Background: Bipartisan Budget Act of 2015 partnership audit rules
The Bipartisan Budget Act of 2015 (BBA) implemented a new partnership audit regime that significantly changed the way partnerships can make adjustments to their returns. If a BBA partnership wants to correct a previously filed return, it generally must file an Administrative Adjustment Request (AAR) — rather than an amended return — and furnish statements to its partners. The partners use these statements when filing their tax return for the year in which the statements were received.
Example: A BBA partnership overstated its 2018 taxable income and filed an AAR in 2020 to correct the issue. The partnership issues a statement to each partner, indicating their share of the reduction in the partnership’s taxable income resulting from the AAR. Each partner takes their share of the reduction of 2018 taxable income into account on their 2020 income tax return, the year in which they received the statement from the partnership. The partners must wait until they file their 2020 tax return to obtain a tax benefit from filing the AAR.
BBA partnership audit rules after new IRS guidance
The new IRS guidance allows BBA partnerships to amend their tax returns and issue amended Schedules K-1. Partners can amend their returns as soon as they receive an amended K-1, which could accelerate the time in which they receive their refund. The relief applies to partnership tax years beginning in 2018 and 2019, and is not limited to changes related to the CARES Act.
BBA partnerships must file the amended return and furnish the Schedules K-1 no later than September 30, 2020, to qualify. Further, the relief only applies to partnerships that filed returns and furnished Schedules K-1 prior to issuing the notice. BBA partnerships filing an initial return after the issuance of the revenue procedure will continue to use the AAR procedures.
To file an amended return, the partnership must file Form 1065 with the “Amended Return” box checked and write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return. A statement also must be attached to each Schedule K-1 with the same notation.
If your partnership already filed an AAR for the taxable year being adjusted, use the items as adjusted in the AAR where applicable. [Note that there are special rules for partnerships that are currently under IRS examination and for partnerships that applied the rules of the proposed global intangible low-tax income (GILTI) regulations for taxable years ending before June 22, 2019.]
How we can help
The partnership rules can be complex, even under normal circumstances. During the coronavirus pandemic and beyond, our CLA professionals can help you understand your options, navigate the process, and file the necessary forms.
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