The window for "easy" partnership amended returns for CARES Act benefits is closing. Only days left. There is a September 30 deadline to amend a Form 1065 by merely checking the box.
WHO should focus on this?
Real estate partnerships are probably most impacted, though others as well. For example, have you evaluated bonus depreciation? Since the allowable depreciation schedule changed, so that "qualified improvement property" is eligible for 15 year MACRS, an election out of section 168(k) could be much more expensive for real estate taxpayers depending on their assets. If a partnership would benefit from CARES Act provisions or other recent guidance, such as the latest guidance regarding the bonus depreciation deduction (flexibility regarding elections in or out of depreciation timelines, changes to the QIP rules under section 168(e), etc.), the partnership can easily file an amended return until September 30, 2020. After that, a full, more time-consuming process will be required.
Most partnerships are subject to the centralized partnership audit rules of the Bipartisan Budget Act of 2015 (BBA) and many of these partnerships filed Form 1065 returns before April 8, 2020. If it is determined that the partners would benefit from claiming previously unclaimed CARES Act provisions (or other tax benefits) for 2018, 2019, or both, returns can be filed under an expedited procedure. Many CARES Act provisions provided retroactive guidance, so calculations of benefits arising from CARES Act provisions have been delayed.
WHAT is the published guidance?
Rev. Proc. 2020-23 permits certain partnerships (partnerships subject to the BBA, as described below, that filed the relevant returns before April 8, 2020) to file amended returns for tax years beginning in 2018 or 2019 using Form 1065 with the "amended return" box checked, and issue amended Schedules K-1 to partners, rather than undertaking the AAR process described in more detail below and generally applicable to those partnerships.
WHY is this guidance important?
The IRS compliance campaigns represent the IRS’ shift from entity-based to issue-based examinations, focusing on those issues that IRS has determined to present a risk of significant noncompliance. The IRS’ stated goal with its campaign initiatives is to improve tax return and issue selection and make the greatest use of limited IRS resources. Each campaign is addressed using one or more “treatment streams” that include issue-based examinations, soft letters encouraging voluntary self-correction, and stakeholder outreach.
Under the BBA, adjusting a partnership tax return is no longer the relatively simple task it was prior to the bill's passage. Under the BBA, if a partnership determines that a previously filed tax return should be adjusted, whether to reflect a negative or a positive adjustment, each of which could have an impact on the partners, and the due date for filing the partnership's return has passed, the partnership must file an "administrative adjustment request" (AAR), which can be complicated. See Section 6031(b). This is partially because, under Section 6227, which governs AARs, a partnership itself can pay an adjustment that results in an imputed underpayment, but favorable adjustments are required to be pushed out to the partners. Treas. Reg. 301.6227-2(d). To submit an AAR, the partnership can e-file an amended Form 1065 with a Form 8082, which describes the adjustments to be made to the previously filed return, as well as certain other forms. The partners receiving the AAR statement (and ancillary forms) are then required to determine and report the corrective amounts for the year being adjusted (as well as intervening years). The additional reporting-year tax may not be carried forward or back, so that an AAR adjustment functions like a nonrefundable credit of the partner.
In addition, as a result of the "reporting year" system imposed by the AAR, filing an AAR would result in partners' only being able to receive any benefits from CARES Act relief on the current taxable year's federal income tax return. Thus, even if an AAR were filed for a partnership, partners generally would not be able to take advantage of CARES Act benefits from an AAR until they file their current year returns, which could be in 2021. Rev. Proc. 2020-23, section 2.04.
For more information on this topic and to answer any questions you may have, please contact your regular Withers attorney or the author of this piece