The Internal Revenue Service has released guidance allowing partnerships subject to amended return filing restrictions enacted under the Bipartisan Budget Act of 2015 to amend 2018 and 2019 partnership returns, including in order to take advantage of retroactive relief provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The Internal Revenue Service released Revenue Procedure 2020-23, 2020-18 I.R.B. 1 (Rev. Proc. 2020-23), on April 8 permitting certain partnerships to amend partnership returns for the 2018 and 2019 taxable years, thereby enabling their partners to more fully and immediately benefit from the retroactive relief provided by the recent Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. Law No. 116-136). This guidance provides welcome relief for applicable partnerships that are otherwise restricted in their ability to file amended partnership returns to take advantage of the CARES Act’s retroactive fix of the so-called “retail glitch” for qualified improvement property (QIP).
However, questions remain regarding the scope of and implementation associated with this guidance, even after the subsequent release of additional guidance on April 10, 2020 (Rev. Proc. 2020-22), which will be the subject of a forthcoming LawFlash, addressing certain retroactive elections and election withdrawals under the business interest deduction limitation and depreciation rules.
As discussed in our prior LawFlash, the CARES Act sets forth a number of taxpayer-favorable federal income tax provisions generally with respect to taxable years beginning before January 1, 2021. The CARES Act includes provisions specifically tailored to partnerships (e.g., in the context of the Internal Revenue Code Section 163(j) limitation on business interest deductions). But the CARES Act also includes broadly applicable changes that are difficult to implement under procedural rules unique to partnerships, and provisions that are not directly relevant to items reported on partnership returns but that may, in hindsight, affect decisions made on previously filed partnership tax returns.
One notable provision of the CARES Act treats QIP (such as interior improvements to retail stores and restaurants) as property subject to a 15-year recovery period for accelerated tax depreciation purposes (and therefore makes such property potentially eligible for 100% expensing under the Section 168(k) bonus depreciation rules). This provision of the CARES Act fixes the technical error called the “retail glitch” in the 2017 legislation commonly referred to as the Tax Cuts and Jobs Act (Pub. Law No. 115-97) (TCJA), which treated such property as subject to a 39-year recovery period (and therefore not eligible for bonus depreciation). As a result of the CARES Act provision, QIP placed into service after September 27, 2017, is now generally eligible for bonus depreciation, retroactive to September 27, 2017.
Rev. Proc. 2020-23 addresses the limitation placed on amending partnership tax returns under the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015, Pub. Law No. 114-74, Title XI (BBA). Specifically, the BBA generally prevents partnerships from amending partnership returns after the due date of the return. Instead, partnerships subject to the BBA (BBA partnerships) are required to file “administrative adjustment requests” (AARs), which, in the case of adjustments that would reduce a partner’s tax liability, can only produce a partner-level benefit on its AAR-year taxable income. Thus, absent relief, partners of BBA partnerships would not be able to receive relief under an AAR until they file their current year returns, which for many partners will not be filed until 2021. Moreover, partners in BBA partnerships generally are not allowed to carry forward benefits to years following the AAR year.
Rev. Proc. 2020-23 addresses this inequitable result (which applies only to partnerships) by permitting BBA partnerships to amend previously filed partnership returns for their 2018 and 2019 taxable years before September 30, 2020, rather than requiring those partnerships to file AARs. Partnerships that avail themselves of the right to amend their returns must comply with the terms of Rev. Proc. 2020-23 and also furnish corresponding amended Schedules K-1 to their partners.
Thus, BBA partnerships should generally be able to take advantage of the retroactive tax benefits in the CARES Act, including benefits from the fix of the retail glitch. The subsequently released Rev. Proc. 2020-22 confirms a BBA partnership’s ability to retroactively benefit from the retail glitch fix to the extent related to an election to be treated as an electing real property trade or business or an electing farming business for purposes of applying the Section 163(j) business interest deduction limitation and Section 168 depreciation rules.
For background, TCJA-enacted provisions permit qualifying taxpayers engaged in a “real property trade or business” or a “qualified farming business” to make an election to not be subject to the Section 163(j) interest deduction limitation rules for that business, but at the cost of not being able to use accelerated depreciation under Section 168 (including bonus depreciation) with respect to that business.
Rev. Proc. 2020-22 establishes procedures for all taxpayers, including BBA partnerships, to retroactively elect or withdraw prior elections to be treated as a real property trade or business or an electing farming business. As we’ll discuss in a forthcoming LawFlash, BBA partnerships may retroactively make or withdraw these elections either by filing amended returns or filing AARs, in each case in the manner provided by Rev. Proc. 2020-22.
Rev. Proc. 2020-23 limits relief to BBA partnerships. This is not surprising, as partnerships not subject to the BBA may follow the general rules allowing filing of amended returns.
With respect to amended returns filed by BBA partnerships pursuant to Rev. Proc. 2020-23, Rev. Proc. 2020-23 provides:
BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for the taxable years beginning in 2018 or 2019 prior to the issuance of this revenue procedure may file amended partnership returns and furnish corresponding Schedules K-1 before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.
Based on the plain language of Rev. Proc. 2020-23, it appears that BBA partnerships may therefore amend returns covered by the guidance to address any relief provided by the CARES Act and/or any non–CARES Act changes (e.g., deductions attributable to other sources). Thus, it appears Rev. Proc. 2020-23 authorizes an amended partnership return where the only items to be changed are unrelated to the CARES Act. This result seems consistent with legislative intent because the Senate Finance Committee’s section-by-section summary of the CARES Act repeatedly states that companies will be allowed to amend prior year returns.
This is also reflected by Rev. Proc. 2020-22, which permits all taxpayers, not just those specifically impacted by the retail glitch fix in the CARES Act, to retroactively make or withdraw elections to be treated as a real property trade or business or an electing farming business for purposes of applying the Section 163(j) business interest deduction limitation and Section 168 depreciation rules.
Rev. Proc. 2020-23 allows a partnership the option to file an amended return instead of an AAR, though it does not prevent a partnership from filing an AAR to obtain the benefits of the CARES Act or any other tax benefits to which the partnership is entitled. However, a BBA partnership that files an amended return pursuant to Rev. Proc. 2020-23 remains subject to the centralized partnership audit procedures enacted by the BBA.
If a BBA partnership has previously filed an AAR and now wishes to file an amended return pursuant to Rev. Proc. 2020-23 for the same taxable year, Rev. Proc. 2020-23 instructs that the partnership should use the items as adjusted in the AAR, where applicable, in lieu of items on the originally filed partnership return. On its face, Rev. Proc. 2020-23 does not prohibit a partnership from filing an AAR to address certain issues and then, shortly thereafter, filing an amended return to address other issues.
If a BBA partnership is currently under examination for a taxable year beginning in 2018 or 2019 and wishes to take advantage of the option to file an amended return provided by Rev. Proc. 2020-23, the partnership may do so if and only if the partnership sends written notice to the revenue agent coordinating the partnership’s examination that the partnership seeks to use the amended return option prior to or contemporaneously with filing the amended return. The partnership must also provide the revenue agent with a copy of the amended return upon filing.
Any partnership currently under examination should consider how, if at all, filing an amended return would delay or interrupt its current examination, given that the revenue agent will be reviewing the amended return per these requirements. Because few BBA partnerships are currently under examination for a taxable year beginning in 2018, this may be a nonissue for most BBA partnerships.
Rev. Proc. 2020-23 is silent as to whether a partner of a BBA partnership that exercises its rights under Rev. Proc. 2020-23 to amend a tax return is required in turn to amend its tax return to mirror the changes made by the partnership.
Generally, under the BBA rules, a consistency requirement applies to all partners. In many cases, we would expect it to be advantageous for a partner to amend its return to mirror the partnership return, as the partnership is likely relying on Rev. Proc. 2020-23 to provide a benefit to its partners. Nevertheless, there are situations where it might not make economic sense for a partner to amend its own return in order to receive a relatively modest benefit, and a taxpayer generally has no duty to amend a return if it was correct when filed.
Rev. Proc. 2020-23 also provides coordinating rules for applying Notice 2019-46, 2019-37 I.R.B. 695 (Notice 2019-46), which permits complying partnerships to continue to apply rules under proposed regulations for the Global Intangible Low-Taxed Income (GILTI) regime for taxable years ending before June 22, 2019, on the amended returns instead of the rules reflected in the GILTI final regulations.
Under Notice 2019-46, if a BBA partnership applied the rules of the proposed GILTI regulations, it may continue to apply the same rules when filing an amended Form 1065 per the provisions of Rev. Proc. 2020-23, as long as the partnership furnishes an amended Schedule K-1 that is consistent with the proposed GILTI regulations and provides notice to its partners of the same, in accordance with the requirements of Rev. Proc. 2020-23.
In the first instance, BBA partnerships should review the CARES Act to determine whether amending their tax returns pursuant to the provisions of Rev. Proc. 2020-23 would provide material benefits to their respective partners. Next, BBA partnerships should consider whether they have any non–CARES Act reasons to amend, as Rev. Proc. 2020-23 appears to provide broad allowances for the same (as described above).
Note that some partnerships may have an affirmative obligation, pursuant to their operating agreements or their fiduciary duties to their partners, to undertake the review described above or to take certain actions in connection with previously filed returns. These partnerships in particular should proceed cautiously before drawing conclusions on whether to amend their returns per the provisions of Rev. Proc. 2020-23. In addition, there are certain circumstances where it might be more beneficial to file an AAR rather than an amended return.
The Internal Revenue Service has released FAQs in connection with other recent guidance. We are optimistic that it will provide similar guidance in connection with Rev. Proc. 2020-23, beyond that provided in Rev. Proc. 2020-22, to confirm, among other items, that Rev. Proc. 2020-23 allows BBA partnerships to amend returns to address any relief provided by the CARES Act or any non–CARES Act changes (or both).
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Daniel A. Nelson
Jason P. Traue
Philadelphia
Casey S. August
Daniel F. Carmody
San Francisco
Gregory Hartker
Sarah-Jane Morin
Washington, DC
Jennifer Breen
Sheri A. Dillon
Bill McKee
William F. Nelson