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On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. In part, the CARES Act provides certain retroactive tax relief for taxpayers for the taxable years ending in 2018, 2019, and in some cases, 2020, including retroactively allowing qualified improvement property to qualify for 100% bonus depreciation, a reduced depreciable life of qualified improvement property under the alternate depreciation system from 40 years to 20 years and an increased business interest deduction limitation from 30% to 50% of adjusted taxable income for tax years 2019 and 2020. For more information on the CARES Act, please see Locke Lord Quick Study: UPDATE: CARES Act Guide: Overview of Key Business Tax Provisions. Relief for taxpayers holding their interests through partnerships was limited due to the mechanics of the existing partnership audit rules and the inability of partnerships to file amended tax returns under such rules. In Revenue Procedure 2020-23, issued on April 9, 2020, the Internal Revenue Service (“IRS”) has provided guidance granting eligible partnerships the ability to file amended partnership tax returns for tax years beginning in 2018 and 2019 so that they are able to take into account the benefits provided in the CARES Act.
The Bipartisan Budget Act of 2015 ( the “BBA”) replaced the partnership audit and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982 with a centralized partnership audit regime that determines, assesses, and collects tax at the partnership level. The BBA applies to most partners and partnerships for tax years beginning after December 31, 2017. The BBA prohibits a partnership from amending the information required to be furnished to its partners after the due date of the partnership’s tax return, unless specifically provided by the Secretary of the Treasury. Instead, a partnership that is subject to the BBA rules and that seeks to adjust an item or amount reflected on an original Form 1065, U.S. Return of Partnership Income, or Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. must file an administrative adjustment request (“AAR”). Filing an AAR would result in partners only being able to receive benefits under the CARES act on their current year’s federal income tax return. Thus, partners may lose out on certain advantages of CARES Act benefits due to the timing of the filing of their tax returns, which would not be until 2021 in many cases.
In Revenue Procedure 2020-23, the IRS acknowledges that the AAR process would significantly delay (and in some cases prohibit) the relief provided in the CARES Act, which was intended to provide immediate relief to taxpayers. Therefore, in order to allow taxpayers to access the benefits provided in the CARES Act timely, Revenue Procedure 2020-23 permits eligible partnerships to file amended tax returns for tax years beginning in 2018 and 2019. Eligible partnerships must file such amended Forms 1065, and furnish Schedules K-1 before September 30, 2020. Amended tax 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. An amended tax return filed under Revenue Procedure 2020-23 will replace any prior tax return for the taxable year, including any AAR filed by the partnership.
Partnerships are only eligible to file an amended tax return if they have not elected out of the centralized partnership audit procedures under the BBA, and if they filed their Forms 1065 and Schedules K-1 for partnership tax years beginning in 2018 and 2019, prior to the issuance of Revenue Procedure 2020-23.
In order to take advantage of the option to file an amended tax return, an eligible partnership must file a Form 1065 with the “Amended Return” box checked and furnish corresponding amended Schedules K-1. The eligible partnership must also clearly indicate the application of Revenue Procedure 2020-23 by writing “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended tax return and attach a statement with each Schedule K-1 sent to its partnership with the same notation.
Eligible partnerships under examination for a taxable year beginning in 2018 or 2019 may still take advantage of the option to file an amended tax return. However, the partnership must send notice to the revenue agent coordinating the partnership’s examination in writing that the partnership will be using the amended tax return option provided in Revenue Procedure 2020-23. The partnership must also provide the revenue agent with a copy of the amended tax return.
If, under Notice 2019-46, the partnership has applied the rules of the proposed global intangible low- taxed income regulations for tax years ending before June 22, 2019, the partnership may continue to apply those same rules as long as the partnership furnishes amended Schedules K-1 consistent with those proposed regulations and provides appropriate notifications to its partners.
There is an open question as to whether a partner is obligated to file his or her own amended tax return when he or she receives an amended K-1. Generally, there is not a statutory requirement to file an amended tax return. However, the revenue procedure seems to imply that partners must also file amended tax returns for 2018 and 2019, but it is not clear what happens if some partners file amended tax returns and others do not
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