BBA Partnerships are Given the Option to Amend 2018 and 2019 Tax Returns
(Revenue Procedure 2020-23)
Through Rev. Proc. 2020-23, the IRS recently offered partnerships a window of opportunity until September 30, 2020 to make corrections to 2018 and 2019 partnership tax returns (Forms 1065) and related Schedules K-1. This concession now gives all partnerships the option to make such adjustments in the classic, familiar fashion, rather than following the newly-applicable partnership audit rules. This allows partners of BBA Partnerships to take advantage of recent favorable business tax law changes in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The relief provided in this Rev. Proc. will be understood only by readers who are somewhat familiar with, or at least aware of, the new partnership audit rules known as The Bipartisan Budget Act of 2015 (“BBA”). Those partnership audit rules are explained in more detail in a previous BNN article, but a short overview is as follows:
The BBA created new rules related to partnership audits that generally are effective for partnership returns beginning on or after January 1, 2018. The most significant impact of the new rules is that they allow the IRS to make tax assessments and collections at the partnership level, rather than partner level. Furthermore, the tax will be assessed and collected against the partnership in the year the audit concludes, rather than the earlier year that is actually under examination. This will shift the burden of payment onto current partners, rather than those who were partners during the year under audit. The tax will be assessed at the highest federal income tax rate, regardless of the potentially lower rates that may otherwise apply. Limited elections are available that may allow some partnerships to alter this treatment.
The issue – and the fix
The CARES Act created many favorable tax law changes for businesses and their owners including allowing 100% bonus depreciation on Qualified Improvement Property (QIP) and net operating loss carrybacks. These changes are explained in more detail in our COVID-19 resource center. However, partnerships that already filed their 2019 returns and did not request extensions, plus any partnerships that did not have valid elections out of the partnership audit rules for the 2018 tax year, are barred by the BBA rules from issuing an amended Schedules K-1 to each of its partners. They would be trapped in the new regime that assesses tax at the entity level at the highest tax rate, or forces the additional deductions into the year the amended return was filed, rather than the year in which the underlying activity was incurred.
Rev. Proc. 2020-23 allows a concession until September 30, 2020 for BBA partnerships to file an amended return for the 2018 and 2019 tax years to 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. They can do so simply by filing an amended partnership return (Form 1065X) and stamping at the top “FILED PURSUANT TO REVENUE PROCEDURE 2020-23.” A similar disclosure is also required on all Schedule K-1 sent to the partners.
The Rev. Proc. also provides relief to BBA partnerships currently under IRS examination, BBA Partnerships that previously filed an Administrative Adjustment Request (AAR), and partnerships that applied the proposed GILTI regulations (Notice 2019-46).
BBA Partnerships that have filed their 2018 and/or 2019 returns and later noticed the need for changes to those returns (whether for the CARES Act or other adjustments), should consider filing an amended return. If so, be sure to do so before September 30, 2020, and follow the protocol described in Rev. Proc. 2020-23.
For more information or a discussion on how this may impact you, please contact John Hadwen or your BNN tax advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.