Alert: Partnerships Can Now File Amended Returns to Receive CARES Act BenefitsApril 9, 2020
The IRS has recently addressed serious concerns with certain consequences of the CARES Act affecting partnerships. The CARES Act retroactively altered many tax provisions first put into place by the Tax Cuts and Jobs Act (TCJA.) These changes had a direct impact on partnerships that filed their 2018 and 2019 tax returns based upon the provisions included in the TCJA at that time.
In addition, a partnership subject to the new Centralized Partnership Audit Regime (CPAR) is no longer permitted to file a conventional amended partnership tax return once the return due date (including extensions) for the partnership's tax return has passed. Under the CPAR, there is a new mechanism to adjust the amounts on an original return. However, the adjustment is made for the year the appropriate form is filed, and not the tax year of the original return. As a result, partners in a partnership would not be able to receive the tax benefits provided for in the CARES Act until 2021 when they filed their 2020 returns – if they filed for an adjustment to 2018 or 2019 now, in 2020 – because they would have been required to adhere to the new CPAR rules. A more detailed discussion of the new rules concerning what a partnership must do to correct errors or make changes to its partnership tax return is outside the scope of this discussion and will be the subject of a future Marks Paneth alert.
As a result of this unforeseen consequence, the IRS just announced in Rev. Proc 2020-23 that partnerships, which under current rules are prohibited from filing a conventional amended return after they have filed Form 1065, may now file an amended partnership return for 2018 or 2019 to take advantage of the CARES Act provisions that were enacted to provide relief from the economic effects of the COVID-19 pandemic. Rev. Proc. 2020-23 provides retroactive tax relief for partnerships for tax years ending in 2018 and 2019. Under the Revenue Procedure, partnerships subject to the CPAR that filed a Form 1065 and provided Schedules K-1 to its partners for tax years beginning in 2018 or 2019 before this Revenue Procedure was issued may file amended partnership returns and provide 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. This relief is only available to partnerships subject to the new CPAR that already filed their returns.
A partnership subject to these new CPAR rules must file Form 1065 with the “Amended Return” box checked on page 1 and provide corresponding amended Schedules K-1 to its partners. When filing an amended tax return, the partnership should write “Filed pursuant to Rev. Proc. 2020-23” at the top of the amended return and attach a statement with each Schedule K-1 sent to the partners with the same notation. The amended return can be filed by mail or electronically. If a partnership is currently under IRS examination, it should notify the revenue agent and provide a copy of the amended returns and all K-1s to the agent.
One of the more significant areas in which this relief will be advantageous is the CARES Act’s correction of the “glitch” in the TCJA regarding the expensing and depreciation of qualified improvement property (QIP) that would include many interior improvements to a non-residential building. Under the TCJA, QIP had to be depreciated over 39 or 40 years, depending on the depreciation method, and was not eligible for immediate expensing. After the technical correction included in the CARES Act, QIP may be depreciated over 15 or 20 years, depending on the depreciation method, and may be expensed immediately.
While taxpayers had been optimistic that this correction would be made, the technical correction contained in the CARES Act brought welcome relief to taxpayers that were unable to take advantage of immediate expensing of certain interior improvements. More importantly, the relief expressed in Rev. Proc. 2020-23 now provides a mechanism to enable taxpayers to avail themselves of this corrected provision for periods in which they have already filed tax returns.
For further information concerning this new development, please contact your Marks Paneth tax advisor. You may also reach out to our Response Team or visit our Pandemic Resource Center for additional updates and guidance on the coronavirus (COVID-19).