IRS Allows Amended 2018 and 2019 Partnership Tax Returns To Take Into Account CARES Act Benefits and Other Tax Attributes

The Internal Revenue Service (“IRS”) released Revenue Procedure 2020-23 to allow eligible partnerships (and limited liability companies treated as partnerships for tax purposes) to file amended tax returns and issue amended Schedules K-1 to partners for 2018 and 2019 tax years.  To take advantage of this relief, a partnership must file an amended IRS Form 1065 and issue corresponding Schedules K-1 before September 30, 2020.

As described below, a partnership subject to the Bipartisan Budget Act of 2015, Pub. L. 114-74 (the “BBA”) (enacted as Sections 6221 through 6241 of the Internal Revenue Code) typically is required to use a current year administrative adjustment procedure to change previously filed returns rather than filing amended returns.  The intent of the CARES Act is to provide immediate benefits to taxpayers by allowing adjustments to 2018 and 2019 tax returns and carryback of net operating losses (“NOLs”) from those years to prior years to obtain refunds of taxes paid with respect to those earlier years.  NOL carrybacks are discussed in greater detail in our Client Alert regarding the impact of the CARES Act on M&A transactions.  The Rev. Proc. 2020-23 guidance is necessary to allow partnerships and their partners to obtain tax benefits under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in a timely manner.

Background for the Issues Addressed by Rev. Proc. 2020-23

The BBA created a centralized partnership audit regime to replace the partnership audit and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248 (“TEFRA”).  In general, the BBA audit rules determine, assess and collect tax at the partnership level and apply to all partnerships unless they elect out of those rules.  Only eligible partnerships may elect out of the BBA audit rules.

A partner in a BBA partnership must treat all partnership-related items consistently on its tax return with the partnership’s treatment of those items on its Form 1065.  In general, a BBA partnership cannot amend its Form 1065 and Schedules K-1 after the partnership has filed its Form 1065 and provided Schedules K-1 for a given tax year.  Instead, a partnership must file an administrative adjustment request (“AAR”) to change any item or amount reflected on its Form 1065 or issued Schedules K-1.  An increase in a loss from an AAR adjustment is pushed out to the partners and taken into account in the tax year that the adjustment is received (rather than creating an adjustment or a refund for the tax year at issue). 

If a partnership were to file an AAR to change a tax item in its Form 1065 due to the CARES Act, a partner would only be able to receive tax benefits from that relief on a tax return for the current year and would not be eligible to apply for a tax refund for the year at issue or preceding years.  Thus, using the AAR procedure would delay a partner’s CARES Act tax benefits until 2021 (i.e., when the partner’s 2020 tax return is filed), even when the AAR affects 2018 or 2019 tax years.  Fortunately, the IRS recognized that the delay resulting from the AAR process would be inconsistent with the intent of the CARES Act to provide immediate benefits to taxpayers.

Impact of Rev. Proc. 2020-23

Rev. Proc. 2020-23 allows a partnership (and a limited liability company treated as a partnership for tax purposes) to file amended IRS Forms 1065 and issue amended Schedules K-1 to partners for tax years beginning in 2018 or 2019 to take into account changes and adjustments related to the CARES Act and any other permissible tax attributes.  This relief is only available to a BBA partnership that filed its 2018 or 2019 tax return prior to April 8, 2020 and does not prevent a partnership from filing an AAR for such tax year if preferred. 

A partnership may file an amended return pursuant to Rev. Proc. 2020-23 to take into account CARES Act relief provisions and any tax attribute to which it is legally entitled in a 2018 or 2019 tax year.  For example, a partnership could adjust its allowable bonus depreciation due to the expansion of bonus depreciation to qualified improvement property under the CARES Act.  In addition, a partnership could adjust its allowable business interest expense deduction (or may withdraw a decision to elect out of the expense deduction limitations) in light of the CARES Act’s changes to Section 163(j) of the Internal Revenue Code.  An amended tax return may also take into account any other tax attributes to which the partnership is entitled by law (e.g., correcting prior allocations (which may be desirable if doing so would create net operating losses eligible for carryback under the CARES Act)).  The partners of the partnership can then take those adjustments into account in preparing their 2018 or 2019 amended tax returns to take advantage of the CARES Act tax provisions.

To take advantage of the Rev. Proc. 2020-23 relief, a partnership must file an amended IRS Form 1065 and issue amended Schedules K-1 to its partners before September 30, 2020.  The partnership should check the “Amended Return” box on its Form 1065 and write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return.  When the partnership provides amended Schedules K-1 to its partners, it must attach a statement to each Schedule K-1 with the same notation.  If the partnership previously filed an AAR for a tax year and would like to file an amended return for the same year, the partnership must use the items as adjusted in the AAR (instead of the items as reflected on the original return) when filing the amended return.

If a partnership would like to file an amended tax return pursuant to Rev. Proc. 2020-23 for a tax year but is currently under examination, the partnership must provide written notification to the revenue agent coordinating its examination (either prior to or contemporaneously with filing the amended return) that it seeks to amend its return for that year.  The partnership must provide the revenue agent with a copy of the amended return upon filing.

Rev. Proc. 2020-23 also provides guidance about a partnership’s obligation to provide information under the proposed regulations for Global Intangible Low-Taxed Income.

Please reach out to us with any questions about the CARES Act and its implications for partnerships.

Contacts:

Thomas W. Ford, Jr.
Houston
tford@HuntonAK.com
+1 713 220-4498

George C. Howell, III
Richmond
ghowell@HuntonAK.com
+1 804 788-8793

Alexander G. McGeoch
Dallas
amcgeoch@HuntonAK.com
+1 214 979-3041

Robert J. McNamara
Houston
rmcnamara@HuntonAK.com
+1 713 220-4413

Caitlin A. Sawyer
Austin
csawyer@HuntonAK.com
+1 512 542-5004

Kendal A. Sibley
Richmond
ksibley@HuntonAK.com
+1 804 788-8697