COVID-19: A Resource Guide

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Retrospective tax break for partnerships

Apr 9, 2020

Updated April 17, 2020 4:00 p.m. (CDT)

The IRS today issued Revenue Procedure 20-25.pdf which provides guidance for taxpayers seeking to change their depreciation for Qualified Improvement Property (QIP) placed in service after December 21, 2017.

On April 8, 2020, the IRS published Revenue Procedure 2020-23 (Rev. Proc. 2020-23) that provides partnerships a limited opportunity to amend their 2018 and 2019 tax returns and issue amended Schedule K-1s to partners to take advantage of the retrospective Coronavirus Aid, Relief, and Economic Security (CARES) Act changes. As discussed below, this will allow partnerships to amend their tax returns to reflect the “fix” for the qualified improvement property which may be significant for many taxpayers! The CARES Act also eased interest deduction limitations and made other modifications. Partnerships can, for a limited time, amend their returns and send Schedule K-1s to their partners who can in turn file amended returns (and even carry back losses) claiming refunds. While partners filing amended returns electronically should receive refunds more quickly, paper amendments are permitted.

The centralized partnership regime requires a partnership to file an administrative adjustment request (AAR) rather than simply filing an amended return. The AAR only provides partners relief on the current taxable year’s federal income tax return, which in the present case generally would not be filed until 2021. This would deny partners the prompt tax benefits the CARES Act intended to provide. Now, partnerships can amend 2018 and 2019 tax returns under the circumstances discussed below and take into account the CARES Act changes and any other tax attributes to which the partnership is entitled by law. This permits the partners to file amended returns for refunds.

The CARES Act provides not only stimulus and relief for struggling businesses and industries during the COVID-19 crisis, but also makes technical corrections left undone after the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). TCJA erroneously excluded qualified improvement property, which generally includes improvements made to the interior of a non-residential building such as retail and restaurant remodels, from 100 percent bonus depreciation and stuck such improvements with 39-year depreciation. The CARES Act corrects this error, known as the “retail glitch,” allowing taxpayers to take 100 percent bonus depreciation on qualified improvement property retroactively for past tax years and going forward. If bonus depreciation is not taken, the property may be depreciated over 15 years.

The Code’s centralized partnership audit procedures apply to all partnerships unable to elect out of such rules after December 31, 2017. These audit procedures generally prohibit a partnership from amending its tax returns and issuing amended Schedule K-1s. Contrary to the general rule, Rev. Proc. 2020-23 allows partnerships to file amended partnership returns before September 30, 2020 and issue amended Schedule K-1s, provided that:

  1. An eligible partnership must have filed Forms 1065 and furnished Schedule K-1s to its partners prior to April 8, 2020 for the partnership taxable years beginning in 2018 or 2019; and
  2. The partnership files an amended Form 1065 (rather than an AAR) and furnishes Schedule K-1s to its partners for a taxable year beginning in 2018 or 2019 by September 30, 2020; 
  3. The Partnership follows the procedure for filing an amended return provided by Section 3 of Rev. Proc. 2020-23 including checking the amended return box and writing “FILED PURSUANT TO REV. PROC. 2020-23” on the top of the amended return and attach a statement with each Schedule K-1 sent to its partners with the same notation.          

Special rules apply for partnerships that are already under examination for the relevant taxable periods or have previously filed an AAR for the same taxable year.

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