The IRS Provides Welcome Relief to Partnerships Claiming Benefits under the CARES Act
April 10, 2020
By Miri Forster
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide immediate relief to individuals, partnerships and corporations alike in response to the extraordinary impact of the coronavirus (COVID-19) pandemic. To claim benefits from the CARES Act, some taxpayers will be required to file amended returns for 2018 (and 2019, if already filed). For partnerships, the centralized partnership audit regime (as enacted by the Bipartisan Budget Act of 2015, or ““BBA”), effective for tax years beginning after December 31, 2017, introduced new procedures for correcting previously filed partnership tax returns, which may prevent BBA partnerships (and their partners) from attaining the immediate benefits intended by the CARES Act. This may be especially relevant to partnerships wishing to claim bonus depreciation as a result of technical corrections to the qualified improvement property rules. To address these challenges, the IRS has issued Revenue Procedure 2020-23, which provides “eligible BBA partnerships” with the option to file an amended partnership return for 2018 or 2019 (the “Applicable Years”) and issue amended Schedules K-1 to allow partnerships to more promptly benefit from the relief intended by the CARES Act.
Partnerships and the BBA
Under the BBA, tax is determined, assessed and collected at the partnership level. The regime shifts the economic impact of any partnership adjustment to the entity level and is a significant departure from prior partnership procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The BBA applies to all partnerships required to file Form 1065 (U.S. Return of Partnership Income) unless the partnership makes a valid election out of the BBA pursuant to Section 6221(b) and the accompanying Treasury Regulations.
Generally, partnerships eligible to elect out of the BBA must only have partners that are either individuals, an estate of a deceased partner, S corporations, C corporations or foreign entities that would be classified as a C corporation if domestic. If eligible, the partnership makes the election out of the BBA on an annual basis on a timely filed partnership return (including extensions). Disregarded entities, trusts, nominees and partnerships are not considered eligible partners. Therefore, a partnership with even one partnership-partner remains subject to the BBA and is not permitted to elect out of the new regime.
Under the BBA, a partnership is required to file an administrative adjustment request (“AAR”) to make adjustments to a previously filed Form 1065 (U.S. Return of Partnership Income). Unlike under TEFRA, the filing of an AAR under the BBA re-starts the statute of limitations for making adjustments. The BBA also eliminates the use of amended Schedules K-1 (Partner's Share of Income, Deductions, Credits) and replaces it with new tax forms. Specifically, these new forms are Form 8985, Pass-Through Statement--Transmittal/Partnership Adjustment Tracking Report, and Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s)). When filing an AAR, the partnership must determine if the partnership adjustment results in an imputed underpayment for the year at issue. If there is an imputed underpayment, the partnership can either pay the tax when the AAR is filed or elect to push out the AAR adjustments to the partners in the partnership during the year at issue (“reviewed year partners”). If the adjustment results in an overpayment, which is the more likely scenario under the CARES Act, the partnership is required to push out the adjustments to its reviewed year partners. The reviewed year partners then take those adjustments into account in the year in which the adjustments are received from the partnership. As an example, under the BBA, and assuming a partnership files an AAR in 2020 for the 2018 tax year, any adjustment pushed out to its 2018 reviewed year partners is not reflected until the partner files its 2020 return, sometime in 2021. This result negates the immediate benefits envisioned by the CARES Act.
To allow partnerships (and their investors) to obtain prompt relief, Revenue Procedure 2020-23 provides eligible BBA partnerships with the option to file amended partnership returns for years 2018 and 2019 and to issue amended Schedules K-1 to its partners under certain circumstances. Eligible BBA partnerships are those partnerships that have already filed Forms 1065 and furnished Schedule K-1s for tax years beginning in 2018 or 2019 prior to issuance of the revenue procedure. With amended Schedules K-1, partners can take advantage of the benefits afforded by the CARES Act without waiting until the filing of their 2020 return, as noted in the above example.
BBA partnerships that apply the revenue procedure must file its 2018 or 2019 Form 1065 (with the “Amended Return” box checked) and furnish corresponding Schedules K-1 by September 30, 2020. The amended partnership return should clearly reference “Filed Pursuant to RP 2020-23” at the top of the amended return along with a statement with the same notation attached to each Schedule K-1 issued to its partners. BBA partnerships may file amended returns either electronically or by mail, but electronic filing may result in faster processing times. These 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. The option to file an amended Form 1065 for the Applicable Years under the revenue procedure should be considered alongside considerations for filing Form 3115 (Application for Change in Accounting Method) to request an automatic change of accounting method with respect to qualified improvement property. Partnerships that choose not to follow the revenue procedure, or for amended returns with respect to the Applicable Years filed after September 30, 2020, the BBA requires corrections to previously filed partnership returns to follow the AAR procedures described above.
BBA partnerships that originally relied on proposed Global Intangible Low-Tax Income (“GILTI”) regulations under Regulation Section 1.951A-5 may continue to use the proposed regulations when filing an amended partnership return under the revenue procedure so long as the partnership furnishes amended Schedule K-1s that are consistent with the proposed regulations and provides appropriate notification to its partners as set forth in Notice 2019-46 (which provides guidance to domestic partnerships and S corporations that wish to apply proposed GILTI regulations for tax years ending before June 22, 2019) . Nothing in the Revenue Procedure changes a partnership’s obligation to provide information required by Notice 2019-46, Section 5.02. If the partnership applies the final GILTI regulations under Regulation Section 1.951A-1(e), any amended Schedule K-1s issued under the Revenue Procedure must be consistent with the final regulations.
Finally, the revenue procedure provides special rules for BBA partnerships that are currently under examination for 2018 or 2019 or have previously filed an AAR for those years.
EisnerAmper will continue to keep you up to date on relevant new developments regarding the tax implications of the coronavirus pandemic.