IRS Provides More Welcome Relief to Certain BBA Partnerships—but Only Until October 15, 2021
June 25, 2021
By Miri Forster
It has been approximately two years since partnerships first filed income tax returns under the Centralized Partnership Audit Regime (“BBA”). Under the BBA, amended Schedule K-1s are eliminated and partnerships are required to file an Administrative Adjustment Request (“AAR”) under IRC Sec. 6227 to correct a previously filed partnership return. In response to Covid-19 and the CARES Act, the IRS issued Rev. Proc. 2020-23 to allow certain BBA partnerships to first stray from the BBA AAR procedures. Under Rev. Proc. 2020-23, eligible partnerships were permitted to file an amended partnership return for 2018 or 2019 and issue amended Schedule K-1s to more promptly benefit from relief intended by the CARES Act. (See The IRS Provides Welcome Relief to Partnerships Claiming Benefits under the CARES Act)) Now in 2021, the IRS has released another temporary fix to the BBA AAR procedures. Under Rev. Proc. 2021-29, eligible partnerships have until October 15, 2021 to again file an amended partnership return and amended Schedule K-1s to more quickly account for certain changes enacted by the Consolidated Appropriations Act. (See The Consolidated Appropriations Act, 2021 Payroll Protection Program Loan.)
Rev. Proc. 2021-29 provides the following BBA partnerships with the option to file an amended Form 1065 and amended Schedule K-1s for tax years 2018, 2019 or 2020:
- BBA partnerships that filed original Forms 1065 and all required Schedules K-1 for 2018, 2019 or 2020 prior to June 17, 2020; and
- that have residential rental property that was placed in service before January 1, 2018, that is held by an electing real property trade or business, and that wishes to retroactively apply a 30- year recovery period under the alternative depreciation system (ADS) in IRC Sec. 168(g) (in place of the 40-year period under prior law), or
- that choose to make a late election under IRC Sec. 163(j)(7) to be treated as an electing real property trade or business and no longer be subject to an interest expense limitation.
Rev. Proc. 2021-29 was issued simultaneously with Rev. Proc. 2021-28, which explains how a taxpayer with residential rental property can retroactively change its method of depreciation or general asset account treatment for such property to comply with changes enacted by the Consolidated Appropriations Act. For more details on Rev. Proc. 2021-28 see New IRS Guidance for Depreciation Changes to Certain Residential Rental Property.
Will Congress Make Changes to the BBA?
Does the latest deviation from the BBA AAR rules reflect an accommodating IRS? Absolutely. Does it also highlight the practical difficulties with applying the Centralized Partnership Audit Regime in certain situations? Yes. The Biden Administration has acknowledged another challenge with the BBA’s everyday application. Under the BBA, reductions in tax liability are only permitted to decrease a partner’s tax liability to zero. As a result, any excess does not result in an overpayment that can be refunded.
To ensure that partners in a BBA partnership receive the full benefit of any reductions in tax resulting from partnership adjustments, the Administration has proposed amendments to IRC Secs. 6226 and 6401. These amendments would allow a net negative change in tax that exceeds the income tax liability of a partner in the reporting year to be considered an overpayment under IRC Sec. 6401 that may be refunded. That would be a welcome change for BBA partnerships and their investors.