The IRS has just issued Revenue Procedure 2020-23. It intends to address a problem caused by some tax changes under the CARES Act for partnerships. It provides relief permitting partnerships to obtain the benefit of the new tax provision more quickly.

What is the CARES Act?

The CARES Act includes a number of new tax deductions.They involve the ability to immediately write-off the cost of Qualified Improvement Property (QIP), retroactively to 2018. The problem for partnerships was the manner in which they could receive tax refunds related to a prior year deduction.

Under the Bipartisan Budget Act of 2015, partnerships became subject to Centralized Partnership Audit Regime (CPAR) rules. These rules intend to permit the IRS to audit a partnership at the entity level. Primarily to avoid having to address individual partners. Small partnerships can elect out of these rules, but others cannot:

  • Partnerships or trusts with certain types of partners.
  • Those with more than 100 partners.

The CPAR rules provide that a covered partnership (BBA partnership) cannot file an amended return for a prior period but must file an Administrative Adjustment Request (AAR). If the AAR reflects a reduction of income for such prior year, this reduction remains a partnership item and carries forward as a deduction to a later year of the entity. This rule would effectively cause the deduction to carry over to the 2020 tax year in many situations, delaying the benefit of the deduction until its partners filed their separate 2020 tax returns in 2021. This rule frustrates the purpose of the CARES Act to get the benefit of cash refunds to taxpayers expeditiously.

An “eligible BBA partnership” is one that has filed its partnership income tax return and furnished all required Schedules K-1 to its partners. This applies to  taxable years beginning in 2018 or 2019 (prior to the issuance of this Revenue Procedure). Eligible partnerships have the option of filing amended returns and providing corrected Schedules K-1 to its partners before September 30, 2020. The amended returns aren’t limited to the changes under the CARES Act. However, they can include any other tax attributes to which the partnership is entitled.

How To Obtain Tax Credit

  • The partnership should file a Form 1065 Partnership Income Tax Return with the Amended Box checked.
  • The BBA partnership must write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return
  • Attach a similar statement with each Schedule K-1 sent to partners.

The procedure also considers the situation where a BBA partnership has previously filed an AAR for the tax year. It allows filing an amended return using, as a starting point, the information as adjusted in the AAR.

A BBA partnership under examination is also allowed to use this procedure. However, the IRS requires the partnership to give written notice to the revenue agent coordinating the examination indicating its intention to use this amended return. Additionally, the revenue agent must also be provided with a copy of the amended return.

This is a significant relief provision which will assist partners in obtaining the benefit of CARES Act deductions more quickly while we are waiting for more information on the implementation.

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