Administrative Relief: IRS Will Allow Partnerships To File Amended Returns and Real Property Businesses To Undo Interest Expense Elections

Alerts / April 13, 2020

As promised, the IRS has begun to issue guidance assisting taxpayers in applying the retroactive aspects of the CARES Act. To address the disconnect between certain partnerships’ ability to file amended returns and the CARES Act’s policy of providing immediate tax benefits, the IRS has issued Revenue Procedure 2020-23. In lieu of filing an administrative adjustment request (AAR) with respect to taxable years beginning in 2018 or 2019, the guidance allows partnerships to amend Form 1065 and Schedules K-1 to include both CARES Act benefits and other tax attributes. To assist real property and farming businesses that may regret electing out, or failing to elect out, of the interest expense limitation under Section 163(j), Revenue Procedure 2020-22 allows taxpayers to revoke or make a late Section 163(j)(7)(B) election by filing an amended return. For a complete discussion of the CARES Act revisions to the interest expense limitation, see our alert President Signs $2 Trillion CARES Act With Significant Tax and Workforce Relief for Businesses and Individuals.

Although the CARES Act provides immediate, retroactive tax relief with respect to taxable years ending in 2018, 2019, and 2020 by temporarily increasing the business interest expense deduction limitation and retroactively permitting bonus depreciation for qualified improvement property (among other provisions), this relief generally depends on a taxpayer’s ability to file an amended tax return. This left many partnerships out in the cold: A partnership subject to the centralized partnership audit rules (BBA Partnership) generally is unable to amend its return and instead must file an AAR, a process which could delay partners’ receipt of benefits or even create a nonrefundable benefit which they may be unable to utilize. The guidance offers an equitable solution to this problem by permitting partnerships to amend 2018 and 2019 returns which were originally filed prior to April 8, 2020. Further, partnerships that elected out of the interest expense limitation may withdraw this election by filing a statement with their amended returns. (Revenue Procedure 2020-22 also provides procedures for other section 163(j)-related elections as well as for taxpayers other than BBA Partnerships.)

Amended partnership returns must be filed before Sept. 30, 2020. Special rules apply if a partnership’s tax returns for the 2018 or 2019 taxable year are already under IRS exam, the partnership has filed an AAR with respect to its 2018 or 2019 taxable year, or the partnership has applied proposed regulations Section 1.951A-5 pursuant to Notice 2019-46 (relating to GILTI inclusion amounts). Finally, the IRS has advised all taxpayers to delay filing amended returns pending the release of additional guidance regarding administration of CARES Act provisions; partnerships with qualified improvement property are advised to stay tuned.

Authorship Credit: Michelle M. Hervey and Morgan W. Holtman

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