Updated as of April 24, 2020
The IRS provides partnership filing relief for taxpayers that may want to amend their prior year Form 1065.
Under the Bipartisan Budget Act of 2015, any partnership whose partners included certain trusts, disregarded entities, or other partnerships was unable to elect out of the centralized partnership audit regime. As a result, they were unable to amend partnership returns, and were instead required to file a Form 8082 Administrative Adjustment Request (AAR) to report any changes to a previously filed return. The partners would then reflect these changes on their individual income tax return in the year the AAR was filed, unless the partnership agreed to pay entity level imputed taxes. This is a much more difficult and complicated process than filing an Amended Form 1065.
Thankfully, on April 8, 2020, the IRS granted relief to taxpayers, issuing Revenue Procedure 2020-23, which allows partnerships to amend their 2018 and/or 2019 income tax returns. To be eligible for this relief, the partnership must have previously filed a Form 1065 and furnished all required Schedule K-1’s to the investors for the 2018 and 2019 tax years. There is a short window of time in which to file an amended return. Taxpayers only have until September 30, 2020 to file these amended returns and furnish amended K-1s to the partners in order to take advantage of this relief.
These amended returns may include provisions of the CARES Act, along with any other tax attributes available to the partnership under law. Prior to this relief, many taxpayers may not have had the ability to claim these additional deductions currently. Taxpayers would only have been able to reflect the AAR changes on their 2020 income tax returns. This taxpayer-favorable Revenue Procedure may allow taxpayers to accelerate cash flow by claiming additional deductions and therefore increasing tax refunds.
Some of the recent tax law changes that you may consider amending for your return include, but are not limited to:
- Interest limitations subject to 50% adjusted taxable income limitation vs. 30% (for 2019)
- Qualified Improvement Property (QIP) eligible for 15-year class life
- Bonus depreciation
- Section 45L tax credit
- Section 179D tax deduction
- The R&D tax credit
- Section 199A deduction
Taxpayers should keep in mind that often when you make a correction or change for one item of the law, other provisions of the law come into play. For example, if you amend your return to claim bonus depreciation, you will lower your adjusted taxable income, which may cause your interest expense deduction to become limited.
Typically, the way to correct a class life change for depreciation, including the CARES Act change that allowed for QIP to be 15-year property in lieu of the previous 39-year property, is to file Form 3115 and catch-up on all missed depreciation through a Method # 7 change in accounting method. Note the QIP property classification encompasses three previous classifications for non-residential property: Qualified Leasehold Improvements, Qualified Restaurant Property and Qualified Retail Improvement Property.
Under this Revenue Procedure, however, taxpayers may have the option to amend (under the one year rule) or File Form 3115. The CARES Act made changes to the business interest limitations that could affect decisions made in prior years.
When taxpayers interest expense was limited under 163j, an electing real property or farming business had the option to elect out of those interest limitation rules. In doing so, they were required to use the ADS class life for real property. This election would preclude the availability of bonus depreciation on qualified improvement property. ADS for real property is not eligible for bonus depreciation. The ADS class life for real property is 40 years for commercial real estate, 30 years for residential real estate and 20 years for qualified improvement property. While QIP property of 15 years qualifies for bonus, it would not qualify when an electing real property trade or business elected out of 163j.
The IRS recently issued guidance providing that electing real property trades and business the ability to make or withdraw late elections under the new 50% interest limitations under 163j. This offers relief for many taxpayers.
There is still uncertainty as to whether taxpayers will be allowed to revoke a previously made real property trade or business election for the interest limitation purposes. This election would preclude the availability of bonus depreciation on QIP.
As we await further guidance on how to implement the various changes in the tax law, we can rely on Rev. Proc. 2020-23 and file amended returns. Please reach out to us with any questions.