Partnerships subject to a new centralized auditing regime can more easily access tax benefits in the latest Covid-19 response package, under new IRS guidance.
Revenue Procedure 2020-23 allows partnerships to file amended returns to get newly available tax breaks in years for which they already filed, such as 2018 and 2019. Under tax code Section 6031, partnerships subject to this auditing regime are barred from amending the form given to their partners after it’s due, unless the Treasury Department allows, or the partnership’s representative files an Administrative Adjustment Request.
The latest stimulus law (Public Law 116-136), known as the CARES Act, allows brick-and-mortar businesses to fully take advantage of the 2017 tax overhaul’s full expensing provision starting in 2018. A drafting error previously excluded many of their renovation expenses. The relief package also loosened a restriction on debt interest payment deductions for 2019 and 2020.
“Without the option to file amended returns,” the IRS said, partnerships subject to the centralized auditing rules that already filed a Form 1065 for 2018, 2019, and, in some cases, 2020 “generally are unable to take advantage of the CARES Act relief for partnerships.”
Partnerships can elect out of the auditing rules, which are meant to streamline the process for the IRS, if they have fewer than 100 partners and all the partners fit into certain eligible categories.
The guidance doesn’t allow real estate partnerships that elected out of the interest write-off limit to go back and reverse their elections, tax professionals said. It allows them to make the election, but opting out may be far more attractive now, with the interest deduction limit temporarily loosened and more opportunities to take advantage of full expensing.
Glenn Dance, a former IRS official and now a partner at Holthouse Carlin & Van Trigt LLP in Irvine, Calif., wrote a letter to Treasury and IRS in March asking for this permission to amend returns. He referenced the CARES Act’s rollback of limitations on use of losses as tax breaks for pass-through businesses such as partnerships, in addition to the full expensing and interest write-off restriction changes.
“In many instances, the ability of taxpayers to ‘monetize’ the associated tax benefits will require the filing of amended tax returns,” Dance wrote. “We urge you to provide guidance, as quickly as possible, allowing such partnerships to file amended tax returns in situations in which prior year returns reflect, or would have reflected, partnership items, the amount of which may be affected by provisions contained in the CARES Act.”
The Real Estate Roundtable sent a similar letter dated April 4.
The guidance still allows partnerships to take the Administrative Adjustment Request route, which can be a simpler process than filing an amended return, which requires all partners to amend their returns, Dance told Bloomberg Tax. That approach can take longer to yield results, so amending is the best chance for partnerships to get the CARES Act benefits more quickly, he said.
This is also helpful if partnerships aren’t under certain contractual obligations to former partners, as in some narrow circumstances the Administrative Adjustment Request route only affects current partners, said Bahar Schippel, a partner at Snell & Wilmer in Phoenix. Former partners who left in 2019, for instance, could reap the benefits if the partnership amended its 2018 return.
The guidance also isn’t limited to the stimulus package. Language in the revenue procedure allows for changes to unrelated issues as well, Schippel and Dance said. But it’s unclear whether partnerships can use the guidance to make other, unrelated changes to their past returns, Schippel told Bloomberg Tax.
“If you found a mistake or something and you want to take a better position, this allows you to do that,” she said. “Certainly if you were taking advantage of a CARES Act change, you could bundle it up with that. But if you weren’t, it wasn’t obvious to me that you could.”