In these uncertain and unprecedented times dealing with the international pandemic COVID-19, one thing that we are seeing for certain are rapid changes and updates. In many cases, guidance given just the day before is quickly out of date. On April 7th, Capstan released a blog entitled “How to Implement QIP under the CARES Act: Amended Return or Form 3115?” Just one day later the IRS issued amended return procedures to cure QIP through Rev. Proc. 2020-23 which applies to BBA Partnerships (partnerships subject to centralized audit procedures under the Bipartisan Budget Act of 2015). (Download full version here of Rev. Proc. 2020-23 ).
As we have written, the CARES Act corrected the Qualified Improvement Property (QIP) drafting error from the Tax Cuts and Jobs Act and now allows our clients to retroactively take QIP (1) as 15-year MACRS property and receive 100% bonus or (2) 20-yr ADS with no bonus if you elected out the 163(j) business interest limitation provisions. We are working hard at Capstan to proactively update all client reports that were subject to the error in Qualified Improvement Property (QIP) from 1/1/2018 on.
As with any tax law changes, we encourage you to reach out to your tax professional about this change and how it will impact your specific circumstances to ensure you are using the correct methodology in picking up QIP now that the drafting error is fixed. This is achieved through either amended returns or using the 3115 Change in Accounting Method for the current year. In some cases, these depreciation deductions will have a significant impact on offsetting income from 2018 and 2019 and generating much needed cash flow.
Summarized below is a very brief overview of Rev. Proc. 2020-23 which applies to BBA Partnerships:
Option to file amended return
BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for the taxable years beginning in 2018 or 2019 prior to the issuance of this revenue procedure may file amended partnership returns and furnish corresponding Schedules K-1 before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.
To take advantage of the option to file an amended return provided by this revenue procedure, a BBA partnership must file a Form 1065 (with the “Amended Return” box checked) and furnish corresponding amended Schedules K-1. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return and attach a statement with each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail but filing electronically may allow for faster processing of the amended return.
Special rule for BBA partnerships whose returns are under examination
If a BBA partnership is currently under examination for a taxable year beginning in 2018 or 2019 and wishes to take advantage of the option to file an amended return, the partnership may only do so if the partnership sends notice to the revenue agent coordinating the partnership’s examination in writing that the partnership seeks to use the amended return option described in this revenue procedure prior to or contemporaneously with filing the amended return. The partnership must also provide the revenue agent with a copy of the amended return upon filing.
Special rule for BBA partnerships who have previously filed an AAR
If a BBA partnership has previously filed an Administrative Adjustment Request (AAR) and wishes to file an amended return pursuant to this revenue procedure for the same taxable year, the partnership should use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return.
Coordination with Proposed GILTI Regulations
A partnership may continue to apply the rules of proposed §1.951A-5 for purposes of filing an amended Form 1065 for such taxable years under this revenue procedure if the partnership furnishes amended Schedules K-1 consistent with those proposed regulations. The partnership must provide appropriate notifications to its partners as required by Notice 2019-46 within the period described in the revenue procedure.
The Capstan team is here to help you in any way we can. We will be happy to revisit any reports that might be immediately impacted by the CARES Act, keeping in mind that the QIP change is retroactive, and we are ready to answer any questions about how the new legislation might affect you.