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April 15, 2020 | Legal Advisory

On April 8, 2020, the Internal Revenue Service (“IRS”) released Rev. Proc. 2020-23. This Revenue Procedure allows tax partnerships to realize cash benefits of amendments to the Internal Revenue Code under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress on March 27, 2020. The Revenue Procedure accomplishes this result by permitting tax partnerships to file amended tax returns and amended Schedule K-1s in lieu of administrative adjustment requests. Without this Revenue Procedure, partnerships would not realize the cash benefits of the CARES Act until 2021. By filing amended returns, those cash benefits will be available much sooner.

In 2018, a new partnership tax audit regime (the “Partnership Audit Rules”) became effective. Under this regime, a partnership wishing to adjust items on its income tax return must make an administrative adjustment request (“AAR”). If the AAR does not reflect an imputed underpayment (a new concept under Subchapter 63C), the partnership must issue AAR statements to its partners. The benefits of the adjustments, if any, are taken into account in the tax year in which the adjustments are made.

On March 27, 2020, the CARES Act amended certain business tax provisions, including bonus depreciation for qualified improvement property effective in 2017, increased business interest deduction caps, increased business loss allowance, and increased use of net operating loss carryforwards. These amendments were designed to provide businesses with opportunities to receive refunds for prior year returns. These refunds further Congress’ goal of increasing cash available to businesses during the country’s response to COVID-19.

Under the Partnership Audit Rules, adjustments for the 2018 and 2019 tax years would not benefit partners of tax partnerships until they file returns for the 2020 tax year. This result conflicts with the goal of providing businesses immediate cash for the economic hardship precipitated by public health responses to COVID-19.

Revenue Procedure 2020-23 overrides the Partnership Audit Rules. Revenue Procedure 2020-23 allows tax partnerships to amend tax returns and Schedule K-1s as they did before the Partnership Audit Rules became effective. As a consequence, the partnership will not file an AAR, and the partners will receive revised K-1s and not AAR statements. Most importantly, the partners may amend their own returns for 2018 and 2019 tax years to claim immediate refunds that arise from beneficial adjustments.

The Revenue Procedure only applies to tax partnerships subject to the Partnership Audit Rules. The Revenue Procedure will not apply to a partnership that elected out of the Partnership Audit Rules. Further, the Revenue Procedure only applies to partnerships that filed Form 1065, Return of Partnership Income, and furnished Schedule K-1s to their partners for tax years beginning in 2018 and 2019 prior to April 8, 2020.

A filing partnership must check the “Amended Return” box on Form 1065 and add “FILED PURSUANT TO REV. PROC. 2020-23” on the top of the amended tax return. Additionally, the partnership must issue new Schedule K-1s to its partners, which should include a statement that the return was amended and filed pursuant to Rev. Proc. 2020-23.

Partnerships eligible to file an amended Form 1065 may adjust items in response to the CARES Act as well as for any other tax attributes to which the partnership is entitled by law. We encourage all eligible partnerships to explore the benefits of filing amended returns under this Revenue Procedure. Please contact us if you have any questions about filing amended returns under this Revenue Procedure.

This advisory was prepared by Nutter’s Tax Department. If you would like additional information, please contact your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.