On April 8, 2020, Treasury issued Revenue Procedure 2020-23 allowing eligible partnerships to file amended federal income tax returns for tax years beginning in 2018 and 2019 so that such partnerships can immediately benefit from the COVID-19 relief provided by the CARES Act passed on March 27, 2020. This relief is particularly beneficial for real estate partnerships that incurred “qualified improvement property” expenditures during their 2018 and 2019 tax years because the CARES Act corrects the so called “retail glitch” made by the Tax Cuts and Jobs Act (TCJA) in 2017, and now allows such expenditures to be immediately expensed as bonus depreciation.
Tax Compliance Background
For tax years beginning after December 31, 2017, many partnerships became subject to the Bipartisan Budget Act (BBA), which prohibits partnerships from amending partnership income tax returns unless specifically permitted by Treasury. Instead of filing amended income tax returns, partnerships subject to the BBA must file Administrative Adjustment Requests (AARs) which would provide the partnership with adjustments on its current year tax return and not the tax year at issue. Therefore, any partnership looking to take advantage of relief provided by the CARES Act would not receive any benefit until it files its 2020 tax return, which would not be until 2021.
Retail Glitch Correction under the CARES Act
The TCJA erroneously modified the depreciable life of qualified improvement property (i.e., improvements, subject to limited exceptions, to the interior of nonresidential real property made after the building was placed into service) so that it was 39 years and, as a result, such improvement expenditures were not eligible for immediate expensing as bonus depreciation.
The CARES Act corrects the depreciable life for qualified improvement property by including qualified improvement property as “15-year property.” This correction allows qualified improvement property expenditures to be immediately expensed as bonus depreciation. This correction is effective retroactively and applies to property placed in service after September 27, 2017. This fix may create tax refunds for real estate partnerships and provide much needed liquidity.
Revenue Procedure 2020-23
Revenue Procedure 2020-23 allows partnerships subject to the BBA rules to immediately file amended income tax returns for tax years beginning in 2018 and 2019 that were filed prior to the issuance of this Revenue Procedure instead of having to file an AAR in 2021 (for the 2020 tax year). The partnerships must file any amended partnership income tax returns and corresponding Schedule K-1s prior to September 30, 2020. The partners of the partnership would need to file an amended tax return or refund claim upon receipt of the amended Schedule K-1s.
Any benefits received from amending applicable returns (e.g., as a result of bonus depreciation for qualified improvement property) will become immediately available and the taxpayers will not have to wait until 2021 to claim the benefit. The IRS has stated that it will soon issue guidance on how individuals can make refund claims for benefits under the CARES Act.
If you have any questions about this legal update, please do not hesitate to reach out to the authors or any of your contact(s) at Morris, Manning & Martin, LLP.