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Amending Partnership Returns

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Amending Partnership Returns

The heading of this note is somewhat misleading, because as the result of changes made by the Bipartisan Budget Act of 2015, you can no longer amend a partnership return (but for a limited duration exception discussed below).  If a change needs to be made to a partnership return because the adjustment will benefit the partners, the partnership must file an Administrative Adjustment Request (AAR).

Generally, an AAR is not like an amended return.  It gives the reviewed year partner (the partner in a year that the adjustment relates to) a tax credit, but that credit can only be used in the year that AAR is filed.  For example, if an adjustment is to be made this year to a 2018 partnership return, the partnership would file an AAR in 2020.  The 2018 partners would be entitled to a credit which they would apply against their 2020 income tax liability.  If the partner has little or no income in 2020 (or perhaps even a loss) he will receive little or no benefit from the credit.  The credit is not refundable and cannot be carried to a different year.  Finally, the result may be the loss of future depreciation or additional gain on the sale of an asset whose basis is reduced because of the adjustment and the deduction that had never yielded a benefit to the taxpayer.

This issue has recently come to light because of the CARES Act which corrected the   depreciation rules applicable to Qualified Improvement Property (QIP).  QIP was intended to be depreciable over 15 years and eligible for 100% bonus depreciation but because of a drafting error, QIP was given a 39-year recovery period and not eligible for bonus depreciation.  The CARES Act fixed this mistake in 2020 and mandates the 15-year recovery period.  Partnerships that placed QIP in service in 2018 or 2019 could also be eligible for 100% bonus depreciation.  However, if an AAR is filed in 2020, the 2018 and 2019 partners will receive a tax credit in 2020 and that will only be a benefit if they have taxable income in 2020 sufficient to absorb the credit.

Because of this problem, the IRS has provided temporary relief in Rev. Proc. 2020-23.  That Revenue Procedure allows a partnership in certain circumstances to file an amended return for 2018 and 2019, provided those returns were filed before April 8, 2020.  Also, the amended returns must be filed before September 30, 2020.  This would allow the affected partners to receive a tax benefit in the year they should have received the tax benefit and is a departure, and a limited departure from the existing rules for adjustments to partnership returns.

There is another approach and that is for the partnership to obtain the benefit of an adjustment by changing its accounting method.  That is a going forward approach.  Where an AAR would affect the reviewed year partners, change in accounting method would generally effect those who are partners when the change is made so there may be a difference if there is a change in the ownership in the partnership after the reviewed year.

There has been a great deal written about this recently, principally because of the correction for the depreciation allowable for QIP.  However, except for Rev. Proc. 2020-23 the method for correcting partnership returns to benefit partners is not done by amending the return but through the AAR process.

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