New IRS Guidance allows Certain BBA Partnerships to File Amended Returns in lieu of AARs
The Internal Revenue Service (IRS) recently released Revenue Procedure (Rev. Proc.) 2021-29 to allow eligible partnerships under the BBA regime to amend partnership returns for the 2018 through 2020 tax years instead of having to file administrative adjustment requests (AARs). This creates an exception to the normal rule prohibiting a BBA partnership from amending the information that it must furnish to the partners (i.e., Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc.) after the due date of Form 1065, U.S. Return of Partnership Income.
“BBA partnerships” are those subject to the centralized partnership audit regime under §§6221 through 6241 of the Internal Revenue Code (IRC). This audit regime came into effect in 2018 and generally determines, assesses, and collects tax at the partnership rather than partner level.
On December 27, 2020, Congress enacted §202 of the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) as part of the Consolidated Appropriations Act, 2021. Section 202 retroactively allows a change to a 30-year recovery period under the alternative depreciation system (ADS) for residential rental property placed in service prior to 2018 held by an “electing real property trade or business.”
An “electing real property trade or business” means a business choosing to elect out of the business interest limitation under IRC §163(j). Businesses allowed to make this election include “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” However, such electing businesses must use the slower ADS system for depreciating residential rental property.
Rev. Proc. 2021-29 gives BBA partnerships the option to file an amended return in lieu of an AAR when incorporating the tax changes under §202 of TCDTRA. However, it does not prevent a partnership from filing an AAR instead if it so chooses.
Eligible partnerships must be subject to the BBA, have filed a Form 1065, and furnished all required Schedules K-1 for tax years beginning in 2018, 2019, and 2020 before the release of Rev. Proc. 2021-29. The partnership must also meet the following requirements:
- The partnership must file the amended partnership return and furnish corresponding Schedules K-1 prior to October 15, 2021.
- The partnership must fall into one of the following two categories:
- Be within the scope of Proc. 2021-28 (provides procedures for a taxpayer changing its method of computing depreciation in order to comply with §202 of TCDTRA). These partnerships must own residential rental property and choose to change their method of depreciation for such property by filing an amended Form 1065.
- Fall within the scope of §3.01(1) of Proc. 2020-22 relating to making a late election for a real property trade or business under IRC §163 by filing an amended Form 1065.
Rules and Procedures for Filing an Amended Return
A BBA partnership must file a new Form 1065 for either the 2018, 2019, or 2020 tax year with the “Amended Return” box checked and furnish corresponding amended Schedules K-1. The amended return should include the words “FILED PURSUANT TO REV PROC 2021-29” at the top and include such statement on each Schedule K-1 furnished to the partners. The partnership can electronically file the amended return.
Note that, although the amended return must include changes related to §202 of the TCDTRA, it can include other changes as well.
For returns under examination, the partnership must send a written notice to the revenue agent coordinating the examination stating that the partnership will amend the Form 1065 pursuant to Rev. Proc. 2021-29 prior to or at the time of filing the amended return. The partnership must also provide the revenue agent with a copy of the amended return upon filing.
For partnerships that have already filed an AAR for the same tax year, the partnership should use the items as adjusted on the AAR, where applicable, in lieu of any reporting from the originally filed partnership return. The amended return replaces any prior return, including any AAR filed by the partnership.
For more information on Rev. Proc. 2021-29 and how it may impact your situation please contact one of our experienced CPAs or tax professionals at Kurtz & Company, P.C.
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Author Of this post: Daniel Quintana