Does Extending Your Partnership’s Tax Return Each Year Make Sense? YES!
In 2015, the Bipartisan Budget Act (BBA) changed how partnerships adjust previously filed tax returns. Effective for tax years starting after Dec. 31, 2017, it centralized partnership audit rules. Provided your partnership didn’t elect out, it’s subject to BBA rules.
This may work in your company’s favor in filing an extension for your tax return both this year and in the future. By extending Form 1065, U.S. Return of Partnership Income, the due date is moved to Sept. 15, giving you six months of flexibility in correcting the tax year without having to follow the new audit rules.
BBA Partnership Audit Rules
The BBA replaced partnership procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (TERFA). It was impacted by amendments under the Protecting Americans from Tax Hikes Act of 2015 (PATH) and sections 201 to 207 of Tax Technical Corrections Act of 2018 (TTCA).
As amended, the BBA adjusts, assesses and collects related taxes at the partnership level instead of passing these adjustments on to the company’s partners. Partnerships can elect to push adjustments to its review-year partners who hold an interest in the partnership during that year. If your partnership didn’t elect out, it’s subject to BBA partnership audit rules. A partnership representative must be designated by your company and, if the representative is an entity, a designated individual must also be appointed.
How to Elect Out
Electing out has to happen annually, and you must have a partnership with 100 or fewer partners (as determined by adding how many Schedules K-1 were prepared for partners and shareholders in an S corporation). The partners must all be:
- Estates of deceased individuals
- S corporations
- C corporations
- Foreign entities that would be treated as C corporations if domestic
Partners cannot be:
- Disregarded entities
- Estates of individuals outside of deceased partners
- Individuals holding interest on behalf of another or foreign entities that would not be treated as C corporations if domestic
A second return filed prior to the originally-filed return’s due date (with extensions) is considered a superseding return. They’re returns of record because they replace all other returns filed previously. If filing electronically, the Superseding Return box must be checked in the software. When paper filing, the words “Superseding Return” must be written at the top of both Schedules K-1 and Form 1065.
Because tax returns can be modified by submitting superseding returns before the deadline, filing an extension request is a good practice. This lets you quickly and easily revise previously filed returns up to the extended due date. It also allows you to file elections and attachments that would otherwise be considered late.
Amended Returns & AARs
Amended returns are returns filed after the original due date with extensions. Partnerships may elect out of BBA and still change the partnership return by filing amended returns without the administrative adjustment request (AAR) for taxable years that started on or after Jan. 1, 2018.
Amended returns can be filed provided it’s within three years past the latter of:
- The filing date for the partnership return for the year; or,
- The filing deadline for the partnership return outside of extensions.
Partnerships that haven’t elected out of BBA aren’t allowed to file amended Form 1065 or Schedule K-1s. If you’ve not elected out and need to change related items, an AAR must be filed.
If you file your 2021 Form 1065 prior to the March 15, 2022, due date and then discover a needed income change that summer, you’ll need to make adjustments at the partnership level that will impact the 2022 tax year instead of 2021. Those adjustments are taxed automatically at the maximum 37% tax bracket while possibly denying partners the ability to receive increased Section 199A deductions — which, while subject to limitations, could have given partners a write-off of up to 20% of gross adjustment identified by the partnership.
If you’d filed Form 7004 to extend the due date to Sept. 15, 2022, the partners would avoid permanent losses by simply filing a superseding return, which impacts the 2021 tax year. This would possibly allow partners to qualify for lower tax brackets and higher Section 199A deductions.
The regulations and filing of compliant partnership returns can be difficult to understand. However, the IRS provides a one-time transition relief that eligible partnerships can take advantage of in tax years starting in 2018.
The CARES Act did establish specific rules governing adjustments to the BBA partnership returns for the 2018 and 2019 tax years. But in general, the IRS’s leniency in these issues has generally come to an end. The agency has started concentrated enforcement efforts focusing on partnership issues, with more legislative proposals before Congress as we speak. Because there’s no harm in filing tax return extensions for your partnership, it’s a great option to consider.
If you’re ready to get started in the process, an experienced business tax CPA is your best ally. They’ll bring to the table updated knowledge on the ins and outs of partnership returns and extensions to ensure the best results.
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