As 2021 draws to a close and we await a possible Christmas Eve present from Congress in the form of the Build Back Better Bill, the IRS has been busy issuing guidance, in various forms, for partnership and S corporation tax compliance.
Accounting and reporting of forgiven PPP loans
Three, count them, three revenue procedures (one, two, and three) were released as a package. They provide guidance on accounting for and reporting both tax-exempt loan forgiveness for Paycheck Protection Program (“PPP”) loans and the expenses paid for with the funds. The rules also cover Small Business Administration (“SBA”) Economic Injury Disaster Loans (“EIDL”), Shuttered Venue Operator Grants (“SVOG”), and Restaurant Revitalization Grants (“RRG”).
While the specific guidance is quite helpful, it is the ability of partnerships to file amended returns for 2020 that is even more significant. Generally, partnerships subject to the centralized partnership audit rules enacted by the Bipartisan Budget Act of 2015 (the “BBA”) are precluded from filing amended returns. Such so-called “BBA partnerships” correct their returns and the information provided to partners using an Administrative Adjustment Request (“AAR”). The AAR process is cumbersome and the impact of the correction may be moved between tax years.
Now through December 31, 2021, BBA partnerships can file amended partnership returns if they are affected by the adjustments in the Revenue Procedures. Such amended returns may also correct any other items that were incorrectly reported on the original return - even if those items are not the subject of the Revenue Procedures. This is a significant relaxation of the rules but will only remain in effect for a short time.
On a related note, some BBA partnerships have filed amended returns despite being required to use the AAR process. The IRS has stated that these filings won’t be rejected but may be more likely to be subject to an audit. This should not be taken as an implied consent to ignore the BBA procedures.
What forms to include on a short year return
Recently, the IRS told taxpayers and tax professionals that they could rely on published Frequently Asked Questions (“FAQs”) as authoritative guidance. In that spirit, new FAQs were published on short year returns for 2021 – returns that start on or after January 1, 2021 but, for various reasons, are for fewer than 12 months. This isn’t a new problem but for the fact that there are new forms for 2021 that aren’t final yet. These forms – Schedules K-2 and K-3 – are required to be filed to report international transactions and items of international tax relevance.
Under the FAQs, if the final versions of the 2021 forms and instructions aren’t available at least 30 days prior to the return due date, the returns should be filed using the 2020 tax year forms and there will be no penalty for not including the Schedules K-2/K-3. On the other hand, if the final 2021 forms ARE available at least 30 days prior to the due date, then the 2021 forms including Schedules K-2/K-3 must be used in order to avoid any penalties for failure to file a return showing all information required.
Carried interest reporting
Last month, the IRS issued FAQs instructing partnerships on how to compute and report information relating to so-called carried interests. You may recall that the 2017 Tax Cuts and Jobs Act (“TCJA”) added a provision that would recharacterize long-term capital gains as short-term for partners whose interests entitling them to share in such gains was received as compensation for services rendered to the partnership. These are known as Applicable Partnership Interests (“API”).
The FAQs include worksheets which partnerships must attach to their API holders’ K-1s to report recharacterization amounts. There are also instructions on how the Owner Taxpayer should report such amounts on their individual tax returns.
Count on Friedman
The world of partnership and S Corporation tax compliance grows more complex with each passing day. From new legislation to IRS guidance, you can count on your Friedman LLP advisor to keep you current.