Refunds Now Available for Partnerships, LLCs, and Real Property Businesses That Made Improvements to Nonresidential Property in 2018 and 2019
Tax refunds are now available for certain improvements to nonresidential property (including office, restaurant, and retail improvements) that were placed in service in 2018 or 2019, even if the property is held by a partnership (including an LLC that is taxed as a partnership) or by a taxpayer that had made an election under Section 163(j) of the Tax Code to be treated as a "real property trade or business."
In a prior alert, we discussed how the CARES Act allows for 100% bonus depreciation for qualified improvement property (QIP), which generally includes improvements to the interior of nonresidential property. This bonus depreciation is generally available for the 2018 and 2019 tax years, so many taxpayers are able to amend their returns for 2018 or 2019 and receive a tax refund now. There were, however, two roadblocks that might have prevented a taxpayer from obtaining a refund. The IRS has now removed these roadblocks.
QIP HELD BY PARTNERSHIPS
The first roadblock was that refunds are generally not available for partnerships or their partners. The IRS has temporarily suspended this rule by allowing partnerships to file amended returns. It is critical that the instructions in IRS Revenue Procedure 2020-23 are followed; otherwise a partnership might increase the amount of tax that the partners must pay. These risks are discussed further in my Tax Notes article, "Partnership Administrative Adjustment Requests Are Dangerous," Tax Notes Today (April 14, 2020).
QIP HELD BY REAL PROPERTY TRADES OR BUSINESSES
The second roadblock was that bonus depreciation is generally not available for QIP when the taxpayer has made an election under Section 163(j) of the Tax Code to be treated as a "real property trade or business" (RPTB) and thereby avoid certain limitations on interest deductions. Once this election is made, it generally cannot be revoked. Therefore, taxpayers that made this election on their 2018 or 2019 return would ordinarily be unable to claim bonus depreciation for their QIP in those years.
IRS Revenue Procedure 2020-22 has removed this roadblock. Now, a taxpayer may revoke its RPTB election. Here, too, it is critical to comply with the rules laid out in that revenue procedure.