In a previous article, we explained that the CARES Act enabled partnerships to amend tax returns under the old Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) rules rather than following the new centralized audit provisions in the BBA. Prior to this, affordable housing partnerships subject to the centralized audit provisions in the BBA were put in a tough situation when the new administrative adjustment request (AAR) process replaced the option of filing amended tax returns. The change created problems for partnerships receiving Form 8609 after the filing deadline for the tax year in which a project was placed into service.
Waiting for Form 8609 has long been a concern for developers and investors in affordable housing partnerships because the administrative process of completing paperwork and submitting it to state housing agencies can be lengthy. However, prior to the BBA, partnerships and their investors could simply file an amended return using the TEFRA process and claim the credits when they received the 8609 form. The BBA eliminated the option of filing amended returns in favor of a new AAR process in which the adjustment flows through a partnership tax return in the year the adjustment is made instead of the year to which the change originally applied. For example, filing an AAR in 2021 for a change that pertained to the 2018 partnership tax return would now flow through the partnership’s 2021 tax return instead of through an amendment to 2018.
This new process was put in place both to minimize the administrative burden on the IRS and to improve its ability to audit partnerships. However, in cases in which low-income housing tax credits (LIHTC) were granted, some investors experienced a negative impact from the new process because many partnership agreements stipulate that the amount of equity put into a deal may be reduced if investors don’t receive their credits within a projected time frame. As a result, this left some developers facing a tough situation, in many cases, through no fault of their own. The uncertainty has created an environment that threatens the already-fragile financing structures upon which affordable housing projects must rely.
The CARES Act provides BBA partnerships with a short-term remedy through IRS Revenue Procedure 2020-23: the option of filing an amended return under the old TEFRA process for partnership tax years 2018 and 2019 using Form 1065 with the “Amended Return” box checked and an amended K-1. The amended tax return replaces any prior return (including any administrative adjustment request filed by the partnership) if the taxpayer files an amended return for 2018 or 2019 by Sept. 30, 2020. To be eligible to file an amended tax return for 2018 or 2019, the partnership must have filed the original tax return and furnished K-1s before April 8, 2020.
The procedure provides the following benefits:
- A short-term fix for the delayed 8609 issues for investors receiving the LIHTC
- Easier ways to ensure clients receive other potential benefits from the CARES Act:
- 163j adjustments
- Qualified improvement property adjustments & bonus depreciation
- Net operating loss carrybacks
- Business losses through a removal of limitation on these losses
- Immediate results from any 2018 adjustment, without the wait for 2020/2021 adjustments
The AAR process is expected to resume after the September 30 deadline. Advocacy groups for the industry, including the Affordable Housing Tax Credit Coalition, are working with the IRS to find other mechanisms for relief.
If you have a project that was placed in service in 2018 and you’re either still waiting for an 8609 or you received it after the extended filing deadline, you must complete the process in order to file an amended 2018 return by the deadline and avoid potential equity adjusters resulting from late delivery of tax credits.
If you have any questions about issues related to delayed Form 8609 issues, other CARES Act benefits, or the AAR process for claiming credits after Sept. 30, 2020, contact us to discuss your situation and build a plan that fits your needs.
