If you’re trying to opt out of the centralized partnership audit regime under the Bipartisan Budget Act, Form 8985 is not the form you file. The BBA opt-out election is made on Schedule B-2 of Form 1065, together with a “Yes” answer to the Section 6221(b) question on Schedule B.1Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime Form 8985 does something else entirely, and using it in place of Schedule B-2 will not produce a valid election.
What Form 8985 Actually Does
Form 8985, “Pass-Through Statement — Transmittal/Partnership Adjustment Tracking Report,” summarizes and transmits Forms 8986 when a partnership pushes out audit adjustments to its partners under Section 6226 or files an administrative adjustment request under Section 6227.2Internal Revenue Service. Instructions for Form 8985 and Form 8985-V It is a downstream form that applies after the partnership has already been audited under the centralized regime. The opt-out election, by contrast, is a preemptive move: it takes the partnership out of that regime for the year before any audit begins. Different problem, different form.
Who Can Elect Out
Only an “eligible partnership” can make the election. Two conditions must both hold for the taxable year.3Office of the Law Revision Counsel. 26 US Code 6221 – Determination at Partnership Level
First, the partnership must be required to furnish 100 or fewer Schedules K-1 for the year. When an S corporation is a partner, every K-1 that S corporation issues to its own shareholders counts toward the partnership’s total.4eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners
Second, every partner must be an eligible partner for the entire taxable year. A single ineligible partner on a single day disqualifies the partnership. The statute limits eligible partners to five categories:3Office of the Law Revision Counsel. 26 US Code 6221 – Determination at Partnership Level
- Individuals
- C corporations
- S corporations (with the shareholder look-through applied to the K-1 count)
- Foreign entities that would be treated as a C corporation if domestic
- Estates of deceased partners
That list is exhaustive. Partnerships, trusts, disregarded entities (including single-member LLCs taxed as disregarded entities), foreign entities that would not be treated as C corporations domestically, estates of living individuals, and nominees holding interests for someone else are all ineligible.1Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime The disregarded-entity trap is the one that catches most partnerships off guard. A single-member LLC holding a partnership interest looks like a natural person on the underlying facts, but the K-1 issues to the LLC, and the LLC is what the IRS evaluates.
How the Election Is Actually Filed
Two things have to happen on the same Form 1065:
The Schedule B Question
Schedule B contains a yes-or-no question asking whether the partnership is electing out under Section 6221(b). On the 2025 Form 1065 for tax year 2024, this is question 33.5Internal Revenue Service. 2025 Instructions for Form 1065 The number can shift across form revisions, so look for the Section 6221(b) language rather than the line number. Answering “Yes” triggers the Schedule B-2 attachment requirement.
Schedule B-2
Schedule B-2 is where the partnership documents that it meets the eligibility rules. It has three parts.6Internal Revenue Service. Instructions for Schedule B-2 (Form 1065) Part I lists every person who was a partner at any time during the year, with each partner’s name, U.S. taxpayer identification number, and a one-letter type code (I, C, S, E, or F). Part II handles the S corporation look-through: for each S corporation partner, the partnership lists that S corporation’s name and TIN and then every one of its shareholders with a name, TIN, and person-type code. Part III totals the partnership’s own K-1 count plus the K-1s issued by each S corporation partner. The Part III total must be 100 or fewer.
Timing, Duration, and Irrevocability
The election must be made on a timely filed Form 1065, including extensions.4eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners A partnership that files under an automatic extension via Form 7004 is still timely. Miss the extended deadline and the election is gone for that year; there is no late-election relief.
The election applies only to the year for which it is made. Partnerships that want to stay outside the centralized regime have to elect again on each year’s return. There is no multi-year or permanent opt-out.
Once validly made, the election cannot be revoked without IRS consent.4eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners That lock runs both ways: the partnership is committed, and every partner is bound whether they agree with the election or not.
Notifying Partners Within 30 Days
After making the election, the partnership must notify every partner within 30 days.4eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners The regulations do not prescribe a form or delivery method; a written communication by email or letter satisfies the rule. The IRS does not require partner consent signatures or proof of delivery with the return, but the partnership should keep its own records showing the notification happened on time. Opting out shifts individual responsibility for adjustments to each partner, and partners need to know that.
When the IRS Determines the Election Is Invalid
All opt-out elections are treated as valid unless the IRS determines otherwise. If the IRS finds an ineligible partner, a partner count over 100, missing TINs, or incomplete S corporation shareholder disclosures, it notifies the partnership in writing that the election is invalid.1Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime The centralized regime then applies for that year. Entity-level audit procedures kick in, any imputed underpayment is assessed against the partnership rather than the partners, and the partnership and all partners are bound by that determination.4eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners There is no retroactive fix. Getting it right at filing is the only protection.
Where Partnerships Get Tripped Up
Most invalid elections come down to a small set of recurring errors:
- Treating a single-member LLC partner as its individual member. The disregarded entity is what receives the K-1, and it is not an eligible partner.
- Forgetting to add S corporation shareholder K-1s into the 100-count. A partnership with 95 individual partners and one S corporation with eight shareholders has 103 K-1s for eligibility purposes and cannot elect out.
- Ignoring mid-year partner changes. A partner who was eligible on January 1 but transferred the interest to a trust in March disqualifies the partnership for the entire year.
- Missing or transposed TINs on Schedule B-2. Every partner and every S corporation shareholder needs a correct U.S. TIN.
- Attaching Form 8985 in place of Schedule B-2. Form 8985 does not make the election, and no combination of push-out or AAR paperwork substitutes for the Schedule B answer plus Schedule B-2 attachment.