1065 Schedule B-2 Instructions for Form 1065, Schedule B-2

Instructions for Schedule B-2
(Form 1065)

Department of the Treasury
Internal Revenue Service

(December 2018)
Election Out of the Centralized Partnership Audit Regime
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Schedule B-2
(Form 1065) and its instructions, such as
legislation enacted after they were
published, go to IRS.gov/Form1065.

What’s New
Bipartisan Budget Act. The Bipartisan
Budget Act of 2015 (BBA) created a new
centralized partnership audit regime
effective for partnership tax years
beginning after 2017. Section 6221(b) (as
amended by BBA) provides that certain
partnerships with 100 or fewer partners
may elect out of the centralized
partnership audit regime. This schedule
was created to allow partnerships to elect
out of the centralized partnership audit
regime.

Purpose of Form

Partnerships with 100 or fewer partners
can annually elect out of the centralized
partnership audit regime if each partner for
the tax year is an individual, a C
corporation, a foreign entity that would be
treated as a C corporation were it
domestic, an S corporation, or an estate of
a deceased partner. For purposes of
determining whether the partnership has
100 or fewer partners, the partnership
must include, in the count of partners, all
shareholders of each S corporation that is
a partner. If a partnership makes an
election out of the centralized partnership
audit regime, the partnership must
complete and attach this form to the
partnership return for the tax year the
election is being made.
Eligible partnership. A partnership is an
eligible partnership if it has 100 or fewer
eligible partners for the tax year. Whether
the partnership has 100 or fewer partners
is determined by adding the number of
Schedules K-1 required to be issued by
the partnership for the tax year plus the
number of Schedules K-1 required to be
issued by each partner that is an S
corporation to its shareholders for the tax
year of the S corporation ending with or
within the partnership tax year. A
partnership is not an eligible partnership if
Dec 18, 2018

it is required to issue a Schedule K-1 to
any of the following partners.
• A partnership.
• A trust.
• A foreign entity that would not be
treated as a C corporation were it a
domestic entity.
• A disregarded entity described in
Regulations 301.7701-2(c)(2)(i).
• An estate of an individual other than a
deceased partner.
• Any person that holds an interest in the
partnership on behalf of another person.

Who Must File

Partnerships, including Real Estate
Mortgage Investment Conduits (REMIC),
that elect out of the centralized partnership
audit regime must complete this form for
every tax year that the election is to be
effective. If the form is not completed
correctly, the IRS may determine that the
election is not valid.

How To File

This form must be attached to a timely
filed (including extensions) Form 1065 (or
Form 1066 in the case of a REMIC) for
every tax year the partnership is electing
out of the centralized partnership audit
regime.

Specific Instructions
Part I—List of Eligible Partners. In
column 1 provide the name of the partner
required to be furnished a Schedule K-1
from the partnership for the tax year. In
column 2 provide the correct U.S. Tax
Identification Number (TIN) of the partner.
Inaccurate TINs will result in validation
errors, and the IRS may determine that the
election is not valid. In column 3 provide
the code for the type of eligible partner. If
the code is not one of the following, you
may not elect out of the centralized
partnership audit regime. The following
are the codes to be used in column 3 for
eligible partners.
• I— Individual
• C—Corporation
• S—S corporation
• E— Estate of deceased partner
• F— Foreign partner that would be
treated as a C corporation if it were a
domestic entity

Cat. No. 69661H

If the partnership has more than 15
partners, use Part IV to continue the list of
partners.
Ineligible partner types. Types of
partners that will invalidate your election
are the following.
• Partnerships,
• Trusts,
• Foreign entities not treated as C
corporations if they were domestic
entities,
• Disregarded entities described in
Regulations 301.7701-2(c)(2)(i),
• Estates of individuals other than those
of deceased partners, and
• Persons that hold an interest in the
partnership on behalf of another person.
By completing Part I, you are making an
affirmative statement that all of the
partners in the partnership meet eligibility
requirements under section 6221(b)(1)(C),
as amended by BBA, and you have
provided all of the information required on
this schedule.
Part II—List of S Corporation Shareholders. For each S corporation that is a
partner in the partnership, provide the
name of the S corporation and the U.S.
TIN of the S corporation. If there is more
than one S corporation that is a partner in
the partnership during the tax year,
complete a separate Part II (and Part V, if
applicable) of this Schedule B-2 for each
additional S corporation partner. For each
S corporation provide the correct name of
each shareholder for the tax year of the S
corporation ending with or within the
partnership tax year, the correct U.S. TIN
for each shareholder, and the type of
person code. The following are codes
available for S corporation shareholders.
• I— Individual
• T—Trust
• E— Estate of deceased shareholder
• O—Other
The “Other” code includes pension plans
under section 401(a), including Employee
Stock Ownership Plans (ESOPs); section
501(c)(3) charitable organizations; or
eligible disregarded entities.
If there are more than 12 shareholders
for Part II, use Part V to continue the list of
shareholders for that S corporation
partner.
Part III—Total Number of Schedules
K-1 Required To Be Issued. The

number of Schedules K-1 are determined
by adding the number of Schedules K-1
required to be issued by the partnership
for the tax year plus the number of
Schedules K-1 required to be issued by
each partner that is an S corporation to its
shareholders for the tax year of the S
corporation ending with or within the
partnership tax year. Part III adds the total
number of Schedules K-1 required to be
issued by the partnership (as listed in Part
I and Part IV) and the number of
Schedules K-1 required to be issued by
each S corporation partner (as listed in
Part II and Part V) to determine the total
number of partners in the partnership for
the tax year.

Line 1. Enter the total number of
partners reported on Part I and Part IV.

partners, complete Part IV—Continuation
List of Eligible Partners.

Line 2. Enter the total number of
shareholders reported on Part II and Part
V. Do not include the S corporation
partner(s) in this count since those
partners should be included on Line 1.

Part V. Complete Part V if the Part II S
corporation partner is required to issue
Schedules K-1 to more than 12
shareholders. Always include the name of
the S corporation partner and U.S. TIN for
the partner at the top of the page for the
grouping of shareholders that are listed.
Use the same instructions provided under
Part II.

Line 3. Add Line 1 and Line 2 and
report the sum on Line 3. This number
should not exceed 100. If it does, this
partnership is not eligible to elect out.
Include this total on Form 1065,
Schedule B, Question 25.
Part IV. If the partnership is required to
issue Schedules K-1 to more than 15

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Instructions for Schedule B-2 (Form 1065) (Dec. 2018)