Who cannot elect out of centralized partnership audit regime?
Your partnership cannot opt out of this regime in the case of having too many partners, specific types of partners the IRS doesn't enable for this election, or if you make an error on the documentation.
What blocks the opt-out election right away?
The option to opt out is lost immediately if any of the following are true for the tax year:
- You have more than 100 counted partners
- You have a partner type the IRS disqualifies from opting out
- You submit missing or incorrect election forms — like leaving out partner details on the attachments
Which partner categories make the partnership ineligible?
If you have to issue a Schedule K-1 to any of the below partner types, the partnership cannot opt out:
- Another partnership — this covers multi-member LLCs taxed as partnerships
- A trust
- A foreign entity that wouldn't count as a C corporation if it were established in the US
- A disregarded entity — like a single-member LLC treated as disregarded for federal taxes
- An estate — unless it is the estate of a deceased partner
- A nominee or agent — someone holding the interest on behalf of another person
Do S corporation partners prevent an election out?
Not necessarily. Having an S corporation as a partner is fine, but it influences the calculations . Every single shareholder in that S corporation should be counted toward the 100-partner limit. It is also required to list all of those shareholders on the election forms.
How does the 100-partner limit work in practice?
The IRS considers how many Schedule K-1 statements you have to send out for the year. Then, they add the number of shareholders from any S corporation partners you might have. If the final number touches 101 or higher — it is not possible to opt out for that tax year.
What filing issues can result in invalid elections?
The IRS will reject the opt-out in the case of not filing Form 1065 on time — covering extensions — or if the Schedule B-2 attachment has errors. The general mistakes can be presented as below:
- Forgetting a partner’s name / taxpayer ID number
- Putting down the wrong partner "type" on Schedule B-2
- Leaving out the shareholder details for an S corporation partner
- Filing late without an approved extension
Are you eligible this year?
Dimov Audit can confirm your opt-out status before filing
Our team at Dimov Audit is here in Maryland to look over the partner roster, double-check the headcount, and get the election paperwork ready for a flawless submission to the IRS. Reach out to us today to set up a CPAR eligibility review.
