Form 8985: BBA Opt-Out Election, Eligibility, and 30-Day Notice

If you came here to file the BBA opt-out election on Form 8985, stop. Form 8985 is not the opt-out form. The election out of the centralized partnership audit regime created by the Bipartisan Budget Act is made on Schedule B-2 of Form 1065, paired with a “Yes” answer to the Section 6221(b) question on Schedule B.¹ The rest of this article covers what Form 8985 actually does, who qualifies to opt out, and how to file the election correctly.

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 6227.² It comes into play after the IRS has already audited a partnership that stayed inside the centralized regime. The opt-out election is the opposite move: it removes the partnership from the regime before any audit happens, so Form 8985 is never involved.

Both forms sit inside the BBA framework, which is probably why they get confused. Keep them separate: Form 8985 handles consequences of staying in; Schedule B-2 is how you get out.

Which Partnerships Can Elect Out

The election is limited to what the statute calls an “eligible partnership.” Two conditions must both be met for the taxable year.³

First, the partnership must be required to furnish 100 or fewer Schedules K-1 for the year. If any partner is an S corporation, every K-1 that S corporation issues to its own shareholders counts toward the partnership’s total.⁴ A partnership with 95 individual partners and one S corporation that has 8 shareholders has a count of 103, and cannot elect out that year.

Second, every partner must be an eligible partner for the entire taxable year. One ineligible partner for a single day disqualifies the partnership.⁴

Eligible Partners

The statute recognizes only five categories:³

Individuals
C corporations
S corporations (subject to the shareholder look-through for the count)
Foreign entities that would be treated as C corporations if domestic
Estates of deceased partners

Nothing outside that list qualifies.

Ineligible Partners

The disqualifiers that most often sink an election are partnerships holding interests in other partnerships, trusts, disregarded entities (including single-member LLCs taxed as disregarded entities), foreign entities that would not be C corporations domestically, estates of living individuals, and nominees holding on behalf of someone else.¹ A single-member LLC on the partner roster looks harmless, but it kills the election. The member behind the LLC may be an individual, yet the K-1 is issued to the disregarded entity, and that is what the IRS evaluates.

How to Make the Election on Form 1065

The election has two components on the partnership return: the Schedule B answer and the Schedule B-2 attachment.¹

Schedule B

Schedule B of Form 1065 contains a yes-or-no question asking whether the partnership is electing out under Section 6221(b). On the 2025 Form 1065 (tax year 2024), this is question 33.⁵ The number can move between revisions, so look for the Section 6221(b) language rather than the line number. A “Yes” answer triggers the Schedule B-2 requirement.

Schedule B-2

Schedule B-2 has three parts and must cover every person who was a partner at any time during the year.⁶

Part I lists eligible partners. For each one, enter the partner’s name, U.S. taxpayer identification number, and a partner type code: I for individual, C for corporation, S for S corporation, E for estate of a deceased partner, or F for a foreign entity treated as a C corporation.

Part II lists S corporation shareholders. For every S corporation named in Part I, provide that S corporation’s name and TIN, then list each of its shareholders for the relevant year with a name, TIN, and person type code. Shareholder codes include I (individual), T (trust), E (estate of a deceased shareholder), and O (other, covering entities such as ESOPs, Section 401(a) pension plans, and Section 501(c)(3) organizations).⁶

Part III is the total: the combined count of K-1s the partnership itself issues plus the K-1s each S corporation partner issues to its shareholders. The number must be 100 or fewer.

Timing, Renewal, and Irrevocability

The election has to be made on a timely filed Form 1065, including extensions, for the year it applies to.⁴ A Form 7004 extension buys time; missing the extended deadline forfeits the option for that year. There is no late-election relief.

Each election covers only one taxable year. A partnership that wants to stay out of the centralized regime must file Schedule B-2 again every year. No permanent opt-out exists.

Once validly made, the election cannot be revoked without IRS consent, and every partner is bound by it whether they agreed or not.⁴ Think it through before filing, because switching back to the centralized regime for that year is not an option.

Notifying Partners Within 30 Days

After filing, the partnership must notify every partner of the election within 30 days.⁴ The regulations do not prescribe a format. Email, letter, or any other written communication works, and the IRS does not require signed partner consent or proof filed with the return.

Keep the paper trail anyway. The practical effect of opting out is that each partner becomes individually responsible for any adjustments to that year’s partnership items, and partners need to know that. Delivery confirmations, email receipts, or signed acknowledgments protect the partnership if the IRS later questions whether the election was properly made.

When the IRS Rejects the Election

The IRS treats every opt-out election as valid until it decides otherwise. If it finds an ineligible partner, a count above 100, a missing TIN, or incomplete shareholder disclosures, it will notify the partnership in writing that the election is invalid.¹

At that point the centralized audit rules apply for the year by default. The partnership is subject to entity-level audit procedures, and any imputed underpayment is assessed against the partnership rather than the individual partners. The partnership and all partners are bound by the determination.⁴ Nothing lets the partnership repair the election after the fact.

Common Mistakes That Invalidate the Election

The mechanics are simple; the eligibility work is where problems hide. The recurring errors:

Treating a single-member LLC partner as if the member behind it counts. The disregarded entity is on the K-1, and the disregarded entity is ineligible.
Forgetting to add an S corporation partner’s shareholder K-1s to the partnership’s own count, pushing the real total over 100.
Ignoring mid-year partner changes. A partner who was eligible in January but transferred the interest to a trust in March disqualifies the partnership for the whole year.
Blank or transposed TINs on Schedule B-2. Every partner and every S corporation shareholder needs a correct U.S. TIN.
Attaching Form 8985 instead of Schedule B-2. Form 8985 does not make the election. The election only counts when Schedule B says “Yes” and a completed Schedule B-2 is attached.

1
Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime
2
Internal Revenue Service. Instructions for Form 8985 and Form 8985-V
3
Office of the Law Revision Counsel. 26 US Code 6221 – Determination at Partnership Level
4
eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships With 100 or Fewer Partners
5
Internal Revenue Service. 2025 Instructions for Form 1065
6
Internal Revenue Service. Instructions for Schedule B-2 (Form 1065)