How to Make the Form 8893 Election for a Partnership

The Bipartisan Budget Act of 2015 (BBA) established a centralized audit regime, changing how the Internal Revenue Service (IRS) examines partnership tax returns. This system allows the IRS to assess and collect tax underpayments directly at the partnership level. However, certain partnerships can choose to remove themselves from this framework by making an annual election on the partnership’s tax return. Making this election shifts the responsibility for any potential audit adjustments from the partnership entity back to the individual partners.

Determining Eligibility to Make the Election

A partnership’s ability to elect out of the centralized audit regime requires meeting two requirements for the given tax year. The first condition relates to the number of partners. A partnership must furnish 100 or fewer Schedules K-1 to its partners for the taxable year to qualify. This count includes anyone who was a partner at any point during the year, meaning that if a partnership interest was transferred, both the seller and the buyer would be counted toward the 100-partner limit if they each received a K-1.

The second requirement is that every partner in the partnership must be an “eligible partner” as defined by the regulations. Eligible partners include individuals, C corporations, and estates of deceased partners. An S corporation is also considered an eligible partner; however, for the 100-or-fewer count, each shareholder of the S corporation is counted individually. For instance, a partnership with 10 partners, one of which is an S corporation with 91 shareholders, would be considered to have 101 partners and would thus be ineligible to make the election.

Certain entities are defined as ineligible partners, and the presence of even one such partner disqualifies the partnership from electing out. These ineligible partners include other partnerships, trusts, and disregarded entities like single-member LLCs. Foreign entities that would not be treated as a C corporation if they were domestic, as well as estates of living individuals, are also on the list of ineligible partners. A partnership must verify the status of every partner for the entire tax year before considering this election.

Information Required for the Election

To make the election, a partnership must provide specific information for every partner. The election itself is made on the partnership’s Form 1065, U.S. Return of Partnership Income. The process involves answering the appropriate question on Schedule B of Form 1065 and attaching the completed Schedule B-2, “Election Out of the Centralized Partnership Audit Regime.”

Schedule B-2 is where the partnership must substantiate its claim of having only eligible partners. For each of the 100 or fewer partners, the partnership must provide the partner’s full name, their U.S. Taxpayer Identification Number (TIN), and their federal tax classification. The classification must be entered using specific codes found in the form’s instructions, such as “I” for an individual, “C” for a C corporation, or “S” for an S corporation.

Making and Filing the Election

The election to opt out of the centralized audit regime must be made annually for each tax year the partnership wishes it to apply. Once made for a specific year, the election is irrevocable for that year. The authority to make this election rests with a partner who is authorized to sign the partnership’s tax return.

The completed Schedule B-2 must be attached to the partnership’s timely filed Form 1065 for the year of the election. This includes returns filed under a valid extension. The election is not filed separately with the IRS; it must be submitted as part of the complete partnership tax return.

After filing the tax return containing the election, the partnership has an additional compliance step. The partnership is required to notify each partner that the election has been made. This notification must be provided to every partner within 30 days of the date the partnership files its tax return.