Printable Form 2026

IRS Form 1065 (Schedule B-2)

IRS Form 1065 (Schedule B-2) – Partnerships filing Form 1065 often face complex audit rules under the Bipartisan Budget Act (BBA) of 2015, also known as the centralized partnership audit regime. Many small partnerships can avoid these rules entirely by making a simple election using Schedule B-2 (Form 1065) — officially titled “Election Out of the Centralized Partnership Audit Regime.”

This IRS form allows eligible partnerships with 100 or fewer partners to opt out of partnership-level tax audits and adjustments. Instead, any audit issues flow through directly to the individual partners. This guide explains everything you need to know, based on official IRS sources including the form itself (Rev. December 2018), its instructions, the 2025 Form 1065 instructions, and the IRS Elect Out page (last reviewed January 2, 2026).

What Is the Centralized Partnership Audit Regime (BBA)?

Before 2018, most partnerships followed TEFRA rules for audits. The BBA created a new centralized system effective for tax years beginning after December 31, 2017:

  • Audits occur at the partnership level.
  • The IRS assesses and collects any underpayment (imputed underpayment) directly from the partnership.
  • Partnerships must designate a Partnership Representative (PR) with binding authority for all partners.
  • Adjustments can create significant cash-flow issues since the partnership (not the partners) pays any tax, interest, and penalties.

Electing out with Schedule B-2 shifts the burden back to the partners. Each partner handles their share of any adjustments on their individual returns at their own tax rates. This is often far simpler and less expensive for small partnerships.

What Is IRS Schedule B-2 (Form 1065)?

Schedule B-2 is a one-page (plus continuation sheets) attachment to Form 1065 (or Form 1066 for REMICs). It serves two purposes:

  1. It formally makes the election out under IRC Section 6221(b).
  2. It provides the IRS with a complete list of all eligible partners (and S corporation shareholders) to verify the “100 or fewer” rule.

Download the official PDF here: https://www.irs.gov/pub/irs-pdf/f1065sb2.pdf

The form has not been revised since December 2018 and remains current for 2025 and 2026 filings.

Who Can Elect Out? Eligibility Rules?

To qualify, your partnership must be an eligible partnership for the tax year:

  • It must have 100 or fewer partners (counted specially).
  • Every partner must be one of these eligible types:
    • Individual (U.S. or foreign)
    • C corporation (including LLCs taxed as C corps)
    • S corporation
    • Estate of a deceased partner
    • Foreign entity that would be treated as a C corporation if it were domestic

Special “look-through” rule for S corporations:
If any partner is an S corporation, you must count every shareholder of that S corp as a partner for the 100-partner limit. You must list all those shareholders on Part II of Schedule B-2.

Ineligible partners that disqualify the entire election:

  • Another partnership
  • Trust (except certain estates)
  • Foreign entity not treated as a C corp if domestic
  • Disregarded entity (single-member LLC not electing corporate status)
  • Estate of a living individual
  • Nominee or person holding interest for another

How the 100-partner count works (Part III):

  • Line 1 = Number of direct partners listed on Part I + Part IV
  • Line 2 = Total shareholders of all S corp partners (from Part II + Part V)
  • Line 3 = Total (must be 100 or fewer)

If Line 3 > 100, you cannot elect out.

Benefits of Filing Schedule B-2 and Electing Out

  • Avoids partnership-level imputed underpayments and penalties.
  • No need to designate or maintain a Partnership Representative.
  • Simpler compliance for small or family partnerships, professional firms, real estate groups, and investment clubs.
  • Adjustments are assessed at each partner’s individual level (often at lower rates and with more offsets available).
  • Election is made annually and is valid unless the IRS notifies you otherwise in writing.

Step-by-Step: How to Complete Schedule B-2 (Form 1065)

  1. Answer “Yes” on Form 1065, Schedule B, Question 33 (2025 version):
    “Is the partnership electing out of the centralized partnership audit regime under section 6221(b)?”
    Enter the total from Schedule B-2, Part III, line 3.
  2. Complete Part I – List of Eligible Partners (up to 15 per page; use Part IV for more):
    • Name of each partner
    • Correct TIN (SSN, EIN, or ITIN — inaccurate TINs can invalidate the election)
    • Type code: I (Individual), C (Corporation), S (S corp), E (Estate of deceased), F (Eligible foreign entity)
  3. Complete Part II – List of S Corporation Shareholders (separate Part II for each S corp partner):
    List every shareholder of each S corp partner with name, TIN, and type (I, T, E, O). Use Part V for continuation.
  4. Part III – Total Schedules K-1 Required
    Calculate the total as described above. This must be ≤ 100.
  5. Attach to timely filed Form 1065 (including extensions via Form 7004).
    The election must be made on a timely return — it cannot be made on an amended return.

Pro tip: Tax software (Drake, TaxAct, Lacerte, etc.) often auto-generates Schedule B-2 from your K-1 data when you answer “Yes” to the Schedule B question.

Filing Deadlines and Important Notes (2026 Filing Season)

  • Calendar-year 2025 partnerships: Due March 16, 2026 (Monday, since March 15 is Sunday).
  • Fiscal-year partnerships: 15th day of the 3rd month after year-end.
  • Extension: Automatic 6 months with Form 7004 (filed by original due date).
  • The election applies only to the tax year for which it is made.
  • IRS reviews the election; if invalid, you will receive written notice and default to full BBA rules.

Common Mistakes That Invalidate the Election

  • Missing or incorrect TINs.
  • Counting over 100 after S corp look-through.
  • Including an ineligible partner type.
  • Filing late (even with extension, the election must be on the original timely return).
  • Forgetting to list all S corp shareholders.
  • Not attaching Schedule B-2 when answering “Yes” on Schedule B.

Frequently Asked Questions (FAQ)

  • Can I elect out every year?
    Yes — it is an annual election made with each Form 1065.
  • What if my partnership grows and exceeds 100 partners next year?
    You simply do not make the election that year and follow full BBA rules (including designating a PR).
  • Do REMICs use Schedule B-2?
    Yes — attach to Form 1066 and check the appropriate box.
  • Does electing out affect my ability to file amended returns?
    No — but if you do not elect out, you generally must use Administrative Adjustment Requests (AAR) on Form 1065 instead of amended K-1s.
  • Where can I find the latest instructions?
    Always check IRS.gov/Form1065 for the current Form 1065 instructions and Schedule B-2 instructions.

Conclusion: Is Schedule B-2 Right for Your Partnership?

For the vast majority of small partnerships — especially those with individual, C corp, S corp, or deceased-estate partners — filing IRS Schedule B-2 (Form 1065) is a smart, low-effort way to stay out of the complex centralized audit regime.

By completing this simple attachment and answering “Yes” to Schedule B Question 33, you keep control at the partner level and avoid unnecessary partnership-level tax liabilities.

Ready to file? Download the form directly:
Schedule B-2 PDF

For personalized advice, consult your tax professional or CPA, as eligibility depends on your specific partner structure each year.

Sources:

  • IRS.gov (Elect Out page, last reviewed Jan 2, 2026)
  • Schedule B-2 (Form 1065) Rev. Dec 2018 & Instructions
  • 2025 Instructions for Form 1065
  • Official IRS Form 1065 (2025)

Stay compliant and audit-ready — make the election correctly the first time. If you found this guide helpful, bookmark it for next year’s filing season!