A lot of small LLCs check the "elect out of BBA" box every year and assume they are done. Some of them are not. One partner held through a single-member LLC, one family trust, or one late return can void the election for that year, and you may not find out until an IRS examiner tells you.
The election out matters because it changes who the IRS audits. If it is valid, the partnership audit rules in IRC Sections 6221 through 6241 do not apply for that year. If it is not, you are in the centralized regime, with a partnership-level tax bill and a partnership representative who binds everyone.
What electing out does
IRC 6221(b)(1) says the BBA subchapter "shall not apply" to a partnership for a taxable year if the requirements are met. Treas. Reg. 301.6221(b)-1(a) confirms the effect and points to the regular deficiency procedures in IRC 6211 through 6215. In plain terms, the IRS has to examine the partners, not the partnership, and each partner deals with his or her own adjustments.
That can be a meaningful difference. The default BBA outcome is an imputed underpayment paid by the partnership at the highest rate. Outside BBA, each partner's tax is determined at that partner's own rates and circumstances.
The eligibility requirements
IRC 6221(b)(1) and Treas. Reg. 301.6221(b)-1(b) set out the tests. All of them must be met for the year.
1. 100 or fewer partners, counted the IRS's way
The partnership must be required to furnish 100 or fewer Schedules K-1 under IRC 6031(b) for the year. That is a count of statements, not of owners on the last day of the year. The regulation's examples show that a partner who dies mid-year and the partner's estate each count, and so do a seller and buyer of an interest in the same year.
S corporation partners add a twist. Under IRC 6221(b)(2)(A) and Treas. Reg. 301.6221(b)-1(b)(2)(ii), you must also count each K-1 the S corporation is required to furnish to its shareholders for its year ending with or within the partnership's year. In the regulation's own example, a partnership with 50 individual partners and one S corporation partner that has 50 shareholders has 101 partners, and cannot elect out.
Spouses who each own a separate interest count as two partners. A spouse whose only interest is a community property interest in the other spouse's partnership interest does not count separately, according to the regulation's examples.
2. Every partner must be an eligible partner, all year
Each K-1 must go to a partner that was eligible for the partnership's entire taxable year. Eligible partners are:
- Individuals
- C corporations
- Foreign entities that would be treated as C corporations if they were domestic
- S corporations (even if the S corporation's own shareholders would not qualify)
- Estates of deceased partners
Treas. Reg. 301.6221(b)-1(b)(3)(ii) lists partners that are not eligible:
- A partnership (including a multi-member LLC taxed as a partnership)
- A trust
- A foreign entity that would not be a C corporation if domestic
- A wholly owned entity disregarded as separate from its owner
- An estate of an individual other than a deceased partner
- Any person who holds an interest on behalf of another person
- A qualified subchapter S subsidiary
The disregarded entity rule surprises people. If you hold your interest through a single-member LLC for liability protection, the partnership cannot elect out for that year, even though the LLC is ignored for most income tax purposes. The regulation lists trusts as ineligible without carving out family or estate planning trusts, so an interest held in trust is a problem too.
IRM 4.31.9.7.4.2.1.1 tells examiners to confirm there are no ineligible partners at any time during the year, to cross-check Schedule B-2 against the K-1s and IRS records, and, if an LLC partner is reported as a corporation, to verify that the LLC actually elected corporate treatment. If the partnership had ineligible partners during the year, the IRM says the election out is invalid.
How to make the election
The election is made on Form 1065. According to the IRS's election out page, the partnership answers "yes" on Schedule B to the question asking whether it is electing out under section 6221(b), and attaches Schedule B-2 listing each partner's name, U.S. TIN, and type of eligible partner, including all shareholders of any S corporation partner.
The question number on Schedule B moves around. IRM 4.31.9.7.4 lists it as Question 25 for 2018 through 2020, Question 29 for 2021, Question 30 for 2022, Question 31 for 2023, and Question 33 for 2024 and 2025.
The key requirements from Treas. Reg. 301.6221(b)-1(c):
- Timely filed return. The election must be made on the partnership's timely filed return, including extensions, for that year. A late return cannot carry a valid election out. If your partnership is behind, see our guide to partnership filing deadlines and extensions.
- Full partner disclosure. The partnership must disclose every person who was a partner at any time during the year, with name, correct TIN, federal tax classification, and an affirmative statement that the partner is eligible.
- Partner notice. The partnership must notify each partner of the election within 30 days of making it, in a form and manner the partnership chooses.
- Annual. The election applies only to the year of the return. You make it, and meet the tests, every year.
IRM 4.31.9.7.4 also notes that examiners and their managers have discretion to accept the election even when information on Schedule B-2 was transposed incorrectly, if the IRS has information that remedies it. That is discretion, not a right. Get the schedule right.
What happens if the IRS says the election is invalid
Treas. Reg. 301.6221(b)-1(e) says an election out binds the partnership and partners unless the IRS determines it is invalid. If the IRS makes that determination, it notifies the partnership in writing, and BBA applies to that year.
IRM 4.31.9.7.4 adds practical details. The IRS uses Letter 6062, Notice of Invalid Election Out of the BBA, and the determination is not immediately and independently appealable. If substantive issues are also unagreed, Appeals considers both. The examiner is told to give the partnership 30 days to file a BBA administrative adjustment request before the notices of administrative proceeding are issued. The IRM also tells examiners to reset the IRC 6235(a)(1) adjustment deadline to three years after the Form 1065 filing date.
In other words, an invalid election out puts the partnership straight into the centralized regime, with all the deadlines described in our BBA notices and timeline guide.
Revoking an election out
Under Treas. Reg. 301.6221(b)-1(c)(1), an election out cannot be revoked without IRS consent. Why would a partnership want to revoke? Sometimes a partnership-level audit is simpler or cheaper than chasing each partner separately.
IRM 4.31.9.7.5 explains the process. As a general rule, the partnership can request revocation within the first 30 days after it receives Letter 2205-D, the notice that an examination will take place. The request is made on Form 15288, Request to Revoke Partnership Election under IRC 6221(b) or Request to Revoke Election under 1101(g)(4), one year per form. The partnership must also designate a partnership representative on Form 8979. Requests after the 30 days are considered only in unusual circumstances.
Tiered structures
An election out by one partnership does not shield it in its role as a partner in another partnership. Treas. Reg. 301.6221(b)-1(d) says that if an electing partnership owns an interest in a BBA partnership, it is still subject to the BBA rules for that interest, including the consistency requirement of IRC 6222. And IRC 6226(b)(4)(C) applies the push-out rules for tiered partners even when the partner partnership elected out.
Should you elect out?
For many eligible small partnerships, electing out is the natural default. It keeps adjustments with the people who earned the income. But it is not automatic, and it is not right for every partnership. Questions to consider:
- Is every partner eligible for the entire year, including how each one actually holds title?
- Will the return be filed on time, including extensions?
- Do you have correct TINs and classifications for every partner and every S corporation shareholder?
- Would the partners rather deal with one partnership-level audit than several individual ones?
An election out is only as good as the Schedule B-2 behind it. If you are not sure whether your partnership qualified in a past year, or the IRS has questioned an election, call the Law Offices of Darrin T. Mish, P.A. in Tampa, Florida at 813-229-7100.
Frequently asked questions
Can an LLC with a single-member LLC as a partner elect out of BBA?
No. Treas. Reg. 301.6221(b)-1(b)(3)(ii) lists a wholly owned entity disregarded as separate from its owner as an ineligible partner. If any K-1 goes to a disregarded entity during the year, the partnership is not eligible to elect out for that year. The same is true for partners that are trusts, partnerships, or nominees holding an interest for someone else.
Can I elect out of BBA on a late-filed Form 1065?
No. IRC 6221(b)(1)(D) and Treas. Reg. 301.6221(b)-1(c)(1) require the election to be made on a timely filed return, including extensions. A partnership that files late cannot make a valid election out for that year, and the BBA centralized audit rules will apply if the IRS examines the return.
Do S corporation shareholders count toward the 100-partner limit?
Yes. Under IRC 6221(b)(2)(A) and the regulations, a partnership with an S corporation partner must count each K-1 the S corporation is required to furnish to its shareholders for the S corporation's year ending with or within the partnership year. The partnership must also list those shareholders on Schedule B-2.
What happens if the IRS finds my election out invalid?
The IRS notifies the partnership in writing, and BBA applies to that year. IRM 4.31.9.7.4 says the IRS uses Letter 6062 and that the determination is not immediately and independently appealable. Examiners are told to allow 30 days for the partnership to file a BBA administrative adjustment request before issuing the notice of administrative proceeding.
This guide is general information about federal tax law, not legal advice for your situation. Reading it does not create an attorney-client relationship.