Small Business Services

Amended Partnership Return Reflects Opt-Out Option

Are you a partner in a U.S. partnership? If so, you may want to listen up. There is a revision of Form 1065, U.S. Return of Partnership Income that pertains to Centralized Partnership Audit Regime regulations.

What’s the Change?

Eligible partnerships may choose to opt out of the new audit procedure.

A Brief History

The Bipartisan Budget Act  introduced a new audit process called the Centralized Partnership Audit Regime (CPAR). It impacts partnerships for tax years 2018 and onward.

Under CPAR, assessments made following a partnership audit are made at the partnership level using the highest individual rate and apply to the assessment year rather than the year under audit.

Previously, partnerships had to follow the Tax Equity and Fiscal Responsibility Act of 1982 “TEFRA” where adjustments from an audit were passed down separately to each partner.

Partnerships that meet certain requirements may elect to opt-out of CPAR.

To qualify for the election, the partnership must have 100 or fewer partners, all of whom are eligible partners. Eligible partners are individuals, C corporations, S corporations, estates of deceased partners, and certain foreign entities.

Partnerships with any of the following types of partners don’t qualify for the election: a partnership, a trust, a disregarded entity (such as a single member LLC), a nominee, an estate of an individual other than a deceased partner, and a foreign entity that would not be treated as a C corporation were it a domestic entity.

The number of partners is determined by the number of Schedule K-1s required to be issued by the partnership plus the number of Schedule K-1s required to be issued by any S corporation partner to its own shareholders.

How To Opt Out of the New CPAR

The new Form 1065 has a checkbox (Schedule B, Box 25) for partnerships to elect out of CPAR.

If eligible, you must also complete Schedule B-2 (Form 1065), Election Out of the Centralized Partnership Audit Regime. This requires you to list each eligible partner. (And if one of the partners is an S corporation, each shareholder of the S corporation.)

Eligible partnerships should consider if the election is worth it. Keep in mind: if the election is made, partners are subject to audit under the general rules for individual taxpayers.

Under the opt-out election:

  • Assessment adjustments apply to the year before audit rather than the year the assessment is made.
  • Assessments are made at the partners’ individual tax rates rather than the highest individual tax rate, which is currently 37%.

All partnerships are subject to CPAR unless eligible to opt out and the election must be made annually. If you do opt out, your partnership must notify each of its partners of the election within 30 days of making the election.

What If You Don’t Elect to Opt Out?

Partnerships that don’t elect to opt out must complete the “Designation of Partnership Representative” information in the area just below Box 25. The representative doesn’t need to be partner, but must have a substantial U.S. presence. They also have to act as the partnership’s sole authority.

Electing partnerships don’t have to designate a representative, but should determine who will handle all tax matters for the partnership and keep that information with the partnership agreement.

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