IRS finalizes international reporting Schedules K2 and K3: PwC

Posted by on May 10, 2023 in Blog

what is a schedule k tax form

Certain limited liability corporations (LLC) with multiple members may be taxed as a partnership using the form. Technology is changing and evolving every day, and the impact on partnership/S corporation return reporting has been immense. While those with the technology skills can likely build the software and develop the necessary bridge workpapers, data inputs, etc., tax professionals will need to have a detailed understanding of the rules and complexities so they can assist in building out the software. It is important that advisers have procedures in place well in advance of the 2021 Schedule K-1 season in order to ensure that the automation process and custom-made software are capable of adapting to the necessary changes of Schedules K-2 and K-3. The new international-related schedules will be required to be filed with 2021 partnership/S corporation returns and 2021 Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc. In general, the Form 1065 Schedule K-3 reports a partner’s distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1.

In a similar context, Schedules K-2 and K-3 also may effectively replace certain filing requirements of partnerships with respect to foreign information reporting. Based on recently released draft Form 8992 instructions, domestic partnerships no longer may be required to file Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI) and a new separate Schedule A due to the introduction of Part VI of Schedule K-2 and Part VI of Schedule K-3.

How do shareholders use Schedule K-1?

If the partnership attached any of the forms identified in boxes 7, 8, and 9 to the Form 1065, the partnership need not attach them again to the Schedule K-2. Report foreign taxes that are potentially suspended on Schedule K-2, Part III, Section 4, line 2E, and each partner’s share of such taxes on Schedule K-3, Part III, Section 4, line 2E. If the information required in a given section exceeds the space provided within that section, do not write “See attached” in the section or leave the section blank. Instead, complete all entry spaces in the section and attach the remaining information on additional sheets. For all attachments, include the part, section, line number, and column of the relevant portion of Schedule K-2 and Schedule K-3.

what is a schedule k tax form

When completing other parts of Schedules K-2 and K-3 (for example, a line in Part II, Section 2; or Part IX, Section 2), list an amount without regard to whether the partner is disallowed a deduction under section 267A for the amount. Check the “Yes” box to indicate the applicable parts of Schedule K-2 and Schedule K-3. Be sure to attach the approval letter to a computer-generated Schedule K-2 or K-3. However, if the computer-generated form is identical to the IRS prescribed form, it does not need to go through the approval process, and an attachment is not necessary. The instructions add an exception to completing Part VI of the Schedule K-2 with respect to a CFC and an exception to completing Part VI of the Schedules K-3 for a partner with respect to a CFC. For the latest information about developments related to Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and their instructions, such as legislation enacted after they were published, go to

Schedule K-2 and K-3

If the partnership has such taxes, it must check box 2 and attach a completed Schedule I (Form 1118) to the Schedule K-2 and Schedule K-3 (with the partner’s distributive share). The partnership need not complete Form 1118, Schedule I, Part I, column 12; Part II, lines 2 through 4; or Part III, lines 1 and 3. The partnership must attach Schedule I (Form 1118) even if there are no corporate partners because the limitation applies to individuals eligible to claim a foreign tax credit. Used to figure the partnership’s what is a schedule k tax form income or loss by source and separate category of income and to report the partner’s distributive share of such income or loss. In a nutshell, the new forms will create more clarity for shareholders and partners when it comes to calculating their U.S. income tax liability or when considering potential international-related deductions, credits, and miscellaneous items. Much of the information to be included in Forms K-2 and K-3 was already required in Schedules K-1 via a white paper attachment.

Numerous providers have made the switch to internally or externally developed software that provides for increased automation of Schedule K-1 creation and distribution. In the digital world, this creates efficiency on the preparation side and convenience on the recipient side. No longer does a K-1 provider need to spend as much time with detailed data entry, and no longer does a recipient need to wait for a Schedule K-1 to come in the mail. For large partnership/S corporation returns with numerous investors and Schedules K-1, some automation has become a near necessity to charge competitive fees and deliver returns and Schedules K-1 timely. The IRS has acknowledged that some partnerships may face compliance challenges with Schedules K-2 and K-3 for tax year 2021. When determining a filer’s good-faith effort, the IRS will consider the extent to which the taxpayer changed its systems, processes, and procedures for collecting and processing information relevant to Schedules K-2 and K-3.