IRS Implements New Schedules K-2 and K-3 for 2021 Tax Year

IRS Implements New Schedules K-2 and K-3 for 2021 Tax Year

*The IRS updated their guidance on February 16, 2022 with some exceptions for certain domestic partnerships and S corporations, which will only be granted for tax year 2021. We encourage you to contact your tax advisor if you have questions.

The IRS has issued changes for new Schedules K-2 and K-3 that will affect pass-through entities for the 2021 tax year. Domestic partnerships, foreign partnerships and S Corporations with items with “international relevance” must complete the Schedules K-2 and K-3.

What Are Schedules K-2 & K-3?

The Schedules K-2 and K-3 were created to supplement and expand on some items that were already being reported on the Schedule K-1.

  • Schedule K-2: Will provide international components and information needed at a partner level with information necessary for foreign tax credit, foreign-derived intangible income (FDII), global intangible low-taxed income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) provisions. For Form 1120-S and 8865 filers, the schedule will be 14 pages. For Form 1065 filers, the schedule will be 19 pages and will replace line 16 on Schedule K-1. This schedule will highlight whether additional forms related to foreign investments in subsidiaries or branch entities will be required.
  • Schedule K-3: Will provide partners and shareholders with their respective share of international information provided on Schedule K-2. For Form 1120-S and 8865 filers, the schedule will be 15 pages and will replace the information on line 16 of K-1. For Form 1065 filers, the schedule will be 20 pages and will replace the information on line 14 of K-1.

Who Does This Affect?

Given the IRS’s definition of “international relevance,” which is wide-ranging, this would apply for the following pass-through entities with:

  • Non-U.S. activities including foreign subsidiaries, export sales and payments made to non-U.S. parties
  • Foreign partners or shareholders
  • Partners or shareholders that file Form 1116

The IRS, under Notice 2021-39, is offering penalty relief for filers who make a good faith effort to comply with the reporting required for Schedules K-2 and K-3 for the 2021 tax year.

What Should Those Affected Do Next?

Prior to making any decisions on next steps, tax filers should consult with their tax advisor to explore options available. While one of those options could be for any S corporations and partnerships to file an extension, we recommend speaking with your tax advisor before making any decisions.

If you have any questions regarding this new file requirement, please contact your BSSF tax advisor.

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