Reporting Changes for Partnerships
New York, NY — January 10, 2023
If you are an investor or a manager of pass-through entities such as partnerships or S corporations, the changes in reporting schedule K-2 and K-3 for tax year 2022 will be of relevance to you, as the IRS now requires each party (investors and partnerships / S corporations) actively communicate with each other to request and issue, respectively, the said schedules.
What is Schedule K-2 and K-3?
Schedule K-2 is used to report items of international tax items from the operation of a partnership or a S corporation. Schedule K-3 is used to report to partners or shareholders their share of the items reported on Schedule K-2.
Who must file?
Any partnership or S corporation required to file Form 1065 or 1120-S that has international tax items that affect U.S. tax liability, U.S. withholding tax, or U.S. reporting obligation of its partners or shareholders.
When and where to file?
Schedules K-2 and K-3 are attached to the partnership's Form 1065 or to the S corporation's Form 1120-S.
Domestic Filing Exception (Exception To Filing Schedule K-2 and K-3)
For the 2022 tax year, a domestic partnership or S corporation does not need to file Schedules K-2 and K-3 if all of the following 4 criteria are met by the partnership or if the criteria 1, 3, 4 are met by the S corporation:
1. No or limited foreign activity;
2. (Not applicable to S corporation) Only U.S. citizen / resident alien partners;
3. Partner or shareholder notification; and
4. No 2022 Schedule K-3 requests by the 1-month date
No or limited foreign activity
The domestic partnership or the S corporation either has no foreign activity or, if it does have foreign activity, such foreign activity is limited to (a) passive category foreign income (e.g., interest, dividends, and capital gains); (b) upon which not more than $300 of foreign tax was paid or accrued by the partnership or S corporation; and (c) such income and taxes are shown on a payee statement that is furnished to the partnership or the S corporation.
Only U.S. citizen / resident alien partners
All direct partners in the domestic partnership are:
U.S. citizens or U.S. resident alien individuals;domestic estates and trusts of which the beneficiaries are solely U.S. citizens or U.S. resident alien individuals;S corporations with a sole shareholder; orSingle-member LLCs where the sole member is one of the persons listed above
Partner/shareholder notification
The partnership or the S corporation sends to its partners or shareholders a notification stating that no Schedule K-3 will be provided by the partnership or the S corporation unless the partner or shareholder requests the Schedule K-3 from the partnership or the S corporation. This notification can be provided as an attachment to the Schedule K-1.
No 2022 Schedule K-3 requests by the 1-month date
The partnership or S corporation does not receive a request from any partner or shareholder for Schedule K-3 information on or before the 1-month date. The "1-month date" is 1 month before the date the partnership or S corporation files the Form 1065 or 1120-S. For calendar year partnerships or S corporations, the latest 1-month date is August 15, 2023, if the partnership or S corporation files an extension.
Do you need to request K-3 from the partnership or the S corporation?
If you are an investor in a partnership or an S corporation and claim a credit for foreign taxes paid (on your foreign investment income, for example), you may need to request Schedule K-3.
For more information, please consult your Perelson Weiner tax advisor
Perelson Weiner is a full service Certified Public Accounting and consulting firm dedicated to serving the needs of successful entrepreneurs, high net worth individuals and families and international companies doing business in the United States. Perelson Weiner LLP is a member of the Center for Public Company Audit Firms and the Private Company Practice Section of the American Institute of Certified Public Accountants (AICPA). The firm is a member of PrimeGlobal, the third largest association of independent accounting firms in the world, comprised of over 350 highly successful independent public accounting firms in 90 countries.