Good News on K-2 / K-3 Forms

• November 2, 2022
• Paul Neiffer

Based on recently released instructions to Schedule K-2 and K-3 for partnership tax returns, it appears that most of our partnership returns will not have to prepare these schedules for 2022 tax returns. The key requirements are as follows:

1. The partnership had none of the following foreign activity during the 2022 tax year:
   a. Foreign income taxes paid or accrued;
   b. Foreign source income or loss;
   c. Ownership interest in a foreign partnership;
   d. Ownership interest in a foreign corporation;
   e. Ownership of a foreign branch; or
   f. Ownership interest in a foreign entity that is treated as disregarded.
2. If the partnership’s foreign activity is limited to 1(a) and (b) above, it may still qualify for this exception if all of the following apply:
   a. The partnership only has passive category foreign source income;
   b. The partnership is treated as having paid no more than $300 of foreign taxes on that income; AND
   c. The partnership received a payee statement reporting these amounts.
3. All direct partners are one of the following:
   a. Individuals that are U.S. citizens or resident aliens;
   b. Domestic decedent’s estates with solely U.S. citizen and/or resident alien individual beneficiaries;
   c. Domestic grantor trusts that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; or
   d. Domestic non-grantor trusts with solely U.S. citizen and/or resident alien individual beneficiaries.

You will need to notify all partners in the partnership by January 15, 2023 (for calendar year returns). This notification can either be via mail or electronic. The notification must state that the partner will not receive a Schedule K-3 from the partnership unless the partner request the schedule. They will have until February 15 to make that request.

Most of the farm partnerships tax returns that I review in a year will easily meet these requirements. This is very good news since this form can be very painful to prepare. We assume that the instructions for the S corporation K-2/K-3 forms will be similar.

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