What should private equity know about the new K-2 and K-3 schedules
In an effort to replace, supplement and clarify the current foreign reporting structure and to increase taxpayer compliance with the international tax provisions of the Internal Revenue Code, the IRS has introduced Schedules K-2, Distributive Share Items – International, and K-3, Share of Income, Deductions, Credits, etc. – International, for partnerships and S corporations for the 2021 tax year.
Partnerships or S corporations with items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners or shareholders under the international tax provisions of the Internal Revenue Code must complete the relevant parts of Schedules K-2 and K-3. The partnership or S corporation only need to complete Schedules K-2 and K-3 if there are international activities or if there are foreign partners or shareholders.
Schedule K-2 will be an extension of Schedule K and will be used to report items of international tax relevance from the operation of the partnership or S corporation. Schedule K-3 will be an extension of Schedule K-1 and will be generally used to report a partner or shareholder’s share of the items reported on Schedule K-1. Partners and shareholders must include the information reported on Schedule K-3 on their tax or information returns.
The twelve parts of Schedules K-2 and K-3 are comprehensive in their attempt to address international issues that could impact the partner or shareholder’s tax or information returns, and will include:
Miscellaneous international information (Part I).
Allocation and apportionment of gross income and deductions for calculating the foreign tax credit (Parts II and III).
Information to calculate the foreign-derived intangible income deduction (Part IV).
Information from Passive Foreign Investment Companies to complete Forms 8621 (Part VII).
Foreign distributive share of deemed sale items on a transfer of an interest (Part XIII, Schedule K-3).
Penalties can be assessed for failing to properly file the new Schedules K-2 and K-3, including failure to file or show information on a partnership tax return or S corporation tax return, failure to file correct information returns, failure to furnish correct payee statements and failure to furnish information as required under Section 6038. Notice 2021-39 describes relief that is available to taxpayers in the first transition year, assuming that a good faith effort was made to comply with the new extensive international reporting requirements.
Source: IRS.gov
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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