New Schedules K-2 and K-3 Coming for the 2021 Tax Year
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
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
[…] gains, and partnerships with foreign investors and/or foreign transactions (don’t forget the new Schedules K-2 and K-3 reporting) will be heavily […]