Update on Filing Requirements for Schedules K-2 and K-3
Last month, the IRS released drafts of the 2022 instructions for Schedules K-2 and K-3. The instructions added a new domestic filing exception that has a significant impact to flow through businesses.
The domestic filing exception exempts a domestic partnership from Schedules K-2 and K-3 filing requirements if each of the following requirements are met with the respect to the partnership’s 2022 tax year:
- 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) an ownership interest in a foreign partnership; (d) an ownership interest in a foreign corporation; (e) an ownership of a foreign branch; or (f) an ownership interest in a foreign entity that is treated as disregarded.
- If the partnership’s foreign activity is limited to the first two items 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.
- 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.
With respect to a partnership that satisfies #1 and 2 above, the partnership must notify the partners, either electronically or by mail, that they will not receive Schedule K-3, unless a specific request for the Schedule is made by the partner(s). The notification must be dated no later than two months before the due date, without extension, for filing of the partnership’s tax year 2022 Form 1065.
A partner’s request for Schedule K-3 must be submitted to the partnership one month before the due date, without extension, of the partnership’s Form 1065. For tax year 2022 calendar year partnerships, this “one month” date is February 15, 2023.
The 2022 instructions for Schedules K-2 and K-3 also included some other key planning considerations, which we will share next week.
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.
[…] addition to the new domestic filing exception discussed last week, the 2022 instructions for Schedules K-2 and K-3 added the following exceptions to completing Parts […]