Schedules K-2 and K-3 — What Transportation Companies Need to Know

• January 5, 2022
• Brandon Knight

The IRS has released final versions of two new international-related tax filing schedules that are being added to passthrough entity returns (including Forms 1065, 8865, and 1120-S). Many people may, at first glance, may be lead to believe that K-2 and K-2 reporting matters are primarily a global tax issue; however, nearly every pass-through entity we serve could be affected – including domestic organizations with no foreign business activity. A special consideration and example of automatic qualification for this heightened level of reporting would be a company that is a member in a group captive insurance program.

These new schedules are intended 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. These additional schedules will be required to file in 2022 for tax years beginning in 2021, specifically:

• Schedule K-2 — Shareholder’ Distributive Share Items – International
• Schedule K-3 — Shareholder’s Share of Income, Deductions, Credits, etc. – International

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 increased reporting provides information around category and source of income to help partners and shareholders correctly calculate foreign tax credits.

Schedule K-2 will be an extension of Schedule K (required form in previous years) 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 generally be used to report a partner or shareholder’s share of the items reported on Schedule K-2. Partners and shareholders must include the information reported on Schedule K-3 on their tax or information returns.

In addition to sourcing, the new schedules will provide detailed information to better facilitate the preparation of Form 5471 (Controlled Foreign Corporations), Form 8621 (Passive Foreign Investment Companies), Form 8991 (Base Erosion Payments), and Form 8993 (Foreign-Derived Intangible Income).

Failure to file complete and accurate Schedules K-2 and K-3 can trigger various penalties that can depend on the number of partners or shareholders the entity has.

How Can We Help?

These new schedules and related filing requirements (in some cases exceeding 19 pages) are significant, especially in the case of foreign operations.

For questions, please contact your CLA Advisor or reach out to us today.

Thanks to Kyle Dawley, Kate Shelton and countless others for their help with this post!

Sources: irs.gov

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