Revised Schedule K-2 and K-3 Instructions
IRS provides additional reporting relief
When it comes to filing taxes for a partnership, Schedule K-2 and K-3 are important forms to understand. These forms provide detailed information about the partnership’s income, deductions and credits, which are then reported on the partners’ individual tax returns.
Schedules K-2 and K-3 report items of international relevance.
Schedule K-2 is used to report the partners’ distributive share items, which include the partnership’s income, gains, losses, deductions and credits. Schedule K-2 is an extension of Schedule K of Form 1065, Form 1120-S and Form 8865.
Schedule K-3 is used by the partnership to report each partner’s share of the partnership’s income, deductions, credits and other items. Schedule K-3 is an extension of Schedule K-1.
The forms were first required to be filed for the 2021 tax year and the compliance challenges continue. The final instructions for the 2022 tax year provide some relief,
New Domestic Filing Exception
The final 2022 instructions to Schedules K-2 and K-3 contain a “domestic filing exception” for certain domestic partnerships with no or limited foreign activities (under $300 of foreign income tax allowable as a credit), and that meet other restrictions related to the types of partners. Partnerships meeting this exception are not required to file Schedules K-2 and K-3 and they have partner notification requirements.
Importantly, if any partners are themselves partnerships, the domestic filing exception is not available.
The domestic filing exception may be available for some general partner entities and management companies. For example, if the members are all domestic individuals and the other requirements are met, the exception may apply.
Partnerships (including LLCs taxed as partnerships) and S corporations that meet the no-foreign-partners or shareholders, and no-or-little-foreign-activity tests and wish to opt out of filing Schedules K-2 and K-3, must provide notice to all partners/members of this intent to give partners or shareholders the opportunity to request a K-3. If no partner or shareholder responds to request a schedule, at least one month before the date the tax return is filed (no later than August 15, 2023 for the 2022 tax year), then the company is not required to file either Schedules K-2 or K-3 with the IRS. However, the company may be required to prepare a Schedule K-3 for any partner or shareholder who requests the schedule after the earlier date of when the return is filed, or August 15, 2023. This notification can be provided in a statement to the Partner or Shareholder as an attachment to their form K-1.
The K-2 and K-3 reporting requirements are also similar for S Corporations and their shareholders.
Coordinating and planning with a tax advisor to provide Schedules K-3 to investors in a timely manner is critical. Please contact an Adams Brown advisor if you have any questions about Schedule K-2 or K-3.