New draft K-2, K-3 partnership forms released

Tax Hot Topics newsletter The IRS released proposed draft Schedules K-2, Partners’ Distributive Share Items—International and K-3, Partner’s Share of Income, Deductions, Credits, etc.—International and accompanying instructions on July 8 addressing international reporting requirements of certain partnerships.

The proposed forms are meant to replace, supplement, and clarify parts of the existing international tax reporting sections in Schedule K and Schedule K-1. Schedule K-2 will be filed with a partnership’s Form 1065 while Schedule K-3 will be delivered to partners in the same manner and timing as Schedule K-1. The IRS has requested comments on the draft forms by Sept. 14 and intends to finalize them for tax year 2021. The IRS plans to make similar revisions to the Form 1120-S and Form 8865 for the 2021 tax year.

The purpose of the new forms is to better align the information partnerships provide with the tax forms used by partners, and provide greater clarity for partners on how to compute their U.S. income tax liability with respect to international tax matters. Schedule K-2 is divided into nine parts while Schedule K-3 has 10 parts. Below is a list of each part.

  • Part I: Partnership’s Current Year International Transaction Information (K-2) / Partner’s Share of Current Year International Transaction Information (K-3)
  • Part II: Foreign Tax Credit Limitation
  • Part III: Other Information for Preparation of Form 1116 or 1118
  • Part IV: Other Foreign Transaction Information for U.S. Partners
  • Part V: Information on Partners’ Section 951(a)(1) and Section 951A Inclusions (K-2) / Information on Partner’s Section 951(a)(1) and Section 951A Inclusions (K-3)
  • Part VI: Information to Complete Form 8621
  • Part VII: Partnership’s Interest in Foreign Corporation Income (K-2) / Partner’s Share of Partnership’s Interest in Foreign Corporation Income (K-3)
  • Part VIII: Partners’ Information for Base Erosion and Anti-Abuse Tax (Section 59A)
  • Part IX: Foreign Partners’ Character and Source of Income and Deductions
  • Part X: Foreign Partner’s Distributive Share of Deemed Sale Items on Transfer of Partnership Interest (K-3 only)

The forms would provide both the IRS and partners with various information addressing a wide range of international tax areas, ranging from information supporting the claim of a foreign tax credit, to information necessary for corporate partners to compute its base erosion and anti-abuse tax.

The proposed changes would not affect domestic partnerships with no items of international tax relevance. However, the proposed changes may present challenges to partnerships with foreign operations and investments, including asset management funds and private equity funds.

Grace Kim
Principal, Partnerships
Washington National Tax Office 
T +1 202 521 1590

David Sites
Washington National Tax Office
T +1 202 861 4104

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office 
T +1 202 521 1552

Sarah Barlow
Senior Associate
Washington National Tax Office
T +1 202 521 1505

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