The IRS has released updated drafts of partnership return schedules implementing new international reporting requirements. The new schedules are meant to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to deductions, credits, and other items relevant to international tax.
The updated drafts include Schedule K-2, “Partners’ Distributive Share Items—International,” and Schedule K-3, “Partner’s Share of Income, Deductions, Credits, etc.—International.” The forms are scheduled to be effective for tax years beginning in 2021 (i.e. taxpayers must complete these new forms for the 2022 filing season). The IRS also plans to release an early draft of the related instructions this summer. Prior proposed draft Schedules K-2 and K-3 were released in July 2020. For more details, please see our prior coverage
Some notable differences between the current draft and the previous draft include:
- It appears taxpayers will only need to complete the applicable parts of Schedules K-2 and K-3, as shown by the new check boxes included at Line E on page 1 of the forms
- Dual consolidated losses, partner loan transactions, high-taxed income, and several other categories are now included in Part 1, Partner’s Share of Partnership’s Other Current Year International Information, as additional items requiring statements
- Part IV and Part V of the schedules were modified, with Part V retaining the request for information related to “Distributions from Foreign Corporations to Partnership.” Presumably further guidance will be forthcoming on the IRS approach related to distributions under the aggregate theory for the Global Intangible Low-Taxed Income (GILTI) and Subpart F
- Both forms were reduced by one page from the previously issued proposed forms, bringing the K-2 to 19 pages and the K-3 to 20 pages
The updated forms will apply to persons required to file Forms 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally speaking, foreign activities or foreign partners). To promote compliance with adoption of the new Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the IRS intends to provide certain penalty relief for the 2021 tax year in future guidance.
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