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Is There a New Schedule K-2 and K-3?

Yes… there is. Effective for the tax year 2021 any partnership with foreign partners or with foreign activity is required to file Schedules K-2 and K-3.

Background

The Tax Cuts and Jobs Act (TCJA), passed in December of 2017, brought major reform to U.S. international tax. These changes impacted taxable income from offshore activity but also resulted in increased reporting requirements. Since then, tax practitioners have been trying to hit moving targets with everchanging updates to forms and filing requirements year after year.

Among the changes to International reporting are the Schedules K-2 and K-3 which are being  added to further enhance Schedule K-1 reporting. The IRS first released a draft of the Schedules K-2 and K-3 in June of 2020 and recently released an updated draft version of the forms.

Historically all of a partnerships foreign reporting to its partners was on one-line item, line 16 of the Schedule K-1. Due to the changes under TCJA as well as the ever increasing offshore activity of U.S. taxpayers the IRS identified a need bring some consistency to how partnerships report their foreign activity.   The new format is intended to streamline the reporting so that partners receive the information that is necessary to accurately complete their tax returns in a consistent format across all partnerships.

Because 2021 is the initial year and implementing the new filing requirement may pose some challenges, the IRS does offer relief for taxpayers that make a good faith effort to comply for 2021.

Overview of Changes

Schedule K-1 Box 16, Foreign Transactions, will now be limited to a simple checkbox disclosure which discloses if Schedule K-3 is attached.

The actual Schedule K-2 and K-3 will provide additional detail on foreign tax credit attributes by basket of income, additional detail for Global Intangible Low-Taxed Income (GILTI) calculations, and other common reporting items such as PFICs that partnerships have typically conveyed to their partners in white paper statements.

The transition to reporting additional detail on the Schedule K-2 and K-3 may be challenging for partnerships.  However, the hope is that this transition pain will be short lived and the benefits to partners and the increased efficiency in the IRS’s processing of this data will be beneficial for all taxpayers in the system.

Author: Charles Batikha, CPA | cbatikha@withum.com

For help understanding your Schedule K-2 and K-3  filing requirement and assistance with these forms please reach out to us.

International Tax Services

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