What are Schedules K-2 and K-3? Where do I enter information for these schedules?
Schedules K-2 and K-3 are new for 2021. For info about Drake22, see Related Links below.
Schedules K-2 and K-3 are used to report more detailed information about a partnership's foreign transactions, however, they may be needed even if there is no foreign information to report. The new international-related schedules will be required to be filed (starting in 2021) in partnership returns and on Schedules K-1, Partner's Share of Income, Deductions, Credits, etc. The new forms will create more clarity for partners on how to calculate their U.S. income tax liability when considering potential international-related deductions, credits, and miscellaneous items. Although these forms contain a new level of detail, most of this information was already required to be included with previous Schedules K-1 as white paper attachments. With the Schedules K-2 and K-3, the information is now being required in a standardized format with an additional level of detail.
Per the instructions, "These schedules replace,
supplement, and clarify the former line 16,
Partners’ Distributive Share Items, Foreign
Transactions, of Schedule K, Form 1065,
and line 16, Foreign Transactions, of
Schedule K-1 (Form 1065). Schedules
K-2 and K-3 also replace, supplement,
and clarify reporting of certain amounts
formerly reported on Form 1065,
Schedule K, line 20c..."
The data entry screens for Schedules K-2 and K-3 are found on the K, K-1, K-2, K-3 tab of the 1065 package. Once applicable entries have been made, Schedule K-2 and K-3 are generated in view mode with Schedule K-3 included for each partner as part of their the K-1 set. Partners must include the information reported on Schedule K-3 on their own return.
Schedules K-2 and K-3 must be included as PDF attachments to Form 1065 (EF Messages 1508 and 1509). When the return is complete, click Attach PDF in view mode to generate the automatic attachments.
EF Message 0430 generates until the K-2/K-3 is either included or the transitional relief selection is made. An option for including a PDF of the forms created outside the software is detailed below.
PDF Attachment Option
Some parts of Schedules K-2/K-3 are not yet available in Drake21. A checkbox is available on the K screen > Credits tab that can be used to indicate that the Form K-2/K-3 has been prepared outside of the software and will be e-filed with the return as a PDF attachment. The forms must be completed outside of Drake Tax and then attached as a PDF to the return. You must complete the PDF screen and attach the forms in view. This checkbox also checks the boxes on the Form 1065, line 16 on Schedule K and K1.
Transitional Relief from Filing
For 2021, a partnership may qualify for transitional relief from filing Schedule K-2 and K-3. To make this selection, check the box Partnership qualifies for transitional relief from Schedules K-2 and K-3 filing requirements per the exceptions listed in the "Schedules K-2 and K-3 Frequently Asked Questions" section found at IRS.gov on screen 1:
If this box is marked, Form K-2/K-3 will not be generated. The field help provides more information about the transitional relief and exceptions:
- To qualify for this exception, the partnership must meet each of the following guidelines:
- In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates or foreign trusts.
- In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
- In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information regarding (on the form or attachments thereto):
- Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S)
- Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S)
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
- https://www.irs.gov/businesses/schedules-k-2-and-k-3-frequently-asked-questions-forms-1065-1120s-and-8865
Helpful Links
Part I of Schedules K-2 and K-3
Used to report international tax items not reported elsewhere on Schedule K-2 or Schedule K-3.
Part II of Schedules K-2 and K-3
Used to figure the partnership's income or loss by source and separate category of income and to report the partner's distributive share of such income or loss. Partners will use the information to figure and claim a foreign tax credit on Form 1116 or Form 1118.
Part III of Schedules K-2 and K-3
Used to report information necessary for the partner to determine the allocation and apportionment of research and experimental (R&E) expense, interest expense, and the foreign-derived intangible income (FDII) deduction for the foreign tax credit limitation. It is also used to report foreign taxes paid or accrued by the partnership and the partner's distributive share of such taxes, as well as income adjustments under section 743(b) by source and separate category. Partners will use the information to figure and claim a foreign tax credit on Form 1116 or Form 1118.
Part IV of Schedules K-2 and K-3
Used to report the information necessary for the partner to determine it's section 250 deduction with respect to foreign-derived intangible income (FDII). Partners will use the information to figure and claim a section 250 deduction with respect to FDII on Form 8993.
Part V of Schedules K-2 and K-3
Used to report information the partner needs to determine the amount of each distribution from a foreign corporation that is treated as a dividend or excluded from gross income because the distribution is attributable to previously taxed earnings and profits (PTEP) in the partner's annual PTEP accounts with respect to the foreign corporation, and the amount of foreign currency gain or loss on the PTEP that the partner is required to recognized under section 986(c). Partners will report the dividends and foreign currency gain or loss on Form 1040 or 1120. If eligible, partners will also use this information to figure and claim a "dividends received deduction" under Section 245A on Form 1120, and/or a foreign tax credit on Form 1116 or Form 1118.
Part VI of Schedules K-2 and K-3
Used to provide information the partner needs to determine any inclusions under sections 951(a)(1) and 951A. Partners will use the information to complete Form 8992 and Forms 1040 and 1120 with respect to subpart F income inclusions, section 951(a)(1)(B) inclusions, and section 951A inclusions.
Part VII of Schedules K-2 and K-3
Used to provide information needed by partners to complete Form 8621, and to provide partners with information to determine income inclusions with respect to the passive foreign investment company (PFIC).
Part VIII of Schedules K-2 and K-3
Used to provide the foreign corporation's net income in the income groups for purposes of the partner's deemed paid taxes computation with respect to inclusions under sections 951A, 951(a)(1), and 1293(f). Partners will use the information to figure and claim a deemed paid foreign tax credit on Form 1118.
Part IX of Schedules K-2 and K-3
Used to provide information for the partner to figure its base erosion and anti-abuse tax (BEAT). Partners will use the information to complete Form 8991.
Part X of Schedules K-2 and K-3
Used to provide information for the partner to figure its tax liability with respect to income effectively connected with a U.S. trade or business (ECI) or with respect to fixed, determinable, annual, or periodical (FDAP) income. Partners will use the information to figure and report any U.S. tax liability on Forms 1040-NR, 1120-F, or other applicable forms.
Part XI of Schedules K-2 and K-3
Used to provide certain information to U.S. and foreign partners with respect to section 871(m) by a publicly traded partnership that satisfies certain other requirements. Certain partners will use the information to determine their U.S. withholding tax obligations and to figure and report any U.S. tax liability on forms 1042 and 1042-S.
Part XII of Schedules K-2 and K-3
Reserved for future use.
Part XIII of Schedule K-3
Used to provide information for a foreign partner to figure its distributive share of deemed sale items on a transfer of the partnership interest. Partners will use the information to complete Form 4797 and Form 8949.