What are Schedules K-2 and K-3 on an 1120-S? 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 scorp'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 s-corp returns and on Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc. The new forms will create more clarity for shareholders 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,
"Schedules K-2 and K-3 are new for the 2021 tax year. These schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 1120-S, U.S. Income Tax Return for an S Corporation, Schedule K, line 14, Foreign Transactions; and Schedule K-1 (Form 1120-S), Part III, Shareholder's Share of Income, Deductions, Credits, etc., line 14, Foreign Transactions. Schedules K-2 and K-3 also replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 1120-S, Schedule K, line 17d, Other items and amounts; and Schedule K-1, Part III, line 17, Other information. The new schedules assist S corporations in providing shareholders with the information necessary to complete their returns with respect to the international tax provisions of the Internal Revenue Code. For example, the new Schedule K-3 provides information necessary for shareholders who make an election under section 962 to figure their foreign tax credit on Form 1118, Foreign Tax Credit—Corporations, and other shareholders to figure their foreign tax credit on Form 1116, Foreign Tax Credit (Individual, Estate or Trust), respectively."
PDF Attachment Option
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. If you choose this method, the forms must be completed outside of Drake Tax (links below) 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 1120S, line 14 on Schedule K and K-1.
Important: If you check this box, do not make any entries on the screens on the SBS, K2, K3 tab. Be sure to delete any blank (but activated) or partially completed screens on the SBS, K2, K3 tab if using this option. An activated screen is shown as blue when in data entry.