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17944: 1065 - Schedule K2/K3 (Drake22)

1065 Partnership

Is there an exception to filing Schedule K-2 or K-3 this year? How do I include Schedule K-2 and K-3 for a partnership through Drake22? 


The IRS draft instructions (December 2022) required an exception to be filed two months prior to the due date of the return (January 15th for calendar year filers). That was changed by IRS and the final instructions have different guidelines for claiming an exception for certain partnerships, called the domestic filing exception.

The following is adapted from the 2022 Instructions for Schedules K-2 and K-3 (Form 1065). A domestic partnership does not need to complete and file with the IRS the Schedules K-2 and K-3, or furnish to a partner* the Schedule K-3 if all of the following are true:

  1. No or limited foreign activity. 
  2. All partners are U.S. citizen or resident alien partners.
  3. All partners must be notified that they will not receive Schedule K-3 from the partnership unless they request the schedule.
  4. No partners submit a request to receive Schedule K-3 to the partnership 1 month before the date the partnership files the return. See the instructions for details on this request and what to do if a request is received.

Selections are available on the K screen > Credits tab > line 16

The options are as follows: 

  1. Schedules K-2 and K-3 are not required. 
    1. Schedule K, box 16 is not marked.
    2. The following message is printed below box 16: Qualified for exception to filing Schedule K-2.  
    3. Schedules K-2 and K-3 are not produced. 
    4. A statement page, K3EX STM, is produced for each Schedule K-1 to notify the partners that they will not receive Schedule K-3. This wording cannot be changed, but you can use screen K3G to provide additional information to the shareholders. 
    5. Note 822 is generated.
  2. Schedule K-2 is required. Schedules K-3 are required and will be produced for all partners. 
    1. Must make additional entries on the applicable K-2 screens (located on the right side of the PTR K, K-1, K-2, K-3 tab). 
    2. Schedule K, box 16 is marked. 
    3. Schedules K-2 and K-3 are produced. Note that Schedule K-3 is printed for each partner in their K-1 set. 
    4. Note 823 is generated. 
  3. Schedule K-2 is required. Produce Schedules K-3 for applicable shareholders indicated on screen K1. 
    1. See the F1 field help for more info on this option. 
    2. Schedule K-2 is printed.
    3. Schedule K-3 is included in the K1 set for each partner that has an "K-3 File Option" marked on screen K1.
    4. Note 824 is generated.
  4. Schedule K-2 is NOT required. Produce Schedules K-3 for applicable partners indicated on screen K1. 
    1. See the F1 field help for more info on this option. 
    2. Schedule K-2 is not produced.
    3. Schedule K-3 is included in the K1 set for any partner that has the Partner Only box marked on screen K1.
    4. Note 825 is generated.
Once you have selected the appropriate option, ensure that required entries have been made on the screens under K-2 Information - International on the PTR K, K-2, K-2, K-3 tab. Note that a Schedule K-2/K-3 will not generate unless a selection is made in the Country code or Other Source of Information dropdown on the II1 screen. The K2EX STM is transmitted to the IRS, if completed in data entry. 

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