Overview

Schedules K-2 and K-3 are used to report detailed information about a partnership's foreign transactions, however, they may be needed even if there is no foreign information to report. These international-related schedules are required to be filed (starting in 2021) with 1065 returns and distributed to partners with their Schedules K-1. These forms are designed to provide more clarity for partners on how to calculate their US income tax liability when considering potential international-related deductions, credits, and miscellaneous items. Although these forms contain a greater 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 the additional level of detail.

Requirements

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:

• No or limited foreign activity.

• All partners are US citizen or resident alien partners.

• All partners must be notified that they will not receive Schedule K-3 from the partnership unless they request the schedule.

• 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.

Data Entry

Selections are available on the K screen > Credits tab > line 16. The options are as follows:

• Schedules K-2 and K-3 are not required.

  • Schedule K, box 16 is not marked.

  • The following message is printed below box 16: Qualified for exception to filing Schedule K-2.

  • Schedules K-2 and K-3 are not produced.

  • 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 partners.

  • Note 822 is generated.

• Schedule K-2 is required. Schedules K-3 are required and will be produced for all partners.

  • Must make additional entries on the applicable K-2 screens (located on the right side of the PTR K, K-2, K-2, K-3 tab).

  • Schedule K, box 16 is marked.

  • Schedules K-2 and K-3 are produced. Note that Schedule K-3 is printed for each partner in their K-1 set.

  • Note 823 is generated.

• Schedule K-2 is required. Produce Schedules K-3 for applicable partners indicated on screen K1.

  • See the F1 field help for more info on this option.

  • Schedule K-2 is printed.

  • Schedule K-3 is included in the K1 set for each partner that has an "K-3 File Option" marked on screen K1.

  • Note 824 is generated.

• Schedule K-2 is NOT required. Produce Schedules K-3 for applicable partners indicated on screen K1.

  • See the F1 field help for more info on this option.

  • Schedule K-2 is not produced.

  • Schedule K-3 is included in the K-1 set for any partner that has the Partner Only box marked on screen K1.

  • 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. An override is available on the K screen > Other Information Cont'd. tab > line 21.

See Drake Tax - 1040 - 1065 Schedule K1 - Box 21 and Schedule K-3 for details about entering information for partners that received Schedule K-3.