Overview

Schedules K-2 and K-3 are used to report detailed information about an S corporation'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 S corp returns and distributed to shareholders with their Schedules K-1. These forms are designed to provide more clarity for shareholders 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

An S corporation does not need to complete and file with the IRS the Schedules K-2 and K-3, or furnish to a shareholder* the Schedule K-3 if all of the following are true:

• No or limited foreign activity.

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

• No shareholders submit a request to receive Schedule K-3 to the s-corporation 1 month before the date the s-corporation 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 14. The options are as follows:

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

  • Schedule K, box 14 is not marked.

  • The following message is printed below box 14: 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 shareholders 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.

  • Note 822 is generated.

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

  • Must make additional entries on the applicable K-2 screens (located on the right side of the SBS K,K1, K2, K3 tab).

  • Schedule K, box 14 is marked.

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

  • Note 823 is generated.

• Schedule K-2 is required. Produce Schedules K-3 for applicable shareholders 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 shareholder that has a K-3 Print Option marked on screen K1E.

  • Note 824 is generated.

• Schedule K-2 is NOT required. Produce Schedules K-3 for applicable shareholders indicated on screen K1E.

  • 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 shareholder that has the Shareholder Only box marked on screen K1E.

  • 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 SBS K,K1, K2, K3tab. An override for foreign taxes paid or accrued is located on screen K > AMT and Basis tab > line 16f.

See Drake Tax - 1040 - 1120-S Schedule K-1 - Box 16, Code F and Schedule K-3 for details about entering information for shareholders that received Schedule K-3.