The IRS updated the regulations for Schedule K-2 and Schedule K-3 reporting in 2022, which have had a major influence on business tax return filling for firms in the US. The revised versions have two new international-related schedules to pass-through entity returns. Read on to learn about Schedules K2 and K3, the implication for foreign investors, and who needs to complete these forms.
What’s the purpose of the new Schedule K-2 and K-3?
The new schedules were created to give owners consistency and certainty regarding how to determine their US income tax requirements from relevant international items. These changes help streamline tax filing and reporting requirements for the partners while making it easier for the IRS to assess business returns.
The previous versions of Schedules K and K-1 did not specify a structure for providing foreign information, which resulted in an array of unformatted statements attached to Schedules K and K-1.
The revisions have significantly increased the number of taxpayers needing to file the schedules. According to the updated instructions, a business may be required to submit information on the schedules even if it has no international partners, foreign source income, assets producing that income, or foreign taxes paid or collected.
What’s Schedule K-2? (Partners’ Distributive Share Items — International)
Schedule K-2 is an entity-level form. It’s used to report items of international relevance from the operation of a partnership. The form requires more taxpayer information to determine US tax liabilities for items with global tax implications. It’s an extension of Form 1065 Schedule K.
What’s Schedule K-3? (Partner’s Share of Income, Deductions, Credits, etc. — International) Schedule K-3 is a form used to report each partner’s or shareholders’ distributive share of items of international relevance, such as international income, deductions, and credits. Partners and shareholders must be given copies of Schedule K-3 as it is an extension of Form 1065 Schedule K-1.
Who needs to file Schedule K-2 and K-3?
Generally, Schedules K-2 and K-3 must now be completed with US Income Tax Returns by companies with overseas investments, foreign partners, international investments, or partners who may require additional information for foreign tax credit filings.
What are the implications?
The new schedules add more complexity to reporting for private equity and alternative asset management funds with foreign activities. The additional informational items required on these forms could make it more difficult for funds to comply with tax laws while complicating investor-relations issues and timing issues.
We encourage foreign investors, partnerships, and S corporations to seek advice while preparing your business tax return. Book an appointment to see how the revisions affect your business tax return obligations. We can help you comply with the new tax laws, as penalties can be steep.