Schedule K-2 & K-3 – Additional Relief for 2022 Tax Filings
In our signature tax event last fall, we highlighted the changes to the proposed 2022 partnership instructions for Schedule K-2 and K-3, which continue to loom large and are impacting many more organizations than initially anticipated. Now the IRS has updated the proposed instructions to provide additional relief. That’s welcome news for some taxpayers, but it’s important to keep in mind that the changes are still just proposals at this point.
What are the criteria for excluding Schedule K-2 and K-3?
The draft partnership instructions for 2022 partnership filings state that all four of the following criteria must be met for the partnership to exclude schedules K-2 and K-3.
Criteria 1 – No or limited foreign activity
Limited activity is defined as:
- Only having passive foreign income
- No more than $300 of foreign income taxes allowed as a credit, AND;
- Foreign income and taxes are on a statement furnished to the partnership
Criteria 2 – Rules for direct partners during the tax year
During the tax year, all direct partners are one of the following:
- Individuals that are U.S. citizens
- Individuals that are U.S. resident aliens
- Domestic decedent’s estates with solely U.S. citizen and/or resident alien individual beneficiaries
- Domestic grantor trusts with solely U.S. citizen and/or resident alien individual grantors and beneficiaries, or;
- Domestic non-grantor trusts with solely U.S. citizen and/or resident alien individual beneficiaries
Criteria 3 – Notification of partners
If a partnership meets the criteria of 1 and 2, the partnership must notify partners they will not receive Schedule K-3. This notification can be provided as an attachment to the schedule K-1.
Criteria 4 – No requests received from any partner
If the partnership doesn’t receive a request from any partner for Schedule K-3 information on or before one month prior to the due date of the tax return.
More changes could be on the horizon
The instructions are still proposed, and the IRS has already shown they are willing to adjust the instructions based on feedback received. We’ll keep you updated on any changes as they are released. If you have any questions on the impact of your international activity, the Barnes Dennig team of top international tax pros is here to help. Contact us today.