Schedules K-2 & K-3 – Relief from Filing for Tax Year 2022

Published on November 2, 2022 by Rob Riesenbeck in International Business, Tax Services

Schedules K-2 and K-3 continue to loom large – and they’re affecting many more organizations than initially anticipated. They’re also continuing to change and adapt since their 2021 inception, and proposed changes may bring relief for some previously affected organizations, at least for the 2022 tax year.

The first year of this new foreign reporting structure affected each flow-through entity with even the slightest amount of foreign activity. As a result, there were certainly growing pains involved for business owners and tax preparers alike having to learn and understand these new forms.

What’s changing – and who it helps

With the proposed 2022 partnership instructions for schedules K-2 and K-3, there appears to be some relief on the horizon for certain domestic partnerships. Starting in the 2022 tax year, domestic partnerships that meet all four of the criteria below will be eligible to omit schedules K-2 and K-3 from their already complex tax return.

What are the criteria for excluding Schedule K-2 and K-3?

The draft 2022 partnership instructions state that the following four criteria must be met for domestic partnerships to exclude schedules K-2 and K-3:

1. No or limited foreign activity. Limited activity means:
   • 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.
2. 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.
3. If a partnership meets the criteria of 1 and 2, the partnership must notify partners within 2 months of the due date of the tax return that the partners will not receive a Schedule K-3 unless requested.
4. The partnership does not receive a request from any partner for Schedule K-3 information on or before 1 month before the due date of the tax return.

Navigating uncharted waters

Foreign reporting continues to become more complicated from the tax perspective, and navigating complex IRS instructions and understanding how the changes affect your business can feel like a minefield. If you need professional guidance with international tax activity, the Barnes Dennig team of top international tax pros is here to help.

Join us on November 16th at 10 AM ET as we delve into the latest changes in international tax, along with other tax strategies to help your business thrive in 2023 and beyond in a landmark virtual event.

Can’t make it? You can watch later on demand – and our team of top international tax pros is always here to help. Contact us for a free consultation!

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