New Schedules K-2 and K-3: Reporting Partners' International Share of Income, Deductions, Credits

Description

Designed before the 2017 Tax Act, the current Schedule K-1 has only one line for reporting all foreign transactions. This requires practitioners to attach narratives and supplemental schedules explaining foreign reportable items that partners must then interpret and report on their individual income tax returns. The IRS must manually review these same attachments.

The lack of consistency in reporting foreign items creates confusion for all. For partnerships, new Schedules K-2 and K-3 have been added for the 2021 tax year reported in 2022. Schedule K-2 is similar to the current Schedule K, and Schedule K-3 is similar to the current Schedule K-1, but both include foreign reportable items.

The new Schedule K-2 has nine parts, while Schedule K-3 has ten. These parts contain the partnership's share of current international transactions, foreign tax credit limitation information, IRC Section 250 deduction for FDII, GILTI inclusions, and other key information needed to properly report foreign income, credits, and deductions on partners' returns. These schedules will also allow the IRS to easily match the same items to the individual partners' individual income tax returns. For this reason, international tax practitioners must understand how to complete these new mandated schedules properly.

Listen as our panel of international tax experts explains how to properly complete new Schedules K-2 and K-3, including advice on preparing for this upcoming reporting obligation.