Understanding the New International Passthrough Reporting
Last year, the IRS released final versions of two new international-related schedules that are being added to passthrough entity returns to provide more clarity for shareholders and partners on how to calculate their U.S. income tax liability when considering potential international-related deductions, credits and miscellaneous items.
The new schedules are Schedule K-2, Partners' Distributive Share Items — International and Schedule K-3, Partner's Share of Income, Deductions, Credits, etc. — International. Similar schedules have been released for S corporation returns as well.
Schedule K-2 will report the partnership/S corporation-level activity attached to a flowthrough return, and Schedule K-3 will be given to each partner or shareholder and report its proportionate amount for each item.
The new schedules will be required to be filed with 2021 partnership/S corporation returns and 2021 Schedules K-1, Partner's Share of Income, Deductions, Credits, etc.
The IRS announced in Notice 2021-39 that it will provide certain penalty relief to filers who fall short of the new requirements in tax years that begin in 2021 as long as they make a good-faith effort to comply.
Here are some additional resources to assist you in understanding these changes:
- “Navigating the new Schedules K-2 and K-3” – Tax Adviser article (September 2021)
- AICPA Foreign Partnership Reporting Task Force comment letter (September 2020)
- AICPA Podcast on Practitioner Insights, K-2/K-3 – “Making Sense of New International Pass-through Reporting”
- AICPA’s Town Hall Feb. 3, 2022, Webcast - Lisa Simpson, AICPA Vice President – Firm Services covers the K-2/K-3 issue at the 17:22 mark
- Changes to the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065)