The Internal Revenue Service (IRS) recently issued revised instructions for Schedules K-2 and K-3 for the 2022 tax year. The revised instructions include a new “domestic filing exception” for partnerships and S corporations in response to requests for expanded filing relief and clarity. The Schedules K-2 and K-3 reporting forms are used by pass-through entities to report certain international income, deductions, credits and other miscellaneous items.
Partnerships and S corporations that meet the domestic filing exception will not be required to file Schedules K-2 and K-3 with the IRS. The domestic filing exception will be met with the following requirements:
- The entity’s foreign activity, if any, must be limited as described in the form instructions (generally limited to passive foreign income with not more than $300 of foreign income taxes allowable as a credit).
- If the entity is a partnership, all direct partners must be U.S. citizens or resident alien partners (domestic estates and trusts with solely U.S. citizens and/or resident alien beneficiaries are included) as further described in the form instructions.
- Partners/shareholders must be timely notified. The eligible entity must notify the partners/shareholders by the time they are finished with their Schedule K-1. The notice can be provided as a Schedule K-1 forms. The notification must state that partners/shareholders will not receive Schedule K-3 from the partnership or S corporation unless requested.
- No 2022 Schedule K-3 requests are made by a partner/shareholder to the qualifying entity on or before the “one-month date.” The one-month date is defined as one month before the date the qualifying entity files its income tax returns. For example, for a 2022 calendar year partnership filing on extension, the latest one-month date would be August 15, 2023. If a partner/shareholder requests a Schedule K-3 from the entity after the one-month period, then the entity only has to provide the information to the requesting partner/shareholder and does not have to file the Schedules K-2 and K-3 with the IRS.
Qualifying entities that wish to take advantage of the domestic filing exception must timely notify partners/shareholders that the entity will not be issuing Schedule K-3 unless specifically requested. Additionally, qualifying entities will be responsible for tracking whether any timely requests for Schedule K-3 have been made.
To best determine if the domestic filing exception is right for your organization, please contact your BSSF advisor.
About the Author
Mary Kay Toth, CPA, is a Principal at Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. She has over 25 years of experience in public accounting with clients all over the south-central Pennsylvania region. Mary Kay is considered a trusted advisor, consulting with a wide variety of small, closely-held business clients and assisting them with their financial and tax needs which include business tax planning, tax compliance services and financial statement preparation.