The Internal Revenue Service added new information to its frequently asked questions and answers on the new Schedules K-2 and K-3 for reporting international taxes.
The IRS added eight new sets of questions and answers to its
The new Form 1065 Schedule K-2 reports items of international tax relevance and is an extension of the Form 1065, Schedule K. In general, the Form 1065 Schedule K-3 reports a partner’s distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1. In tax years starting in 2021, flow-through entities with items of international tax relevance have to fill out the new schedules.
Questions 19 through 26 were added Monday. They include the answers to questions such as whether a partnership or S corporation is required to complete all parts of Schedules K-2 and K-3 if they don’t qualify for an exception. And if the filer does qualify for an exception, do the instructions nevertheless require them to complete Forms 5471, 8865, and/or 8858? Another question involves when a filer needs to complete Section 1 of Part III, Schedules K-2 and K-3 (Forms 1065, 1120-S, and 8865).
“A filer is not required to complete Section 1 of Part III unless either (1) the partnership or S corporation incurs research & experimental expense or (2) the partner or shareholder is expected to license, sell, or transfer its intangible property to the partnership or S corporation (as provided in §1.861-17(f)(3)),” said the IRS. “This clarification will be added to the tax year 2022 instructions. However, filers may choose to follow this clarification for tax year 2021.”
Other questions involve whether a partnership should report its accrued original issue discount (OID) and OID income taxable on a gross basis to a foreign partner, whether Part VIII (Form 1065) and Part VII (1120-S) of Schedules K-2 and K-3 are required to be completed for dormant foreign corporations, and what needs to be reported by foreign partnerships that have passive foreign investment companies and have made a mark-to-market election.
