New instructions for Schedules K-2, K-3 eye int’l tax

The Treasury and the IRS have released early draft instructions for the new Schedules K-2 and K-3 for 1065s, 1120-Ss and 8865s for tax year 2021. The new schedules themselves appeared on June 3 and 4.

The redesigned forms and instructions give guidance to partnerships, S corporations, and U.S persons who must file a Form 8865 with respect to controlled foreign partnerships on how to provide international tax information.

The updated forms apply to any persons required to file a Form 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners). The changes do not affect partnerships and S corporations with no items of international tax relevance.

The instructions respond to comments received with respect to draft instructions from last summer. Among other things, they:

• Clarify when each part of the schedule is applicable;
• Clarify that the preparer must only complete the applicable parts of the Schedules K-2 and K-3; and,
• Provide instructions for requested new separate schedules regarding determination of the Section 250 deduction and the allocation and apportionment of expenses.

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