Tax Insights

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IRS releases draft instructions for forms K-2 and K-3

On June 29, 2021, the IRS released draft instructions of forms K-2 and K-3, after receiving feedback on the initial instructions that were released in July 2020. These new draft instructions may be found here https://www.irs.gov/pub/irs-dft/i1065s23–dft.pdf. The new forms will be effective for the 2021 tax year.

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Forms K-2 and K-3 are only used by filers of forms 1065, 1120-S and 8865 if the entity has certain international activities, such as foreign partners or international activities. Therefore, these schedules will not be required for entities with no items of international relevance.

The K-2 and K-3 forms will replace certain lines on Form K-1 and will provide more detail in an organized and clear-cut layout, so that partners or shareholders can easily pull the information they need to complete their tax filings.  For example, the K-2 and K-3 for partnerships will replace the K-1 line 16 (foreign tax credit information) and line 20 (other information).

The new forms will provide details of the partners’ or shareholders’ distributive share of some of the following international items:

  • Foreign tax credit
  • Foreign-Derived Intangible Income (FDII)
  • Distributions
  • Global Intangible Low-Tax Income (GILTI)
  • Passive Foreign Investment Companies (PFICs)
  • Interest in Foreign Corporation Income
  • Base Erosion and Anti-Abuse Tax
  • Foreign partners’ character and source of income and deductions
  • Covered partnerships
  • Gain on personal property sale
  • Foreign oil and gain taxes
  • Splitter arrangements
  • High-taxed income
  • Section 267A disallowed deduction
  • Form 8858 information
  • Form 5471 information
  • Other forms
  • Partner loan transactions
  • Dual consolidated loss
  • Other international items

Please consult with a qualified Henry+Horne tax professional for any assistance or questions.  This information is general and should not be relied on.

Jill A. Helm, CPA