Are you invested in a partnership that provides you with an enormous number of documents attached to the K-1? Well the recent form changes are meant to extract some of the long narratives to describe the type of foreign income items being allocated to you and streamline such disclosures to specific Schedules on the K-1.
With the new tax law changes from the Tax Cuts and Jobs Act of 2017, many partnerships became subject to additional international reporting such as global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). In order to convey this information to partners, partnerships have added various footnotes to K-1 forms. There was no guidance in place for any specific format for these footnotes, so partners may have had difficulty interpreting various footnotes provided by different partnerships. This has also proven to be a challenge to the IRS in their audit process as they attempt to reconcile the new foreign reporting of the partnership with each partner. To provide a more streamlined process to this reporting, the IRS has created two new schedules to go along with the K-1, Schedules K-2 and K-3.
The Schedule K-2 will provide the international tax information at the partnership level, and Schedule K-3 will provide a breakdown of this information at the partner level. The K-2 is meant to replace the current K-2 lines 16(a) through 16(r). The K-3 is meant to replace part of K-1, Boxes 16 and 20. The new schedules will assist in the uniformity of reporting and provide clarity to partners and IRS agents on these complex international reporting requirements. These additional schedules would only need to be filed by partnerships with international tax information to report. The forms are expected to be finalized later this year and effective in 2021 (for filing season 2022). The IRS is working on similar revisions for S-Corporations and Foreign Partnership 8865 forms.
Draft forms and instructions may be found here:
Please consult a qualified tax professional for assistance with this reporting. This information is general and should not be relied on.
Jill Helm, CPA