IRS Finalizes Instructions for 2022 Schedules K-2 and K-3

As we have communicated previously, there has been guidance from the IRS regarding Schedule K-2 and K-3 filing requirements and answering tax preparer questions. Recently, the IRS has finalized the instructions for partnerships (2022 Partnership Instructions for Schedules K-2 and K-3 (Form 1065)) and S corporations (2022 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S)) completing 2022 Schedules K-2 and K-3. These final instructions retain the new domestic filing exception to the requirement to file and furnish to partners and shareholders Schedules K-2 and K-3 for tax years beginning in 2022.

Under the Tax Cuts and Jobs Act taxpayers are required to provide a lot more information about “items of international tax relevance” reported on their returns. For tax years beginning in 2021, the IRS requires passthrough entities (partnerships, S corporations and LLCs) with items of international tax relevance to complete Schedule K-2 and Schedule K-3 to report such items.  The IRS finalized the 2022 Instructions for Schedules K-2 and K-3 without substantive changes. The final instructions retain the domestic filing exception provided in the draft instructions.

The final instructions also, among other things, clarify the following:

• When domestic partnerships with solely domestic activity and with partners that are U.S. persons must use Schedules K-2 and K-3,
• How to report capital gains and losses, and
• When to complete certain items on the return with respect to the apportionment factors for research & experimental (R&E) expense.

McGuire Sponsel’s Global Business Services team is available to assist with any questions or support needed in this complicated area. Please reach out to us to schedule a conversation.