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.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.