The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.
The draft forms are:
- Schedule K-2 (Form 1065), Partners’ Distributive Share Items—International, and Instructions for Schedule K-2.
- Schedule K-3 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.—International ; and Instructions for Schedule K-3.
These proposed forms would apply to a partnership required to file Form 1065 only if it has “items of international tax relevance” (i.e., generally, foreign activities or foreign partners). The changes would not affect domestic partnerships with no international tax items to report.
Partner Reporting of International Items
Partners must report international tax information on their tax returns on several tax forms and schedules. They generally obtain this information from their partnerships, usually through narrative statements attached to one or more Schedules K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. Since partnerships compile these statements in a variety of formats, partners might have difficulties translating the statements onto their own returns.
To ease this burden, the Treasury and IRS state that the proposed changes would provide a standard format that offers greater clarity to both partnerships and their partners. This standard format is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, so that partners can more easily prepare their tax returns, and the IRS can more efficiently verify taxpayer compliance. It is intended that all information to be reported on the new schedules is already necessary for the partnership to provide to partners or is available to the partnership.
Draft Schedules K-2 and K-3
Any partnership that is required to file Form 1065, U.S. Return of Partnership Income, and has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Code, will be required to complete the relevant parts of Schedule K-2 and Schedule K-3.
The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r). The proposed schedule provides for international tax information to be reported in a standardized manner. The partnership will attach Schedule K-2 to its Form 1065.
The proposed parts included in new Schedule K-3 (Form 1065) replace portions of Schedule K-1 (Form 1065), Part III, Boxes 16 and 20. The proposed schedule provides information to the partner generally in the format of the following forms that the partner might need to complete:
- Form 1040, U.S. Individual Income Tax Return;
- Form 1040-NR, U.S. Nonresident Alien Income Tax Return;
- Form 1116, Foreign Tax Credit (Individual, Estate, or Trust;
- Form 1118, Foreign Tax Credit—Corporations;
- Form 1120, U.S. Corporation Income Tax Return;
- Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;
- Form 4797, Sales of Business Property;
- Form 8949, Sales and Other Dispositions of Capital Assets;
- Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts;
- Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI); and
- Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).
The partnership will provide Schedule K-3 to its partners according to the timeline for providing Schedule K-1.
The draft schedules and instructions have been released to allow partnerships and other stakeholders time to consider the proposed changes and provide comments that can be taken into account in finalizing the schedules and instructions. The Treasury and IRS will be actively engaged with stakeholders to solicit input on these proposed changes before the forms are finalized later in 2020.
Affected stakeholders can submit comments through September 14, 2020. Written comments should be sent to the following email address: firstname.lastname@example.org with the subject line: “International Form Changes.”
For additional information and updates, see https://www.irs.gov/businesses/1065-form-changes.
The Treasury and IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. They welcome comments on similar changes to be made to these forms for the 2021 tax year.