For 2021, partnerships and S-corporations are required to include new tax forms, Schedule K-2 and Schedule K-3, with their tax returns to provide information regarding foreign income, deductions, taxes and credits, as well as other miscellaneous items of international tax relevance.
The IRS instructions for these forms indicate that if you do not have foreign source income you are not required to file these forms; however, the IRS issued new guidance in late January changing the instructions and indicating that most entities are required to file these forms.
Under the new guidance, a partnership or S-Corporation with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued will still need to report information on Schedules K-2 and K-3 if any owner claims a credit for foreign taxes paid. This includes income generated from other sources such as passive income earned through a brokerage account that results in a foreign tax credit.
The two main exceptions to filing the K-2 and K-3 forms are if the entity has no gross receipts or if all partners/shareholders certify that this information will not be necessary to complete international tax related items on their return (including the foreign tax credit claimed on Form 1116).
Failure to file complete and accurate Schedules K-2 and K-3 can trigger substantial penalties that can depend on the number of partners or shareholders in the entity.
Due to delays in fully implementing the e-filing system for the new forms, the IRS has indicated that if there is a filing requirement for K-2/K-3 the tentative dates for e-filing these forms are:
- March 20 for partnerships
- Mid-June for S-corps
As a result of the revised guidance, it will take more time to prepare business tax returns this year.
Additionally, based on the current situation, it will be necessary to extend your business tax returns until such time as the forms are available for electronic filing. We will keep you apprised of the Schedule K-2 and K-3 filing requirements as the IRS provides more guidance.