Changes to the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065)

 

The following changes are applicable for the 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065)PDF:

The following note is added as the last paragraph in the section entitled "Who Must File" on page 2:

Note. A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. For example, if the partner claims a credit for foreign taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116. Also, a partnership that has only domestic partners may still be required to complete Part IX when the partnership makes certain deductible payments to foreign related parties of its domestic partners. The information reported in Part IX will assist any domestic corporate partner in determining the amount of base erosion payments made through the partnership, and in determining if the partners are subject to the Base Erosion and Anti-Abuse Tax. See each part for applicability.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 1. Gain on personal property sale," on page 3 (column 3) are amended as follows:

Box 1. Gain on personal property sale. In general, income from the sale of personal property is sourced according to the residence of the seller. See section 865. For sourcing purposes, personal property sold by the partnership is treated as sold by the partners. See section 865(i)(5). A U.S. citizen or resident alien individual with a tax home (as defined in section 911(d)(3)) in a foreign country is treated as a nonresident with respect to the sale of personal property only if an income tax of at least 10% of the gain derived from the sale is actually paid to a foreign country with respect to that gain. See section 865(g). In addition, if a U.S. resident maintains an office or other fixed place of business in a foreign country, income from the sale of personal property attributable to such office or other fixed place of business is foreign source only if an income tax of at least 10% of the income from the sale is actually paid to a foreign country with respect to such income.

If the partnership has income from the sale of personal property (other than inventory, depreciable personal property, and certain intangible property excepted from the general rule of section 865(a)) and the partnership pays income tax to a foreign country with respect to income from the sale or the income is eligible for resourcing under an applicable treaty, it must check box 1 and attach a statement to Schedule K-2 and Schedule K-3 (for distributive share) reflecting all the information shown in Table 1, Information on Personal Property Sold. Do not combine sales of property. Each item of property sold must be listed separately with the information shown in Table 1. For column (g), enter the two-letter code from the list at IRS.gov/countrycodes. Do not enter "various" or "OC" for the country code. If the property sale is taxed by more than one country, complete a separate line for that country, but indicate in some manner (for example, a footnote) that the property entered on both lines is the same property.

The instructions for the section "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 7. Form 8858 information," on page 5 (column 3) are amended as follows:

Box 7. Form 8858 information. If the partnership filed one or more Forms 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), or if another person filed the Form(s) 8858 on behalf of the partnership, check box 7 and attach the form(s) to Schedule K-2. With respect to Schedule K-3, the partnership should check box 7 if the partnership checked box 7 on the Schedule K-2. The partnership need not attach Form 8858 to the Schedule K-3.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 8. Form 5471 information," on page 5 (column 3) are amended as follows:

Box 8. Form 5471 information. If the partnership filed one or more Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, or if another person filed the Form(s) 5471 on behalf of the partnership, or if the partnership received Form(s) 5471 as an attachment to a Schedule K-3 issued to the partnership, check box 8 and attach the form(s) to Schedules K-2 and K-3. The Form 5471 does not need to be attached to the Schedule K-3 if the partnership knows or has reason to know that its direct partner (and any indirect partners) does not need the information on Form 5471 to prepare its tax return. For example, the partnership would not need to attach the Form 5471 to Schedules K-3 for certain tax-exempt partners. A pass-through entity partner that receives a Form 5471 with a Schedule K-3 must provide the Form 5471 to its partner unless the pass-through entity knows or has reason to know that its direct partner (and any indirect partners) does not need the information on the Form 5471 to prepare its tax return.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 9. Other forms," on pages 5 (column 3) and 6 (column 1) are amended as follows:

Box 9. Other forms. If the partnership filed any other international tax forms, or if another person filed these forms on behalf of the partnership, or if the partnership received these forms as an attachment to a Schedule K-3 issued to the partnership, check box 9, and attach those form(s) to Schedules K-2 and K-3. This includes, but is not limited to, the following forms.

  • Form 5713, International Boycott Report.
  • Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
  • Form 8621.
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Exception for Forms 8621 and 8865. With respect to Schedule K-3, the partnership should check box 9 if the partnership checked box 9 on the Schedule K-2. Solely with respect to the Forms 8621 and 8865, the partnership should indicate in an attachment to the Schedule K-3 that Forms 8621 and / or 8865 are attached to Schedule K-2. The partnership need not attach Forms 8621 and 8865 to the Schedule K-3.

Nevertheless, if the partnership did not file Schedule O (Form 8865), Transfer of Property to a Foreign Partnership (Under Section 6038B), containing all the information required under Regulations section 1.6038B-2, with respect to a transfer to a foreign partnership, the partnership must provide the necessary information for each partner to fulfill its reporting requirements under Regulations section 1.6038B-2.

See Other Forms, Returns, and Statements That May Be Required in the Instructions for Form 1065.

If the partnership has filed Form 8990, check box 9 and provide on Schedule K-1 the information needed to complete Form 8990, Schedule A for foreign partners which are required to report their distributive share of excess business interest expense, excess taxable income, and excess business interest income, if any, that is attributable to income effectively connected with a U.S. trade or business.

Note. If the partnership attached any of the forms to the Form 1065 identified in boxes 7, 8, and 9 in response to questions on Form 1065, the partnership need not attach those forms more than once.

The following example is added on page 7 (column 1) after the first paragraph in the instructions entitled "Schedule K-2, Parts II and III, and Schedule K-3, Parts II and  III":

Example. U.S. citizen A and U.S. citizen B own equal interests in domestic partnership. In Year 1, domestic partnership has no foreign source income and no assets that generate foreign source income. Domestic partnership does not pay or accrue foreign taxes. In Year 1, U.S. citizen A pays $100 of foreign income taxes on passive category income which was reported to U.S. citizen A on a qualified payee statement. U.S. citizen A does not pay or accrue any other foreign taxes and has no other foreign source income. U.S. citizen B does not pay or accrue foreign income taxes. In Year 1, because U.S. citizen B paid no foreign taxes for which it can claim a foreign tax credit and U.S. citizen A qualifies for the exemption from completing Form 1116 to claim a foreign tax credit and such information was provided to domestic partnership by both U.S. citizen A and U.S. citizen B, domestic partnership need not complete Schedules K-2 and K-3, Part I, box 1, box 2, box 3, box 4, box 5, and box 10, Parts II or III.

The instructions for the section entitled "Schedule K-2, Parts II and III, and Schedule K-3, Parts II and  III," with respect to the heading "Exception," and, the first "Schedule K-3" heading in that section, on page 7 (columns 2 and 3) are amended as follows:

Exception. If the partnership knows that its only partners are less-than-10% limited partners that do not hold their interest in the ordinary course of the partner's active trade or business, the partnership's foreign source gross income and gross receipts should be reported as passive category income and its deductions allocated and apportioned to foreign source income should be reported as reducing passive category income. See Schedule K-2, Part II, column (c); Part III, Section 1, column (c), Section 3, column (b); and Part III, Section 5, column (d). Any foreign taxes paid or accrued on foreign source income should be assigned to passive category income and reported on Schedule K-2, Part III, Section 4, column (d).

If the partnership has only U.S. source income and none of the partnership's income or deductions must be sourced or allocated and apportioned by the partner, and the partnership knows that its only partners are less-than-10% limited partners, do not complete Part II. If the partnership knows that its only partners are less-than-10% limited partners, do not complete Part III, Section 2. See Regulations section 1.861-9(e)(4)(i).

The partner's distributive share of the amounts determined by the partnership are reported accordingly on equivalent columns in Schedule K-3, Parts II and III. See Regulations section 1.904-4(n)(1)(ii).

Schedule K-3. If the partnership knows or has reason to know that some partners are less-than-10% limited partners (and their partnership interest is not held in the ordinary course of the partner's active trade or business), but not all partners meet this description, when completing the Schedule K-3 for the less-than-10% limited partners, report the partner's foreign source income as passive category income. See Part II, column (c); Part III, Section 1, column (c);  Part III, Section 3, column (b); and Part III, Section 5, column (d). Report the foreign taxes paid or accrued on foreign source income as passive category income in Part III, Section 4, column (d).

For these less-than-10% limited partners, do not complete Part III, Section 2. See Regulations section 1.861-9(e)(4)(i).

If the partnership only has U.S. source income and none of the partnership's income or deductions must be sourced or allocated and apportioned by the partner, do not complete Part II for its partners that are less-than-10% limited partners.

The instructions for the section entitled "Schedule K-2, Part II, and Schedule K-3, Part II (Foreign Tax Credit Limitation)" with respect to the heading "Country code" under "Section 1. Gross Income, lines 1 through 24," on page 8 (column 2) are amended as follows:

Country code. Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. possession with respect to which the gross income is sourced. On lines 1 through 24, for each gross income item, enter on a separate line (A, B, or C) the two-letter code from the list at IRS.gov/countrycodes for the foreign country or U.S. possession within which the gross income is sourced. If a type of income is sourced from more than three countries, attach a statement with the information required on Schedule K-2, Part II, and Schedule K-3, Part II, for that type of income.

If income is U.S. source, enter "US." Do not enter "various" or "OC" for the country code.

Each gross income item (for example, sales vs. interest income) may have different countries listed on "A, B, C, etc." given that the partnership might not have sales income and interest income, for example, from the same country. Line 24 should sum each country's total income reported on Part II, regardless of the line on which such income is reported, whether A, B, C, etc.

The instructions for the section entitled "Schedule K-2, Part III, and Schedule K-3, Part III (Other Information for Preparation of Form 1116 or 1118)," with respect to the heading "Section 4. Foreign Taxes," are amended to add the following paragraph on page 12 (column 2) after the instruction for Line 3:

Exception. Partnerships subject to subchapter C of chapter 63 of the Code (BBA Partnerships) are generally required to file an administrative adjustment request (AAR) under Regulations section 1.905-4(b)(2)(ii) to account for a foreign tax redetermination. If an AAR is filed with respect to a foreign tax redetermination (or if an AAR will be timely filed), do not report the foreign tax redetermination on Line 3.

The instructions for the section entitled "Schedule K-2, Part V, and Schedule K-3, Part V (Distributions From Foreign Corporations to Partnership)," are amended to add the following paragraphs on page 16 (column 2) before the instructions for Rows A-O:

Exception. Part V of the Schedule K-2 is not required to be completed with respect to distributions by a foreign corporation if the partnership knows that (i) none of the distributions by the foreign corporation are attributable to PTEP in annual PTEP accounts of any direct or indirect partner; and (ii) none of the partnership's direct or indirect partners are eligible to claim a deduction under section 245A with respect to any distribution by the foreign corporation. Nevertheless, the partnership may be required to append Worksheet 3 to the Schedule K-2 (discussed below).

Exception. Part V of the Schedule K-3 for a partner does not need to be completed with respect to distributions by a foreign corporation if the partnership knows that (i) none of the distributions by the foreign corporation are attributable to PTEP in annual PTEP accounts of the partner or any U.S. person that is treated as indirectly owning stock of the foreign corporation through the partner ("relevant indirect partners"); and (ii) the partner and relevant indirect partners are not eligible to claim a deduction under section 245A with respect to any distributions by the foreign corporation. Nevertheless, the partnership may be required to append Worksheet 4 to the Schedule K-3 for the partner (discussed below). If this exception is applicable with respect to a foreign corporation, the sum of the amounts reported on Part V of the Schedules K-3 with respect to the foreign corporation may not equal the amounts reported on Part V of the Schedule K-2 with respect to the foreign corporation.

The instructions for the section entitled "Schedule K-2, Part VI (Information on Partners' Section 951(a)(1) and Section 951A Inclusions), and Schedule K-3, Part VI (Information on Partner's Section 951(a)(1) and Section 951A Inclusions)," with respect to the heading "Exception," on page 17 (column 3) are amended as follows:

Exception. Part VI of Schedule K-2 does not need to be completed with respect to a CFC if the partnership knows that it does not have a direct or indirect partner (through pass-through entities only) that is a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or figure section 951A inclusions by taking into account GILTI items (defined below) of the CFC.

Part VI of Schedule K-3 for a partner does not need to be completed with respect to a CFC if the partnership knows that (i) the partner is not a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or figure section 951A inclusions by taking into account GILTI items (defined below) of the CFC; and (ii) no U.S. person that indirectly owns (through pass-through entities only) an interest in the CFC through the partner is a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or figure section 951A inclusions by taking into account GILTI items (defined below) of the CFC. If the partnership does not complete Part VI of Schedule K-3 for a partner with respect to a CFC, the sum of each partner's share of the CFC's subpart F income, section 951(a)(1)(B) inclusion with respect to the CFC, and share of the CFC's GILTI items (defined below) reported on all Schedules K-3 may not equal the aggregate share of subpart F income of the CFC, the aggregate section 951(a)(1)(B) inclusion with respect to the CFC, and the aggregate share of the CFC's GILTI items (defined below), respectively, reported on the Schedule K-2.

The instructions for the section entitled "Schedule K-2, Part VII, and Schedule K-3, Part VII (Information to Complete Form  8621)" include the following new paragraph after the second paragraph in that section on page 19 (column 1):

Finally, a partnership is not required to complete Schedules K-2 and K-3, Part VII for a foreign corporation if the partnership knows that all of its direct and indirect partners that are U.S. persons are either: (i) not subject to the PFIC rules with respect to the corporation under section 1297(d) because they are subject to the subpart F rules with respect to the corporation; (ii) tax-exempt entities that are not subject to the PFIC rules with respect to the corporation under Regulations section 1.1291-1(e); or (iii) pass-through entities with no indirect U.S. taxable partners.

The instructions for the section entitled "Schedule K-2, Part VIII (Partnership's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VIII (Partner's Interest in Foreign Corporation Income (Section 960))," with respect to the heading "Line 1 through 4," first paragraph, are amended on page 22 (column 3) as follows:

Line 1 through 4. The partnership's share of the CFC's net income in each of the subpart F income groups, tested income group, and residual income group by unit is reported on lines 1 through 4.

The CFC's net income and taxes in each of these groups is figured on Form 5471, Schedule Q, and the partnership need only report its share of the income on Schedule K-2 and the partner's share of such amounts on Schedule K-3. See the Instructions for Form 5471, Schedule Q, for the meaning of unit.

Note. If a partnership is reporting information with respect to a PFIC with a QEF inclusion on this Part VIII, attach a statement that includes all of the information on Form 5471, Schedule Q, with respect to the PFIC, including the functional currency of the PFIC. See section 1293(f) with respect to QEF inclusions from a PFIC.

The instructions for the section entitled "Schedule K-2, Part VIII (Partnership's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VIII (Partner's Interest in Foreign Corporation Income (Section 960))," with respect to the heading "Columns (i) and (ii)," are amended on page 23 (column 1) to add the following sentence:

Enter "US" for income sourced in the United States.

The instructions for the section entitled "Schedule K-2, Part VIII (Partnership's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VIII (Partner's Interest in Foreign Corporation Income (Section 960))," with respect to the heading "Line A," are amended on page 23 (column 2) as follows:

Line A. On line A, enter the EIN or reference ID number of the CFC as listed on Form 5471. Do not enter "FOREIGNUS" or "APPLIED FOR." The partnership must check box 8 on Part I and attach to the Schedules K-2 and K-3 a Form 5471, page 1, and Schedule Q for each CFC with respect to which it has a direct or indirect interest. Form 5471, page 1, reports the functional currency of the CFC.

The following changes are applicable for the 2021 Partner's Instructions for Schedule K-3 (Form 1065)PDF:

The instructions for the section entitled "Part I. Partner's Share of Partnership's Other Current Year International Information," with respect to the heading "Items 7-9," on page 3 (column 3) are amended as follows:

Boxes 7-9. If applicable, the partnership will attach Form 5471; Form 8858; Form 8865; Form 5713, International Boycott Report; and other relevant international tax forms. If the partnership has filed Form 8990, Limitation on Business Interest Expense Under Section 163(j), the partnership will also provide on Schedule K-1 the information needed to complete Form 8990, Schedule A for foreign partners which are required to report their distributive share of excess business interest expense, excess taxable income, and excess business interest income, if any, that is attributable to income effectively connected with a U.S. trade or business.

The instructions for the section entitled "Part VIII. Partner's Share of Partnership's Interest in Foreign Corporation Income (Section 960)," are amended on page 12 (column 2) to add the following paragraph to the end of that section:

Note. If a partnership reported information with respect to a PFIC on this Part VIII, it attached a statement that includes all of the information on Form 5471, Schedule Q, with respect to the PFIC. See section 1293(f) with respect to QEF inclusions from a PFIC.