Changes to the 2021 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S)

 

The following changes are applicable for the 2021 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S)PDF:

The following note is added as the last paragraph in the section entitled "Who Must File" on page 1:

Note. An S corporation 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 a shareholder claims a credit for foreign taxes paid by the shareholder, the shareholder may need certain information from the S corporation to complete Form 1116. See each part for applicability.

The instructions for the section entitled "Schedule K-2, Part I (Corporation's Other Current Year International Information), and Schedule K-3, Part I (Shareholder's Share of Corporation's Other Current Year International Information)," with respect to the heading "Box 1. Gain on personal property sale," on page 3 (column 2) 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 S corporation is treated as sold by the shareholders. See section 865(i)(5). A U.S. citizen or resident alien individual with a tax home (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 S corporation 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 S corporation 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 both Schedules K-2 and K-3 (for shareholder's share) with Table 1, Information on Personal Property Sold. Do not combine sales of property. Each item of property sold must be listed separately with Table 1 completed. 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 denote in some manner (for example, a footnote) that the property entered on both lines is the same  property.

The instructions for the section entitled "Schedule K-2, Part I (Corporation's Other Current Year International Information), and Schedule K-3, Part I (Shareholder's Share of Corporation's Other Current Year International Information)," with respect to the heading "Box 7. Form 8858 information," on page 6 (column 1) are amended as follows:

Box 7. Form 8858 information. If the S corporation 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 S corporation, check box 7 and attach such form(s) to the Schedule K-2. With respect to Schedule K-3, the S corporation should check box 7 if the S corporation checked box 7 on the Schedule K-2. The S corporation need not attach Form 8858 to the Schedule K-3.

The instructions for the section entitled "Schedule K-2, Part I (Corporation's Other Current Year International Information), and Schedule K-3, Part I (Shareholder's Share of Corporation's Other Current Year International Information)," with respect to the heading "Box 8. Form 5471 information," on page 6 (column 1) are amended as follows:

Box 8. Form 5471 information. If the S corporation 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 S corporation, or if the S corporation received Form(s) 5471 as an attachment to a Schedule K-3 issued to a partnership owned by the S corporation, check box 8 and attach such form(s) to the Schedules K-2 and K-3. The Form 5471 does not need to be attached to the Schedule K-3 if the S corporation knows or has reason to know that its direct or indirect shareholder(s) do not need the information on Form 5471 to prepare their tax returns. For example, the S corporation would not need to attach the Form 5471 to Schedules K-3 for certain tax-exempt shareholders. An S corporation partner that receives a Form 5471 with a Schedule K-3 must provide the Form 5471 to its shareholder unless the S corporation knows or has reason to know that its direct or indirect shareholder 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 (Corporation's Other Current Year International Information), and Schedule K-3, Part I (Shareholder's Share of Corporation's Other Current Year International Information)," with respect to the heading "Box 9. Other forms," on page 6 (column 1) are amended as follows:

Box 9. Other forms. If the S corporation filed any other international tax forms, or if another person filed these forms on behalf of the S corporation, check box 9, and attach such form(s) to the Schedules K-2 and K-3. This includes, but is not limited to, the Form 5713, International Boycott Report.

See Other Forms and Statements That May Be Required in the Instructions for Form 1120-S.

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

Nevertheless, if the S corporation 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 S corporation must provide the necessary information for each shareholder to fulfill its reporting requirements under Regulations section 1.6038B-2.

Note. If the S corporation attached any of the forms identified in boxes 7, 8, and 9 in response to questions on Form 1120-S, the S corporation need not to attach those forms more than once.

The following example is added on page 6 (column 3) after the second paragraph in the section 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 S corporation. In Year 1, S corporation has no foreign source income and no assets that generate foreign source income. S corporation 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 the S corporation by both U.S. citizen A and U.S. citizen B, S corporation 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, Part II, and Schedule K-3, Part II (Foreign Tax Credit Limitation)," with respect to the "Country code" paragraph under the heading "Section 1. Gross Income, lines 1 through 24," on page 8 (column 1) are amended as follows:

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 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 to expand Schedules K-2 and K-3, Part II, for that type of income to report the additional countries.

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

Each gross income item (e.g., sales vs. interest income) may have different countries listed on "A, B, C, etc." given that the S corporation might not have, for example, sales income and interest income 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 IV, and Schedule K-3, Part IV (Distributions From Foreign Corporations to S Corporation)," is amended to add the following paragraphs on page 11 (column 3) before the instructions for Rows A-O:

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

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

The instructions for the section entitled "Schedule K-2, Part V (Information on Shareholders' Section 951(a)(1) and Section 951A Inclusions), and Schedule K-3, Part V (Information on Shareholder's Section 951(a)(1) and Section 951A Inclusions)," with respect to the heading "Exception," on page 13 (column 2) is amended as follows:

Exception. Part V of Schedule K-2 does not need to be completed with respect to a CFC if the S corporation knows that it does not have a direct or indirect shareholder that is a U.S. shareholder of the CFC required to include in gross income a subpart F 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 later) of the CFC.

Part V of Schedule K-3 for a shareholder does not need to be completed with respect to a CFC if the S corporation knows that (i) the shareholder 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 shareholder 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 S corporation does not complete Part V of Schedule K-3 for a shareholder with respect to a CFC, the sum of each shareholder's share of the CFC's subpart F income, section 951(a)(1)(B) inclusion with respect to the CFC, and share of GILTI items (defined below) of the CFC 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 VI, and Schedule K-3, Part VI (Information to Complete Form 8621)" include the following new paragraph after the second paragraph in that section on page 14 (column 3):

Finally, the S corporation is not required to complete Schedules K-2 and K-3, Part VI for a foreign corporation if the S corporation knows that all of its direct and indirect shareholders are 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.

The instructions for the section entitled "Schedule K-2, Part VII (S Corporation's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VII (Shareholder's Interest in Foreign Corporation Income (Section 960)),"with respect to the heading "Line 1 through 4," first paragraph, are amended as follows on page 17 (column 3) and 18 (column 1):

Lines 1 through 4. The S corporation'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 Schedule Q (Form 5471), and the S corporation need only report its share of the income on Schedule K-2 and the shareholder's share of such amounts on Schedule K-3. See the Instructions for Form 5471, Schedule Q, for the meaning of unit.

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

The instructions for the section entitled "Schedule K-2, Part VII (S Corporation's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VII (Shareholder's Interest in Foreign Corporation Income (Section 960))," with respect to the heading "Columns (i) and (ii)," are amended to add the following sentence on page 18 (column 1):

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

The instructions for the section entitled "Schedule K-2, Part VII (S Corporation's Interest in Foreign Corporation Income (Section 960)), and Schedule K-3, Part VII (Shareholder's Interest in Foreign Corporation Income (Section 960))," with respect to the heading "Line A," are amended as follows on page 18 (column 1):

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 S corporation must check box 8 on Part I and attach to both Schedules K-2 and K-3 Form 5471, page 1, and Schedule Q, for each CFC with respect to which it has an interest. Form 5471, page 1, provides the functional currency of the CFC.

The following changes are applicable for the 2021 Shareholder's Instructions for Schedule K-3 (Form 1120-S)PDF:

The instructions for the section entitled "Part I. Shareholder's Share of Corporation's Other Current Year International Information," with respect to the heading "Items 7-9," on page 3 (column 2) is amended as follows:

Boxes 7-9. If applicable, the S corporation should have attached to the Schedule K-1 or Schedule K-3 Form 5471; Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs); Form 5713, International Boycott Report; and other relevant international tax forms.

The instructions for the section entitled "Part VII. Shareholder's Share of Corporation's Interest in Foreign Corporation Income (Section 960)," are amended on page 10 to add the following paragraph to the end of that section:

Note. If an S corporation reported information with respect to a PFIC on this Part VII, 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.