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

Shareholders' Pro Rata Share Items—International and Shareholder's Share of Income, Deductions, Credits, etc.—International

Section references are to the Internal Revenue Code unless otherwise noted.

2021


S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S) - Introductory Material

Future Developments

For the latest information about developments related to Schedule K-2 (Form 1120-S) and Schedule K-3 (Form 1120-S), and their instructions, such as legislation enacted after they were published, go to IRS.gov/Form1120S.

What’s New

Schedules K-2 and K-3 are new for the 2021 tax year. These schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 1120-S, U.S. Income Tax Return for an S Corporation, Schedule K, line 14, Foreign Transactions; and Schedule K-1 (Form 1120-S), Part III, Shareholder's Share of Income, Deductions, Credits, etc., line 14, Foreign Transactions. Schedules K-2 and K-3 also replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 1120-S, Schedule K, line 17d, Other items and amounts; and Schedule K-1, Part III, line 17, Other information. The new schedules assist S corporations in providing shareholders with the information necessary to complete their returns with respect to the international tax provisions of the Internal Revenue Code. For example, the new Schedule K-3 provides information necessary for shareholders who make an election under section 962 to figure their foreign tax credit on Form 1118, Foreign Tax Credit—Corporations, and other shareholders to figure their foreign tax credit on Form 1116, Foreign Tax Credit (Individual, Estate or Trust), respectively.

General Instructions

The Instructions for Form 1120-S and the Instructions for Schedule K-1 (Form 1120-S) generally apply to the Schedules K-2 and K-3. These instructions provide additional instructions with respect to the Schedules K-2 and K-3.

Purpose of Schedules K-2 and K-3

Schedule K-2 is an extension of Form 1120-S, Schedule K, and is used to report items of international tax relevance from the operation of an S corporation.

Schedule K-3 is an extension of Schedule K-1 (Form 1120-S) and is generally used to report to shareholders their share of the items reported on Schedule K-2. Shareholders must include the information reported on Schedule K-3 on their tax or information returns.

Who Must File

The S corporation need not complete these schedules if the S corporation does not have items of international tax relevance (typically, international activities). Any S corporation that is required to file Form 1120-S and that has items relevant to the determination of the U.S. tax or reporting obligations of its shareholders under the international provisions of the Internal Revenue Code must complete the relevant parts of Schedules K-2 and K-3. See each part and section for a more detailed description of who must file each part and section. Penalties may apply for filing Form 1120-S without all required information or for furnishing Schedule K-3 to shareholders without all required information. The penalties that apply with respect to Form 1120-S and Schedule K-1 apply with respect to the Schedules K-2 and K-3, respectively. See the Penalties section of the Instructions for Form 1120-S.

Note.

Except as otherwise required by statute, regulations, or other IRS guidance, an S corporation is not required to obtain information from its shareholders to determine if it needs to file each of these parts.

Note.

An S corporation is only required to complete the relevant portions of Schedules K-2 and K-3, as applicable. For example, if the S corporation does not own (within the meaning of section 958) an interest in a foreign corporation other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b), it is not required to complete Schedule K-2, Parts IV, V, VI, and VII or the corresponding Schedule K-3 parts.

Note.

Schedules K-2 and K-3 consist of the most common international tax provisions of the Internal Revenue Code. However, not all provisions are specifically identified on these schedules. To the extent that an international provision is implicated that is not otherwise specifically identified, the S corporation should check box 12 on Schedules K-2 and K-3, Part I, and attach a statement to both Schedules K-2 and K-3 (for shareholder's share).

When and Where To File

Attach Schedules K-2 and K-3 to your Form 1120-S and file both by the due date (including extensions) for that return.

Provide Schedule K-3 to your shareholders according to the timeline for providing the Schedule K-1. See the Instructions for Form 1120-S.

See the Instructions for Form 1120-S for requirements with respect to recordkeeping.

See the Instructions for Form 1120-S for instructions concerning amendments or adjustments to Schedules K-2 and K-3.

Computer-Generated Schedules K-2 and K-3

Generally, all computer-generated forms must receive prior approval from the IRS and are subject to an annual review. However, see the Exception below. Requests for approval may be submitted electronically to substituteforms@irs.gov; or requests may be mailed to:

Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:P:TP
1111 Constitution Ave. NW, Room 6554
Washington, DC 20224

Exception.

If computer-generated Schedules K-2 and K-3 conform to and do not deviate from the official form and schedules, they may be filed without prior approval from the IRS.

Important.

Be sure to attach the approval letter to computer-generated Schedules K-2 and K-3. However, if the computer-generated form is identical to the IRS prescribed form, it does not need to go through the approval process, and an attachment is not necessary.

Every year, the IRS issues a revenue procedure to provide guidance for filers of computer-generated forms. In addition, every year the IRS issues Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules, which reprints the most recent applicable revenue procedure. Pub. 1167 is available at IRS.gov/Pub1167. The procedures relevant to Form 1120-S and the Schedule K-1 (Form 1120-S) apply for purposes of the Schedules K-2 and K-3.

How To Complete Schedules K-2 and K-3

Reporting currency.

Report all amounts in U.S. dollars except where specified otherwise.

Form references.

These instructions refer to other forms. If the referenced form has been succeeded by another form, the references to those prior forms encompass any successor forms.

References in these instructions to Form 1040, U.S. Individual Income Tax Return, are intended, if applicable, to include Form 1040-SR, U.S. Tax Return for Seniors, as well as other tax returns for noncorporate shareholders such as Form 1041, U.S. Income Tax Return for Estates and Trusts.

Uses of the parts of Schedules K-2 and K-3, in general.

Part I of Schedule K-2 (and Part I of Schedule K-3).

Used to report international tax items not reported elsewhere on Schedule K-2 or K-3.

Part II of Schedule K-2 (and Part II of Schedule K-3).

Used to figure the S corporation's income or loss by source and separate category of income and to report the shareholder's share of such income or loss. Shareholders will use the information to figure and claim a foreign tax credit on Form 1116 or 1118.

Part III of Schedule K-2 (and Part III of Schedule K-3).

Used to report information necessary for the shareholder to determine the allocation and apportionment of research and experimental (R&E) expense and interest expense for the foreign tax credit limitation. Also used to report foreign taxes paid or accrued by the S corporation and the shareholder's share of such taxes. Shareholders will use the information to figure and claim a foreign tax credit on Form 1116 or 1118.

Part IV of Schedule K-2 (and Part IV of Schedule K-3).

Used to report information the shareholder needs, in combination with other information known to the shareholder, to determine the amount of each distribution from a foreign corporation that is treated as a dividend or excluded from gross income because the distribution is attributable to previously taxed earnings and profits (PTEP) in the shareholder’s annual PTEP accounts with respect to the foreign corporation, and the amount of foreign currency gain or loss on the PTEP that the shareholder is required to recognize under section 986(c).

Shareholders will report the dividends and foreign currency gain or loss on Form 1040.

Part V of Schedule K-2 (and Part V of Schedule K-3).

Used to provide information the shareholder needs to determine any inclusions under sections 951(a)(1) and 951A. Shareholders will use the information to complete Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), and Form 1040, with respect to subpart F income inclusions, section 951(a)(1)(B) inclusions, and section 951A inclusions.

Part VI of Schedule K-2 (and Part VI of Schedule K-3).

Used to provide information needed by shareholders to complete Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and to provide shareholders with information to determine income inclusions with respect to the passive foreign investment company (PFIC).

Part VII of Schedule K-2 (and Part VII of Schedule K-3).

Used to provide the foreign corporation's net income in the income groups for purposes of the shareholder's deemed paid taxes computation with respect to inclusions under sections 951A and 951(a)(1). Shareholders will use the information to figure and claim a deemed paid foreign tax credit on Form 1118.

Specific Instructions

.This is an Image: caution.gifIf the information required in a given section exceeds the space provided within that section, do not write "See attached" in the section, leave the section otherwise blank, and attach all of the information on additional sheets. Instead, if the information required in a given section exceeds the space provided within that section, complete all entry spaces in the section and attach the remaining information on additional sheets. For all attachments, include the part, section, line number, and column of the relevant portion of the Schedules K-2 and K-3. The additional sheets must conform with the IRS version of that section..

Schedule K-2, Identifying Information

At the top of each new page, enter the name of the S corporation as it appears on the Form 1120-S. At the top of each new page, enter the EIN of the S corporation as it appears on the Form 1120-S.

Item A—Part applicability.

Check the "Yes" box to indicate the applicable parts of Schedules K-2 and K-3. Complete and attach each applicable part to Form 1120-S and Schedule K-1 (Form 1120-S). Check the "No" box to indicate the inapplicable parts of Schedules K-2 and K-3. Do not complete and attach the inapplicable parts.

Schedule K-3, Identifying Information

Items A and B.

Items A and B should be the same as reported on Schedule K-1 (Form 1120-S), Part I, Items A and B.

Items C and D.

Items C and D should be the same as reported on Schedule K-1 (Form 1120-S), Part II, Items E and F.

Item E.

Item E should correspond to Schedule K-2, Identifying Information, Item A.

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)

Note.

Shareholders will use the information reported in the attachments with respect to boxes 1 through 5 and 10 to claim and figure a foreign tax credit on Form 1116 or 1118. Section 1373(a) treats an S corporation as a partnership for purposes of sections 901 through 909 and sections 951 through 965.

Note.

Shareholders will also use the information reported in attachments with respect to box 6 to prepare their tax returns (Form 1040) by taking into account that under section 267A they are not allowed deductions for the amounts listed in the statement with respect to box 6.

Note.

Shareholders will use the information reported in attachments with respect to boxes 7 through 9 to identify any international tax information reporting forms or other international tax forms that may impact the shareholders tax returns.

This part is used to report information for international tax items not reported elsewhere on the Schedule K-2. Check the box to indicate whether any of the following international tax items are applicable in the tax year. If applicable, attach statements, as described below, to the Schedule K-2.

If applicable, the S corporation must also complete Schedule K-3, Part I, and include with the Schedule K-3 the attachment(s) as described below with the shareholder's share of the amounts.

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)), 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.

Table 1

Information on Personal Property Sold (for use with Sch. K-2 (Form 1120-S), Part I, box 1; also for use with Sch. K-3 (Form 1120-S), Part I, box 1)

(a) Property
description
(b) Date of sale (c) Proceeds (d) Basis (e) Amount of tax paid in local currency (f) Amount of tax paid
in U.S. dollars
(g) Taxing country
(enter two-letter country code)
             
             
 

Box 2. Foreign oil and gas taxes.

A separate foreign tax credit limitation is applied with respect to foreign oil and gas taxes. See section 907(a) and Regulations section 1.907(a)-1 for details. If the S corporation has such taxes, it must check box 2 and attach a completed Schedule I (Form 1118), Reduction of Foreign Oil and Gas Taxes, to the Schedules K-2 and K-3 (with the shareholder’s share). The S corporation need not complete Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through 4; or Part III, lines 1 and 3. The S corporation must attach Schedule I (Form 1118) because the limitation applies to individuals eligible to claim a foreign tax credit.

Note.

The S corporation attaches a partially completed Schedule I (Form 1118), so that the shareholder has the information it needs to complete Form 1116. The S corporation is not attaching Schedule I (Form 1118), as a form required to be filed by the S corporation for purposes of the S corporation determining creditable taxes because an S corporation cannot claim a foreign tax credit.

Box 3. Splitter arrangements.

Foreign taxes with respect to a foreign tax credit splitting event are suspended until the related income is taken into account by the taxpayer. See section 909. There is a foreign tax credit splitting event with respect to foreign taxes of a payor if in connection with a splitter arrangement the income is or will be taken into account by a covered person. See Regulations section 1.909-2(a). A covered person, as defined in Regulations section 1.909-1(a)(4), includes, for example, any entity in which the payor holds, directly or indirectly, at least a 10% ownership interest (determined by vote or value). A payor, as defined in Regulations section 1.909-1(a)(3), includes, for example, a person that takes foreign income taxes paid or accrued by a partnership into account pursuant to section 702(a)(6).

The S corporation must report foreign taxes that are potentially suspended on Schedule K-2, Part III, Section 3, line 2E, and each shareholder's share of such taxes on Schedule K-3, Part III, Section 3, line 2E. An S corporation may not be able to determine whether taxes are suspended and whether related income is taken into account. However, where the S corporation is able to determine that taxes are potentially suspended, or potentially unsuspended, it must report such taxes and the information requested in these instructions for box 3.

For example, where an S corporation owns a reverse hybrid and the foreign country assesses tax on the S corporation with respect to income earned by the reverse hybrid, the S corporation should report such taxes as potentially suspended taxes.

Report foreign taxes that are potentially suspended on Schedule K-2, Part III, Section 3, line 2E, and each shareholder's share of such taxes on Schedule K-3, Part III, Section 3, line 2E.

Check box 3 and attach a statement to both Schedules K-2 and K-3 that includes the following for each splitter arrangement in which the S corporation participates that would qualify as a splitter arrangement under section 909 if one or more shareholders are covered persons with respect to an entity that took into account related income from the arrangement.

Section 1 of attached statement—Potentially suspended taxes.

  1. Explanation of the splitter arrangement (for example, reverse hybrid owned by S corporation).

  2. Amount of taxes paid or accrued by the S corporation in connection with the splitter arrangement.

  3. Amount of related income on which such taxes were paid or accrued.

  4. The two-letter code for the country to which the taxes were paid or accrued from the list at IRS.gov/CountryCodes. Do not enter "various" or "OC" for the country code.

  5. The separate category and source of income to which the taxes are assigned if determinable by the S corporation.

Section 2 of attached statement—Potentially unsuspended taxes.

Include a separate section that reports the following with respect to each splitter arrangement for which the S corporation has taken into account any related income.

  1. Origin year of the splitter arrangement.

  2. Explanation of the splitter arrangement (for example, reverse hybrid owned by the S corporation).

  3. Amount of taxes paid or accrued by the S corporation in connection with the splitter arrangement in the origin year of the splitter arrangement.

  4. Amount of related income on which such taxes were paid or accrued in the origin year of the splitter arrangement.

  5. The two-letter code for the country to which the taxes were paid or accrued from the list at IRS.gov/CountryCodes. Do not enter "various" or "OC" for the country code.

  6. The separate category and source of income to which the taxes are assigned if determinable by the S corporation.

  7. Amount of related income taken into account in the current tax year and the amount of taxes originally paid that relate to that portion of the related income if determinable by the S corporation.

Box 4. Foreign tax translation.

If the S corporation reports any foreign taxes on Schedules K-2 and K-3, Part III, Section 3, it must check the box for item 4 and attach to Schedules K-2 and K-3 the statement described in the instructions for those sections.

Box 5. High-taxed income.

If the S corporation has passive income, the S corporation must check the box for item 5 and attach a statement to Schedules K-2 and K-3 with Attachment 1 or 2, or both, completed. These attachments will provide the shareholder with the information to determine whether its passive income is high-taxed passive income.

Income received or accrued by a U.S. person that would otherwise be passive income is not treated as passive income if the income is determined to be high-taxed income. See section 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income, a shareholder must group its shares of passive income from an S corporation according to the rules in Regulations section 1.904-4(c)(3), except that the portion, if any, of the share of income attributable to income earned by an S corporation through a foreign qualified business unit (QBU) is separately grouped under the rules of Regulations section 1.904-4(c)(4). See also Regulations section 1.904-4(c)(5)(ii). For this purpose, a foreign QBU is a qualified business unit (as defined in section 989(a)), other than a controlled foreign corporation (CFC) or noncontrolled 10%-owned foreign corporation, that has its principal place of business outside the United States.

Note.

Passive income is not treated as subject to a withholding tax or other foreign tax when a credit is disallowed in full for such foreign tax, for example, under section 901(k).

Attachment 1

Reference: Regulations section 1.904-4(c)(3)
    I. Passive Income Net of Allocable Expenses II. Taxes
A Passive income subject to withholding tax of 15% or more    
B Passive income subject to withholding tax of less than 15% but greater than zero    
C Passive income not subject to any foreign tax    
D Passive income subject to no withholding tax, but subject to other foreign tax    
 

Attachment 2

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU:
  (Complete a separate Attachment 2 for each foreign QBU.) I. Passive Income Net of Allocable Expenses II. Taxes
B Passive income subject to withholding tax of 15% or more    
C Passive income subject to withholding tax of less than 15% but greater than zero    
D Passive income not subject to any foreign tax    
E Passive income subject to no withholding tax, but subject to other foreign tax    
 

Example 1.

USC is an S corporation, with two U.S. citizen individual shareholders with equal interests in the S corporation. In Year 1, USC receives $100 of passive dividend income from a noncontrolled 10%-owned foreign corporation subject to a 15% withholding tax. USC also receives $150 of passive interest income from an unrelated person subject to a 30% withholding tax. USC incurs $80 of expenses that are allocable to the interest income. USC also receives $50 of passive dividend income from a CFC, which is not subject to tax. No expenses are allocable to the dividend income. USC's branch operation in Country X that is treated as a QBU under section 989(a) receives $100 of passive dividend income subject to a 15% withholding tax. Finally, USC earns $400 of passive income with respect to its branch operation in Country X that is treated as a QBU under section 989(a). Such income is subject to foreign tax (but not withholding tax) of $40. Expenses of $120 are allocable to the share of branch income. No expenses are allocable to the dividend income.

For Year 1, USC checks box 5 on Part I of Schedule K-2 (Form 1120-S) and attaches Attachments 1 and 2 to Form 1120-S, Schedule K-2.

Attachment 1 for Example 1

Reference: Regulations section 1.904-4(c)(3)
    I. Passive Income Net of Allocable Expenses II. Taxes
A Passive income subject to withholding tax of 15% or more $170 $60
B Passive income subject to withholding tax of less than 15% but greater than zero 0 0
C Passive income not subject to any foreign tax 50 0
D Passive income subject to no withholding tax, but subject to other foreign tax 0 0
 

Attachment 2 for Example 1

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU: Country X QBU
  (Complete a separate Attachment 2 for each foreign QBU.) I. Passive Income Net of Allocable Expenses II. Taxes
B Passive income subject to withholding tax of 15% or more $100 $15
C Passive income subject to withholding tax of less than 15% but greater than zero 0 0
D Passive income not subject to any foreign tax 0 0
E Passive income subject to no withholding tax, but subject to other foreign tax 280 40
 

USC completes the same attachments with the shareholder shares and attaches those attachments to each Schedule K-3 provided to the shareholders.

Box 6. Section 267A disallowed deduction.

Shareholders will also use the information from box 6 to prepare their tax returns (Form 1040) by taking into account that under section 267A they are not allowed deductions for the amounts listed in the statement with respect to box 6.

Check box 6 if the S corporation paid or accrued any interest or royalty for which the S corporation knows, or has reason to know, that one or more of its shareholders is not allowed a deduction under section 267A. See the instructions for Form 1065, Schedule B, line 22, and FAQs for section 267A at IRS.gov/businesses/partnerships/ faqs-for-Form-1065-Schedule-B-Other-Information-Question-22 for additional information regarding section 267A. In addition, for each shareholder that is disallowed a deduction under section 267A, the corporation should, on the Schedule K-3 as to the specific shareholder, check box 6, Schedule K-3, Part I, and attach to the Schedule K-3 a statement titled "Section 267A Disallowed Deduction" that separately lists the following information.

  1. The amount of interest paid or accrued by the S corporation for which the shareholder is not allowed a deduction under section 267A.

  2. The amount of royalty paid or accrued by the S corporation for which the shareholder is not allowed a deduction under section 267A.

  3. The extent to which information reported on other parts of the Schedule K-3 (for example, a line in Part II, Section 2) reflects interest or royalty for which the shareholder is not allowed a deduction under section 267A.

.This is an Image: caution.gif When completing other parts of Schedules K-2 and K-3 (for example, a line in Part II, Section 2), list an amount without regard to whether the shareholder is disallowed a deduction under section 267A for the amount..

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), check box 7 and attach such form(s) to the Schedules K-2 and K-3.

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, check box 8 and attach such form(s) to the Schedules K-2 and K-3.

Box 9. Other forms.

If the S corporation filed any other international tax forms, 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.

Box 10. Shareholder loan transactions.

An S corporation will need to check this box and complete the attachment if either the S corporation knows or has reason to know that it (i) received a loan from its shareholder (“downstream loan”), as described in Regulations section 1.861-9(e)(8), or (ii) loaned an amount to its shareholder ("upstream loan"), as described in Regulations section 1.861-9(e)(9).

Downstream loan.

On the attachment to both the Schedules K-2 and K-3, provide the details with respect to any downstream loans from its shareholder, including the amount of interest expense paid or accrued by the S corporation. Report the information separately for each separate loan. The reporting should be as follows.

Table 2. Downstream Loans

Name of lender Lender’s TIN Date of loan Amount of loan Interest expense for year
         
         
 

Upstream loan.

On the attachment to both the Schedules K-2 and K-3, provide the details with respect to any upstream loans to its shareholder, including the amount of interest income received or accrued by the S corporation. Report the information separately for each separate loan. The reporting should be as follows.

Table 3. Upstream Loans

Name of borrower Borrower’s TIN Date of loan Amount of loan Interest expense for year
         
         
 

Box 11. Entity treatment for certain S corporations.

If the S corporation has made an election described in Notice 2020-69, 2020-39 I.R.B. 604, to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A, check box 11.

Box 12. Other international transactions.

If the S corporation has transactions, income, deductions, payments, or anything else that implicates the international tax provisions of the Internal Revenue Code and such events are not otherwise reported on this part or other parts of Schedules K-2 and K-3, report that information on an attachment to the Schedules K-2 and K-3 and check box 12.

Schedule K-2, Parts II and III, and Schedule K-3, Parts II and III

Note.

Shareholders will use the following information to claim and figure a foreign tax credit on Form 1116 or 1118.

Schedules K-2 and K-3, Parts II and III, must be completed if the S corporation has at least one shareholder who is eligible to claim a foreign tax credit and such shareholder would have to file a Form 1116 or Form 1118 to claim a credit. This requirement applies regardless of whether the S corporation pays or accrues foreign taxes because other information, such as the source of the S corporation’s income and the value of its assets, are relevant in determining the shareholder’s foreign tax credit. See section 901.

On Schedules K-2 and K-3, Parts II and III, the S corporation reports its gross income, gross receipts, cost of goods sold, certain deductions, and taxes by source and separate category. The S corporation also reports information that the shareholders will need to allocate and apportion expenses and determine the source of certain items of gross income. Unless specifically noted below, the S corporation reports on Schedule K-3, Parts II and III, the shareholder's share of the S corporation's gross receipts, gross income, cost of goods sold, certain deductions, and taxes by source and separate category. The shareholder adds its share of the S corporation's foreign source gross receipts, gross income, cost of goods sold, certain deductions, and taxes by separate category to its other foreign source gross receipts, gross income, cost of goods sold, certain deductions, and taxes in that separate category to figure its foreign tax credit. The S corporation also reports on the Schedule K-3 the share of expenses and the allocation and apportionment factors so that the shareholder may determine expenses allocated and apportioned to foreign source income.

S corporation determination.

The source and separate category of certain gross income, gross receipts, cost of goods sold, as well as the allocation and apportionment of certain deductions, can be determined by the S corporation. This includes deductions that are definitely related to certain gross income and gross receipts of the S corporation. See Regulations section 1.861-8(b)(1). See Schedule K-2, Part II, columns (a) through (e), and Part III, Section 1, columns (a) through (e). In Part III, Section 2, columns (a) through (e), some S corporation assets may be characterized by source and separate category by the S corporation. This includes certain assets that attract directly allocated interest expense under Temporary Regulations section 1.861-10T(b) and (c). See Temporary Regulations section 1.861-10T(d)(2).

In Part III, Section 3, in the U.S. and foreign columns, the S corporation assigns foreign taxes paid or accrued to a separate category and source.

The shareholder's share of the amounts determined by the S corporation are reported on equivalent columns in Schedule K-3, Parts II and III.

Certain gross income, gross receipts, cost of goods sold, assets, deductions, and taxes are not assigned to a source or separate category by the S corporation. See Shareholder determination, later.

Exception.

If the S corporation knows that its only shareholders are less-than-10% shareholders that do not hold their interest in the ordinary course of the shareholder's active trade or business, the S corporation's foreign source gross income 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), and Part III, Section 1, column (c). Report the assets as generating passive category income in Schedule K-2, Part III, Section 2, column (c). Similarly, any foreign taxes paid or accrued on foreign source income should be assigned to passive category income. See Schedule K-2, Part III, Section 3, column (d). The shareholder's share of the amounts determined by the S corporation are reported 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 S corporation knows or has reason to know that some shareholders are less-than-10% shareholders (and their S corporation interest is not held in the ordinary course of the shareholder's active trade or business), but not all shareholders meet this description, when completing the Schedule K-3 for the less-than-10% shareholders, report the shareholder's foreign source income as passive category income. See Part II, column (c), and Part III, Section 1, column (c). Report the assets as generating passive category income in Part III, Section 2, column (c). Similarly, report the foreign taxes paid or accrued on foreign source income as passive category income in Part III, Section 3, column (d).

Foreign branch category income.

An S corporation itself does not have foreign branch category income. However, report all amounts that would be foreign branch category income of its shareholders as if all shareholders were U.S. persons that were not pass-through entities. See Schedule K-2, Part II, column (b); Part III, Sections 1 and 2, column (b); and Part III, Section 3, column (c). The shareholder's share of the amounts determined by the S corporation are reported on equivalent columns in Schedule K-3, Parts II and III.

Section 901(j) income.

Income derived from each sanctioned country is subject to a separate foreign tax credit limitation. If the S corporation derives such income, enter code "901j" on the line after "category code." See Schedule K-2, Part II, column (e); Part III, Sections 1 and 2, column (e); Part III, Section 3, column (f). The shareholder's share of the amounts determined by the S corporation are reported on equivalent columns in Schedule K-3, Parts II and III. See the Instructions for Form 1116 for the potential countries to be listed with the section 901(j) category of income.

Note.

At the time these instructions went to print, section 901(j) is the only category reported in Part II, Sections 1 and 2, column (e), and Part III, Sections 1 and 2, column (e).

Section 951A category income.

Section 951A category income is any amount of Global Intangible Low-Taxed Income (GILTI) includible in gross income under section 951A (other than passive category income). (Section 951A category income does not include passive category income.) If the S corporation pays or accrues tax on the receipt of a distribution of PTEP assigned to the reclassified section 951A PTEP or section 951A PTEP groups, the S corporation must assign those taxes to section 951A category income. The S corporation will enter these taxes on Part III, Section 3, column (b). Section 951A category income is not otherwise reported on the Schedules K-2 and K-3.

Note.

An S corporation may have an income inclusion under section 951A if it made an election described in Notice 2020-69, 2020-39 I.R.B. 604, to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A.

Note.

Do not report as taxes assigned to section 951A category income taxes on a distribution that is attributable to PTEP in a shareholder’s (as opposed to the S corporation’s) annual PTEP accounts.

Income resourced by treaty.

If a sourcing rule in an applicable income tax treaty treats any U.S. source income as foreign source, and there is an election to apply the treaty, the income will be treated as foreign source. This category applies if the S corporation pays or accrues foreign taxes on receipt of a distribution of PTEP that is sourced from an annual PTEP account of the S corporation that corresponds to the separate category relating to U.S. source income included under section 951(a)(1) and resourced as foreign source income under a treaty.

The designations below are only relevant for Part III, Section 3, column (f).

Code "RBT PAS."

If an applicable income tax treaty treats any U.S. source passive category income as foreign source passive category income, and there is an election to apply the treaty, enter code "RBT PAS."

Code "RBT GEN."

If an applicable income tax treaty treats any U.S. source general category income as foreign source general category income, and there is an election to apply the treaty, enter code "RBT GEN."

Code "RBT 951A."

If an applicable income tax treaty treats any U.S. source section 951A category income as foreign source section 951A category income, and there is an election to apply the treaty, enter code "RBT 951A."

Shareholder determination.

In Schedule K-2, Part II, column (f), and Part III, Section 1, column (f), enter the gross income, income adjustments, and gross receipt of the S corporation that is required to be sourced by the shareholder. This includes income from the sale of most personal property other than inventory, depreciable property, and certain intangible property sourced under section 865. See section 1366. This also includes certain foreign currency gain on section 988 transactions. See the Instructions for Form 1116 and Pub. 514, Foreign Tax Credit for Individuals, for additional details. Schedule K-2, Part II, column (f), includes deductions that are allocated and apportioned by the shareholder. This includes most interest and R&E expense. See Regulations sections 1.861-9(e) and 1.861-17(f). In Schedule K-2, Part III, Section 2, column (f), enter the assets that are assigned to a source and separate category by the shareholder. In Schedule K-2, Part III, Section 3, in the shareholder column, enter the foreign taxes that are assigned to a source of income by the shareholder. This includes taxes imposed on certain sales income. The shareholder's share of the amounts determined by the S corporation are reported on equivalent columns in Schedule K-3, Parts II and III.

Schedule K-2, Part II, and Schedule K-3, Part II (Foreign Tax Credit Limitation)

Section 1. Gross Income

Lines 1 through 24.

Form 1116 requires a corporation to separately report gross income by source and separate category. See sections 861 through 865 (and section 904(h) and, in some cases, U.S. income tax treaties). See also section 1366. Therefore, shareholders will report line 24 by country on their Form 1116, Part I, line 1a. Section 1 generally also follows the types of gross income separately reported on Form 1120-S, Schedule K.

Shareholders making a section 962 election, in addition to completing the Form 1116, complete the Form 1118 solely with respect to the deemed paid credit for inclusions under sections 951(a) and 951A.

For each line, report the total for each country in column (g).

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 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.

Note.

Do not enter "various" for the country code. If the country code is U.S. or sourced at the shareholder level, enter "OC."

Example 2.

In Year 1, USC, an S corporation, has employees who perform services in Country X and Country Y. USC earns $25,000 of general category services income, $10,000 with respect to Country X, and $15,000 with respect to Country Y. The two-letter code for Country X is XX and the two-letter country code for Country Y is YY. USC makes the following entries on the first two lines of Schedule K-2, Part II, under line 2.

Example 2 Table
  Description (d)
A XX $10,000
B YY $15,000

Exceptions.

The instructions for Forms 1116 and 1118 specify exceptions from the requirement to report gross income by foreign country or U.S. possession with respect to regulated investment companies and section 863(b). Do not enter a foreign country or U.S. possession (to report on a country-by-country basis) for lines 16 through 18.

Lines 3 and 4. Rental income.

These lines are reported separately because they are reported separately on Form 1120-S, Schedule K. The sourcing rule may be the same for both types of rental income.

Lines 7 and 8. Ordinary dividends and qualified dividends.

Enter only ordinary dividends on line 7 and only qualified dividends on line 8. Do not include as ordinary dividends or qualified dividends the amount of any distributions received to the extent that they are attributable to PTEP in annual PTEP accounts of the S corporation. See the instructions for line 19 for when an S corporation might have an income inclusion with respect to a foreign corporation.

Note.

The amount by which distributions are attributable to PTEP in annual PTEP accounts of a person other than the S corporation (for example, a shareholder) is not determined by the S corporation and therefore is not taken into account for purposes of determining the ordinary dividends to be entered on line 7 or the qualified dividends to be entered on line 8.

Lines 11 through 15 and 27 through 30. Capital gains and losses.

These lines generally match the types of gains and losses reported separately on Form 1120-S, Schedule K. Further, section 904(b)(2)(B) contains rules regarding adjustments to account for capital gain rate differentials (as defined in section 904(b)(3)(D)) for any tax year.

Lines 16 and 46. Section 986(c) gain and loss.

Include the S corporation’s share of a lower-tier pass-through entity’s section 986(c) gain or loss, and the amount of section 986(c) gain or loss on distributions of PTEP sourced from the S corporation’s annual PTEP accounts.

Note.

An S corporation is only responsible for figuring and reporting foreign currency gain or loss under section 986(c) with respect to distributed PTEP sourced from an annual PTEP account of the S corporation. It is not responsible for figuring or reporting foreign currency gain or loss under section 986(c) with respect to distributed PTEP sourced from an annual PTEP account of a person other than the S corporation (for example, a shareholder).

Lines 17 and 47. Section 987 gain and loss.

The source of section 987 gain or loss is generally determined by reference to the source of the income or asset giving rise to such gain or loss. An S corporation may also obtain section 987 gain or loss information from Form 8858.

Lines 18 and 48. Section 988 gain and loss.

The source of foreign currency gain or loss on section 988 transactions is generally determined by reference to the residence of the taxpayer or QBU on whose books the asset, liability, or item of income or expense is properly reflected. If the source is determined by reference to the residence of the taxpayer shareholder, the section 988 gain and loss would be reported in column (f).

Line 19. Section 951(a) inclusions.

Report section 951(a) inclusions if the S corporation takes into account such income. An S corporation may not have subpart F income if, pursuant to Proposed Regulations section 1.958-1(d)(4), it applies Proposed Regulations section 1.958-1(d)(1), which treats an S corporation as not owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951, and for purposes of any other provision that applies by reference to section 951.

Line 20. Other income.

Attach a statement to the Schedules K-2 and K-3 describing the amount and type of other income.

Line 21. Section 951A(a) inclusions.

Report section 951A(a) inclusions if the S corporation takes into account such income. An S corporation will not have an income inclusion under section 951A unless it made an election described in Notice 2020-69, 2020-39 I.R.B. 604, to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A.

Line 24. Total gross income.

Enter the total gross income received from all sources on line 24. Then add the gross income on lines 1 through 23 by country or possession and enter the total by country in rows A, B, and C (and additional rows if more than three countries).

Section 2. Deductions

Lines 25 through 54.

Deductions of the S corporation must be allocated and apportioned according to certain rules. See, for example, Regulations sections 1.861-8 through -20 and Temporary Regulations sections 1.861-8T and -9T. See also section 1366. For purposes of allocating and apportioning expenses, in general, a shareholder adds the share of the S corporation's deductions to its other deductions incurred directly by the shareholder. See Regulations section 1.861-8(e)(15). The shareholder reports such deductions on Form 1116, Part I, lines 2 through 5. Section 2 generally also corresponds to the deductions separately reported on Form 1120-S, Schedule K.

Line 32. R&E expenses.

In general, R&E expenses are allocated and apportioned by the shareholder and reported in column (f). See Regulations section 1.861-17(f). R&E expenses, as described in section 174, are ordinarily definitely related to gross intangible income reasonably connected with relevant broad product categories of the taxpayer and are allocable to gross intangible income as a class related to such product categories. The product categories are determined by reference to the three-digit classification of the Standard Industrial Classification Manual (SIC code).

Line 38. Charitable contributions.

Charitable contribution deductions are apportioned solely to U.S. source gross income. See Regulations section 1.861-8(e)(12). Therefore, this deduction should be reported in column (a).

Lines 39 and 40. Interest expense specifically allocable under Regulations sections 1.861-10 and -10T.

Apart from interest expense entered on line 39, enter on line 40 interest expense that is directly allocable under Temporary Regulations section 1.861-10T to income from specific S corporation property. Such interest expense is treated as directly allocable to income generated by such S corporation property. See Temporary Regulations section 1.861-9T(e)(1).

Lines 41 through 43. Other interest expense.

A shareholder's share of an S corporation's interest expense that is not directly allocable to income from specific S corporation property is generally allocated and apportioned by the shareholder, subject to certain exceptions, and included in column (f). See Temporary Regulations section 1.861-9T(e)(1).

Interest expense incurred by certain individuals, estates, and trusts is characterized based on the categories of interest expense in sections 163 and 469: active trade or business interest, investment interest, or passive activity interest, adjusted for any interest expense directly allocated under Temporary Regulations section 1.861-10T. See Regulations section 1.861-9T(d). The amounts in each category of interest expense are reported on lines 41 through 43.

Exception.

If an S corporation's only shareholders are less-than-10% shareholders that do not hold their S corporation interest in the ordinary course of the shareholder's active trade or business, the S corporation's interest expense is directly allocated to S corporation gross income based on source of income. All such income is passive category income. See Regulations section 1.861-9(e)(4)(i) for further guidance. However, if the shareholder is not a less-than-10% shareholder or the S corporation interest is held in the ordinary course of the shareholder’s active trade or business, follow the aforementioned rules.

Exception.

See Regulations section 1.861-9(e)(8) and (9) for a special rule for S corporation loans. See also the instructions for box 10 of Part I.

Line 45. Foreign taxes not creditable but deductible.

See the instructions for Forms 1116 and 1118 for examples of foreign taxes that are deductible, but not creditable.

Note.

Foreign taxes that are creditable (even if a shareholder chooses to deduct such taxes) are not reported as expenses on Part II. Creditable taxes are reported on Part III, Section 3.

Lines 49 and 50. Other deductions.

Attach a statement to the Schedules K-2 and K-3 describing the amount and type of other deductions. The statement must conform to the format of Part II.

Schedule K-2, Part III, and Schedule K-3, Part III (Other Information for Preparation of Form 1116 or 1118)

Section 1. R&E Expenses Apportionment Factors

This section requires the S corporation to report information that a shareholder will use to allocate and apportion its R&E expense for foreign tax credit limitation purposes.

Deductible R&E expenses, as described in section 174, are ordinarily definitely related to gross intangible income reasonably connected with relevant broad product categories of the taxpayer and are allocable to gross intangible income as a class related to such product categories. The product categories are determined by reference to the three-digit classification of the SIC code. In general, R&E expenses are apportioned based on gross receipts.

R&E expenses are allocated and apportioned by the shareholder. See Regulations section 1.861-17(f)(1). The regulations require the S corporation to report to its shareholders the gross receipts by SIC code according to source and separate category of income. They also require the S corporation to report the amount of R&E expense performed in the United States and outside the United States to apply exclusive apportionment. See Regulations section 1.861-17(f)(2).

Column (e).

As of the date of these instructions, the only separate category that could be included in column (e) is the section 901(j) category of income. See the Instructions for Form 1116 for the potential countries to be listed with the section 901(j) category of income.

Line 1.

Enter the gross receipts by SIC code for each grouping. Such gross receipts include both the S corporation's gross receipts and certain other parties' gross receipts. See Regulations section 1.861-17(d)(3) and (4). Sales of parties controlled by the S corporation should be included on line 1 if such controlled parties can reasonably be expected to benefit from the R&E expense connected with the product categories. This includes sales that benefit from the shareholder's R&E expenses if licensed through the S corporation. Sales of uncontrolled parties are also taken into account if such sales involve intangible property that was licensed or sold to the uncontrolled party if the uncontrolled party can reasonably be expected to benefit from the R&E expense.

Line 2.

Report the amount of R&E expense related to activity performed in the United States and the amount of R&E expense related to activity performed outside the United States by SIC code. The total of the amounts on Schedule K-2, Part III, Section 1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the total of the amounts on Schedule K-3, Part III, Section 1, line 2, must equal Schedule K-3, Part II, line 32.

Note.

Line 2 is not reported according to source or separate category.

Note.

The SIC code for line 2B(i) does not need to be the same SIC code for line 2A(i).

Section 2. Interest Expense Apportionment Factors

This section requires the S corporation to report information that a shareholder will use to allocate and apportion its interest expense for foreign tax credit limitation purposes.

Interest expense is apportioned based on the average value of assets. See Regulations section 1.861-9(g)(2)(i)(A). A taxpayer can use either the tax book value or the alternative book value of its assets. See Regulations section 1.861-9(i). When reporting the asset that is the basis of stock in nonaffiliated 10%-owned corporations, adjust such amount for earnings and profits (E&P). See Regulations section 1.861-12(c)(2)(i)(A).

Column (b).

The S corporation characterizes its pro rata share of the S corporation assets that give rise to foreign branch category income as assets in the foreign branch category. See Regulations section 1.861-9(e)(10).

Column (e).

As of the date of these instructions, the only separate category that could be included in column (e) is the section 901(j) category of income. See the Instructions for Form 1116 for the potential countries to be listed with the section 901(j) category of income.

Line 1.

Report the average of the beginning-of-year and end-of-year basis in the S corporation’s assets. See Regulations section 1.861-9(g)(2)(i)(A).

Lines 3 and 4.

Report reductions in the S corporation's asset values to reflect the S corporation's directly allocable interest under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. See also Temporary Regulations section 1.861-9T(e)(1).

Line 5.

Report the average value of assets excluded from the apportionment formula. See section 864(e)(3).

Line 6.

Shareholders with an interest in the S corporation of 10% or more apportion interest expense by reference to the shareholder's assets, including the shareholder's pro rata share of S corporation assets. See Regulations section 1.861-9(e)(2). Interest expense must be apportioned according to the interest expense classifications under sections 163 and 469. This includes reporting the assets according to such classifications.

Lines 7 and 8.

The amounts reported on lines 7 and 8 are subsets of the amounts reported on line 6 representing the value of stock held by the S corporation in certain foreign corporations.

With respect to an S corporation-owned specified 10% foreign corporation that is not a CFC, the S corporation will report on line 7, columns (a) through (e), the total value of the stock in all such foreign corporations. The value of the stock is the S corporation’s basis in the stock adjusted to take into account the E&P of the foreign corporations as explained in Regulations section 1.861-12(c)(2). The S corporation must attach a statement to the Schedules K-2 and K-3 with the following information for each foreign corporation for which adjusted basis is reported on line 7.

  • Name of foreign corporation.

  • EIN or reference ID number. Do not enter "FOREIGNUS" or "APPLIED FOR."

  • Percentage of voting and value of stock owned by the S corporation in such foreign corporation.

  • Value of the stock in such corporation included in each of the groupings in 6b through d (denoting separately each of those groupings).

With respect to S corporation-owned CFCs, the S corporation will report on line 8, column (f), the total value of its stock in all such foreign corporations. The value of the stock is the S corporation's basis in the stock adjusted to take into account the E&P of the foreign corporations as explained in Regulations section 1.861-12(c)(2). The S corporation must attach a statement to the Schedules K-2 and K-3 with the following information for each foreign corporation for which basis is reported on line 8.

  • Name of foreign corporation.

  • EIN or reference ID number. Do not enter "FOREIGNUS" or "APPLIED FOR."

  • Percentage of voting and value of stock owned by S corporation in such foreign corporation.

  • Value of the stock in such corporation.

Section 3. Foreign Taxes

In Part III, Section 3, the S corporation assigns foreign taxes paid or accrued (including on U.S. source income) to a separate category and source. Include taxes paid or accrued to foreign countries or to U.S. possessions.

Attachment.

As previously mentioned in the instructions for Schedules K-2 and K-3, Part I, box 4, for each of the amounts listed in lines 1 through 3, attach a statement to the Schedules K-2 and K-3 reporting the following information.

  • The dates on which the taxes were paid or accrued.

  • The exchange rates used.

  • The amounts in both foreign currency and U.S. dollars. See section 986(a).

Column (a).

Enter the code for the type of tax.

Codes for Types of Tax

Code Type of Tax
WHTD Withholding tax on dividends
WHTP Withholding tax on distributions of PTEP
WHTB Withholding tax on branch remittances
WHTR Withholding tax on rents, royalties, and license fees
WHTI Withholding tax on interest
ECI Taxes paid or accrued to foreign countries or possessions on certain effectively connected income
OTHS Other foreign taxes paid or accrued on sales income
OTHR Other foreign taxes paid or accrued on services income
OTH Other foreign taxes paid or accrued
 

Column (b). Taxes assigned to section 951A category.

Taxes assigned to section 951A category income are taxes paid or accrued on distributions of PTEP assigned to the reclassified section 951A PTEP and section 951A PTEP groups. An S corporation might not be able to complete this column due to lack of information regarding the treatment of the current year distributions.

Note.

An S corporation may have an income inclusion under section 951A if it made an election described in Notice 2020-69, 2020-39 I.R.B. 604, to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A.

Note.

Do not report as taxes assigned to section 951A category income taxes on a distribution that is attributable to PTEP in a shareholder’s (as opposed to the S corporation’s) annual PTEP accounts.

Column (f). Other category.

Foreign taxes paid or accrued to sanctioned countries.

No credit is allowed for foreign taxes paid or accrued to certain sanctioned countries.

Foreign taxes related to PTEP resourced by treaty.

If the S corporation pays or accrues foreign taxes on receipt of a distribution of PTEP that is sourced from an annual PTEP account of the S corporation that corresponds to the separate category relating to U.S. source income included under section 951(a)(1) and resourced as foreign source income under a treaty, such taxes are included in column (f).

On the line after "category code," enter one of the following codes:

Code "RBT PAS."

If an applicable income tax treaty treats any U.S. source passive category income as foreign source passive category income, and there is an election to apply the treaty, enter code "RBT PAS."

Code "RBT GEN."

If an applicable income tax treaty treats any U.S. source general category income as foreign source general category income, and there is an election to apply the treaty, enter code "RBT GEN."

Code "RBT 951A."

If an applicable income tax treaty treats any U.S. source section 951A category income as foreign source section 951A category income, and there is an election to apply the treaty, enter code "RBT 951A."

Line 1.

Enter in U.S. dollars the total foreign taxes (described in section 901 or section 903) that were paid or accrued by the S corporation (according to its method of accounting for such taxes). Do not reduce the amount that you report on line 1 by the reductions reported on line 2. Do not report redetermined taxes on line 1. Report such taxes on line 3.

If the S corporation uses the cash method of accounting for foreign taxes, check the "Paid" box and enter foreign taxes paid during the tax year on line 1. Report each shareholder's share on line 1 of Section 3 of Schedule K-3, Part III.

If the S corporation uses the accrual method of accounting for foreign taxes, check the "Accrued" box and enter foreign taxes accrued on line 1. Report each shareholder's share on line 1 of Section 3 of Schedule K-3, Part III.

Note.

Check only one box "Paid" or "Accrued" depending on the method of accounting the S corporation uses to account for foreign taxes.

Enter on a separate line (that is, after A, B, and C), taxes paid or accrued to each country. Enter the two-letter code from the list at IRS.gov/CountryCodes. Do not enter "various" or "OC" for the country code.

Example 3.

The facts are the same as in Example 2, earlier. USC has the cash method of accounting and pays taxes of $1,000 and $3,000 to Countries XX and YY, respectively. USC completes Part III, Section 3, line 1, as follows.

Example 3 Table

      (a) (e)
  Direct (901/903) foreign taxes Paid ☑ Type of tax Foreign
A XX   OTHR 1,000
B YY   OTHR 3,000
 

Line 2.

Enter on line 2 a negative number for the sum of the taxes in the following categories.

A.

Taxes on foreign mineral income (section 901(e)).

B.

Reserved.

C.

Taxes attributable to boycott operations (section 908).

D.

Reduction in taxes for failure to timely file (or furnish all of the information required on) Forms 5471 and 8865 (section 6038(c)).

E.

Foreign income taxes paid or accrued during the current tax year with respect to splitter arrangements under section 909.

F.

Foreign taxes on foreign corporate distributions. For example, include taxes on distributions of PTEP assigned to the following PTEP groups: reclassified section 965(a) PTEP, reclassified section 965(b) PTEP, section 965(a), and section 965(b) PTEP, a portion of which are not creditable. The S corporation may be unable to determine the amount of a distribution that is attributable to non-previously taxed E&P or PTEP for which a foreign tax credit may be partially or entirely disallowed. However, it is important to track this amount as a tax on a distribution.

G.

Other. Attach a statement to the Schedules K-2 and K-3 indicating the reason for the reduction.

There is no need to report the amounts on line 2 by country.

Line 3.

Enter in U.S. dollars the change in foreign tax as a result of a foreign tax redetermination. See section 905(c) and Regulations sections 1.905-3 through -5. If the amount is less than the original foreign tax, report the change as a negative amount. If the amount is more than the original foreign tax, report the change as a positive amount.

Note.

Payment of additional foreign taxes that relate to an earlier tax year by an S corporation that has the cash method of accounting does not result in a foreign tax redetermination. See Regulations section 1.905-3(a). Such amounts should be reported on line 1 as foreign taxes paid by the S corporation in the current year. Report the U.S. tax year to which the foreign tax relates. This would be the U.S. tax year that includes the close of the foreign tax year to which the tax relates. Report the date on which the tax was paid. If there is more than one date tax is paid, enter one of the dates paid on the schedule itself and then attach a statement to the Schedules K-2 and K-3, including all of the information reported on the schedule with the other dates paid.

If there is more than one redetermination in a year with respect to different countries, report such redeterminations on separate lines. Enter the two-letter code from the list at IRS.gov/CountryCodes. Similarly, if there is more than one redetermination in a year with respect to the same country, but the redeterminations are related to different years, report such redeterminations on separate lines. Do not enter "various" or "OC" for the country code.

Example 4.

The facts are the same as in Example 3, earlier. In Year 3, USC resolves a contest with the Country YY taxing authorities and reduces the Country YY tax to $2,000. USC pays the tax liability on April 30 of Year 3. In Year 3, USC reports on its Schedule K-2, Part III, Section 3, line 3, as follows.

Example 4 Table

      (a) (e)
  Foreign tax redeter-
minations
  Type of tax Foreign
A YY   OTHR (1,000)
  Related tax year Year 1
  Date tax paid 4/30/Year 3
 

Schedule K-2, Part IV, and Schedule K-3, Part IV (Distributions From Foreign Corporations to S Corporation)

Note.

Shareholders will use the following information, in combination with other information known to the shareholders, including Schedule P (Form 5471), to exclude from gross income distributions to the extent that they are attributable to PTEP in their annual PTEP accounts and report foreign currency gain or loss with respect to the PTEP on Form 1040.

Use Part IV of Schedule K-2 to report the distributions made by foreign corporations to the S corporation.

Use Part IV of Schedule K-3, to report the shareholder's share of the amounts reported on Part IV of Schedule K-2.

Rows A through O.

Use rows A through O to report information with respect to each distribution by a foreign corporation with respect to its stock that the S corporation (directly or through pass-through entities) owns (within the meaning of section 958) other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b). Each row should relate the S corporation's direct ownership of stock in the foreign corporation or direct ownership of the ownership interests in a pass-through entity that (directly or through other pass-through entities) owns (within the meaning of section 958) stock in the foreign corporation other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b). For example, if an S corporation directly owns 50% of the foreign corporation's stock and owns 50% of the foreign corporation's stock through a partnership, then distributions by the foreign corporation to the S corporation and partnership are to be reported on separate rows in Part IV of the S corporation’s Schedule K-2 (Form 1120-S). If the S corporation owns stock of a foreign corporation through a partnership from which it receives a Part V of Schedule K-3 (Form 1065 or 8865), the S corporation must replicate each line of Part V, Schedule K-3 (Form 1065 or 8865) in Part IV of its Schedule K-2 (Form 1120-S). Rows for distributions with respect to an S corporation’s direct ownership of foreign corporation stock should be listed before rows for distributions with respect to an S corporation's ownership through a pass-through entity of foreign corporation stock.

The S corporation may have annual PTEP accounts with respect to the foreign corporation, or the foreign corporation may have E&P that, when distributed, is excludable from the S corporation’s gross income under section 1293(c). Do not report distributions to the extent that they are attributable to PTEP in annual PTEP accounts of the S corporation or to E&P that is excludable from the S corporation’s gross income under section 1293(c). Distributions by the foreign corporation to the S corporation that are attributable to PTEP in annual PTEP accounts of the S corporation should be properly reflected on the Schedules J (Form 5471) for the foreign corporation. The S corporation should provide this information to its shareholders, as appropriate.

However, to the extent a distribution is attributable to PTEP in an annual PTEP account of the S corporation with respect to a foreign corporation, or attributable to E&P that is excludable from the S corporation’s gross income under section 1293(c), that corresponds to a tax year of the foreign corporation that ended with or within a tax year of the S corporation (i) that began after December 31, 2012, and (ii) for which an election under Regulations section 1.1411-10(g) was not made by the S corporation ("NII PTEP"), append Attachment 3 to Schedule K-2 and an Attachment 4 to each K-3 in the following format, adding additional rows as necessary for each distribution by a foreign corporation. For more information about net investment income and net investment income tax relating to CFCs and QEFs, see Regulations section 1.1411-10.

Attachment 3 (Schedule K-2)

(a) Name of distributing foreign corporation (b) EIN or reference ID number (c) Date of distribution (d) Functional currency of distributing foreign corporation (e) Amount of NII PTEP in functional currency (f) Spot rate (functional currency to U.S. dollars) (g) Amount of NII PTEP in U.S. dollars
             
             
 

Attachment 4 (Schedule K-3)

(a) Name of distributing foreign corporation (b) EIN or reference ID number (c) Date of distribution (d) Functional currency of distributing foreign corporation (e) Shareholder’s share of NII PTEP in functional currency (f) Spot rate (functional currency to U.S. dollars) (g) Shareholder’s share of NII PTEP in U.S. dollars
             
             
 

Note.

If additional rows are required, attach statements to the Schedules K-2 and K-3 that look like the current version of Schedules K-2 and K-3, Part IV, respectively.

Column (b).

Enter the EIN or reference ID number of the distributing foreign corporation. Do not enter "FOREIGNUS" or "APPLIED FOR." For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 1118.

Column (c).

Enter the year, month, and day in which the distribution was made using the format YYYYMMDD.

Column (d).

Enter the applicable three-character alphabet code for the foreign corporation’s functional currency using the ISO 4217 standard. These codes are available at ISO.org/ISO-4217-currency-codes.html.

Note.

Columns (e) and (f) are reported in functional currency.

Column (e).

This represents the S corporation’s share of the amount distributed in functional currency. See Schedule R (Form 5471), column (c).

Column (f).

This represents the S corporation’s share of the amount of E&P distributed in functional currency. See Schedule R (Form 5471), column (d). The total of the amounts reported in column (f) with respect to a distributing foreign corporation should equal the S corporation’s share of the total reported on line 9 of all Schedules J on a separate category of income basis as reported in Schedule J (Form 5471) TOTAL filed with respect to the distributing foreign corporation.

Column (g).

Enter the exchange rate on the date of distribution used to translate the amount of the distribution in functional currency to U.S. dollars. See section 989(b)(1). Report the exchange rate using the "divide-by convention" specified under Reporting exchange rates on Form 5471 in the Instructions for Form 5471.

Column (h).

Enter the amount of the distribution in U.S. dollars. Translate column (e) using the spot rate reported in column (g).

Column (i).

Enter the amount of E&P distributed in U.S. dollars. Translate column (f) using the spot rate reported in column (g).

Column (j).

If the distributing foreign corporation is a qualified foreign corporation, determined without regard to section 1(h)(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).

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)

Note.

Shareholders will use the following information to complete Form 8992 and Form 1040 with respect to income inclusions under section 951(a) (subpart F income inclusions), section 951(a)(1)(B) inclusions, and section 951A inclusions.

Schedules K-2 and K-3, Part V, must be completed with respect to a CFC if the S corporation owns (within the meaning of section 958) stock of the CFC, unless the S corporation owns stock of the CFC solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b).

Generally, a foreign corporation is a CFC if more than 50% of either the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned (within the meaning of section 958(a)) or is considered as owned by applying the rules of section 958(b) by U.S. shareholders. For this purpose, a U.S. shareholder is a U.S. person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of shares of all classes of stock of such foreign corporation.

If the S corporation applies Proposed Regulations section 1.958-1(d)(1) to treat it as not owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951, or is not a U.S. shareholder of the foreign corporation, the information regarding subpart F income inclusions and section 951(a)(1)(B) inclusions that are reported in Schedule K-2, Part V, columns (e) and (f), are not inclusions of the S corporation. Schedule K-3, Part V, columns (e) and (f), report the information shareholders will need to figure and report their subpart F income inclusions and section 951(a)(1)(B) inclusions.

Note.

If the S corporation does not apply Proposed Regulations section 1.958-1(d)(1) to treat it as not owning stock of a foreign corporation, and is a U.S. shareholder of the foreign corporation, then any subpart F income inclusions and section 951(a)(1)(B) inclusions are inclusions of the S corporation, which are therefore not reported in Schedules K-2 and K-3, columns (e) and (f), and are instead reported in Schedules K and K-1, line 10, Other income (loss).

Note.

If the S corporation elects to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A under Notice 2020-69, 2020-39 I.R.B. 604, and the S corporation is a U.S. shareholder of the CFC, then the S corporation determines its GILTI inclusion, which it reports in Form 1120-S, Schedule K, line 10, Other income (loss). Schedule K-1, line 10, Other income (loss), reports the shareholders’ share of the S corporation’s GILTI inclusion. An S corporation that has made an election under Notice 2020-69, 2020-39 I.R.B. 604, and is a U.S. shareholder of the CFC, does not complete columns (g) through (n) of Part V of Schedules K-2 and K-3.

Exception.

Schedules K-2 and K-3, Part V, do not need to be completed with respect to a CFC if the S corporation knows that it does not have a shareholder (or a shareholder of an upper-tier S corporation, if applicable) 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.

Use Schedule K-2, Part V, to report the information on the S corporation’s share of the amounts its shareholders will need to figure their subpart F income inclusions, section 951(a)(1)(B) inclusions, and their GILTI inclusions, with respect to CFCs owned (within the meaning of section 958) by the S corporation. Use Schedule K-3, Part V, to report each shareholder’s share of the amounts needed to determine its subpart F income inclusions, section 951(a)(1)(B) inclusions, and GILTI inclusion, with respect to CFCs owned (within the meaning of section 958) by the S corporation.

If the S corporation must complete Part V of Schedules K-2 and K-3 with respect to a CFC, then the S corporation must complete Part V of Schedules K-2 and K-3 by assuming that each shareholder in the S corporation is a U.S. shareholder of the CFC and is required to include in gross income its share of the CFC's subpart F income, section 951(a)(1)(B) inclusion, and its GILTI.

A shareholder's GILTI is figured based upon its share of the following amounts for each CFC with respect to which it is a U.S. shareholder: tested income, tested loss, QBAI, tested loss QBAI amount, tested interest income, and tested interest expense (collectively, GILTI items) (a CFC's subpart F income and GILTI items, CFC items).

A shareholder's share of a CFC's subpart F income, amounts used to determine its section 956 amount with respect to a CFC, and a CFC's GILTI items may not be limited to the shareholder's share of such income, amounts, or items through its ownership in the S corporation. However, for purposes of completing Part V of Schedules K-2 and K-3, use only the shareholder's share of a CFC's subpart F income, amounts used to determine its section 956 amount with respect to a CFC, and a CFC's GILTI items through the shareholder's ownership in the S corporation.

A shareholder’s share through its ownership in the S corporation of subpart F income and GILTI items is generally anticipated to be figured by multiplying the percentage in column (d) by the amount of subpart F income or GILTI item, respectively. For example, in general, a shareholder’s share through its ownership interest in the S corporation of tested income in column (i) is anticipated to be figured by multiplying the percentage in column (d) by the amount of tested income in column (g).

Line a.

Complete a separate Part V for each applicable separate category of income. However, all GILTI items must be reported on only one Part V. If GILTI items include passive category income, report all GILTI items on the Part V completed for passive category income; otherwise, report all GILTI items on the Part V completed for general category income. Enter the appropriate code on line a.

Note.

The other reporting requirements of a S corporation with respect to reporting income by separate category do not change by reason of the S corporation reporting GILTI items that include general category income on a Part V completed for passive category income.

Codes for Categories of Income

Code Category of Income
PAS Passive Category Income
901j Section 901(j) Income
GEN General Category Income
 

Line b.

If any portion of a CFC item is U.S. sourced, complete a separate Part V for U.S.-sourced CFC items, and check the box on line b on such separate Part V.

Line 1.

Use lines A through K to report information with respect to each CFC owned (within the meaning of section 958) by the S corporation, and for which Part V of Schedules K-2 and K-3 must be completed. If the S corporation owns a CFC through a partnership from which it receives a Part VI of Schedule K-3 (Form 1065 or 8865), the S corporation must replicate each line of Part VI, Schedule K-3 (Form 1065 or 8865) that is related to the CFC on its Part V, Schedule K-2 (Form 1120-S). For example, if an S corporation directly owns 50% of the CFC's stock and owns 50% of the CFC's stock through a partnership, the CFC should be listed on two lines with one line related to the S corporation's direct ownership and the other line related to the S corporation's ownership through the partnership. Lines related to an S corporation's direct ownership of CFCs should be listed before lines related to an S corporation's non-direct ownership of CFCs. If additional lines are required, attach a statement to the Schedules K-2 and K-3 that looks like the current version of Part V.

Column (a).

Enter the name of each CFC for which Part V must be completed.

Column (b).

Enter the EIN or reference ID number of the CFC. Do not enter "FOREIGNUS" or "APPLIED FOR." For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 1118.

Column (c).

Enter the end of the CFC’s tax year using the format YYYYMMDD.

Column (d).

Enter the shareholders' share of CFC items through the shareholders' ownership in the S corporation (aggregate share). See Regulations sections 1.951-1(b), 1.951-1(e), and 1.951A-1(d)(1) for rules on determining the shareholders' share.

Note.

An S corporation that does not apply Proposed Regulations section 1.958-1(d)(1) and is a U.S. shareholder of a foreign corporation listed in column (a) does not report amounts in columns (e) or (f).

Column (e).

Enter the aggregate share of the amount of the CFC's subpart F income, if any. Note that an amount determined under section 956(a) is not considered subpart F income. For guidance on figuring a CFC's subpart F income and the shareholders' share of a CFC's subpart F income, see Worksheet A in the Instructions for Form 5471.

Column (f).

Enter the amount determined under section 956 with respect to the shareholders that relate to the shareholders' ownership in the S corporation. Thus, in determining the section 956 amount, use only the shareholders' share through their ownership in the S corporation of:

  • The average of the amounts of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the CFC’s tax year, and

  • The applicable earnings of the CFC.

For guidance on figuring the shareholders' share of a CFC's earnings invested in U.S. property, see Worksheet B in the Instructions for Form 5471.

Note.

An S corporation that has made an election to be treated as owning stock of a CFC within the meaning of section 958(a) for purposes of applying section 951A under Notice 2020-69, 2020-39 I.R.B. 604, and is a U.S. shareholder of the CFC, does not complete columns (g) through (n) of Part V of Schedules K-2 and K-3.

Column (g).

Enter the CFC's tested income, if any, from line 6 of Schedule I-1 (Form 5471) for each CFC.

Column (h).

Enter the CFC's tested loss, if any, from line 6 of Schedule I-1 (Form 5471) for each CFC.

Column (i).

Enter the aggregate share of the tested income listed in column (g) for each CFC with tested income.

Column (j).

Enter the aggregate share of the tested loss listed in column (h) for each CFC with tested loss.

Column (k).

If the CFC has a tested loss in column (h), enter zero. If the CFC has tested income in column (g), enter the aggregate share of QBAI. A CFC's QBAI is reported on Schedule I-1 (Form 5471), line 8.

Column (l).

If the CFC has tested income in column (g), enter zero. If the CFC has a tested loss in column (h), enter the aggregate share of the CFC's tested loss QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A CFC's tested loss QBAI amount is reported on Schedule I-1 (Form 5471), line 9c, which must be translated to U.S. dollars.

Column (m).

Enter the aggregate share of the CFC's tested interest income. A CFC's tested interest income is reported on Schedule I-1 (Form 5471), line 10c.

Column (n).

Enter the aggregate share of the CFC's tested interest expense. A CFC's tested interest expense is reported on Schedule I-1 (Form 5471), line 9d.

Schedule K-2, Part VI, and Schedule K-3, Part VI (Information To Complete Form 8621)

Note.

Shareholders will use the following information to complete Form 8621 and/or determine income inclusions with respect to the PFICs reported on Schedules K-2 and K-3, Part VI.

Except as otherwise provided, Schedules K-2 and K-3, Part VI, must be filed by every S corporation that owns PFIC stock, directly or indirectly. However, an S corporation that has elected to treat a PFIC as a pedigreed qualified electing fund (QEF), made a mark-to-market (MTM) election with respect to a PFIC applicable to the S corporation’s tax year, or made a qualifying insurance corporation (QIC) election with respect to a PFIC for the S corporation’s tax year, is not required to complete Schedules K-2 and K-3, Part VI, with information regarding such PFIC if the S corporation files Form 8621 for that PFIC. Additionally, an S corporation that satisfies the deemed election requirements of Regulations section 1.1297-4(d)(5)(iv) with respect to a PFIC eligible for a QIC election is not required to complete Schedule K-2, Part VI, or Schedule K-3, Part VI, with respect to such PFIC.

Use Schedule K-2, Part VI, to report certain information with respect to any PFIC owned, directly or indirectly, by the S corporation for which reporting is required, including PFICs with respect to which no QEF or MTM election has been made and unpedigreed QEFs (section 1291 funds), and PFICs with respect to which pedigreed QEF, MTM, QIC, or other elections have been, or may be, made and for which the S corporation is not filing a Form 8621. Use Schedule K-3, Part VI, to report the shareholder’s share, through its ownership in the S corporation, of the amounts reported on Schedule K-2, Part VI.

Complete only one line on both Sections 1 and 2 for each PFIC for which reporting on Schedules K-2 and K-3, Part VI, is required. Each line completed for a PFIC in Section 1 should correspond to the same line on Section 2. If there is no information to report with respect to a PFIC in Section 2, columns (c) through (o), only complete the name and EIN of the PFIC in Section 2, columns (a) and (b), and leave columns (c) through (o) blank for that PFIC. For additional information on determining indirect ownership of PFICs, see Regulations section 1.1291-1(b)(8).

The S corporation may have additional required information with respect to a PFIC for certain columns (for example, scenarios where the S corporation may have multiple different events with respect to the PFIC in the same tax year, such as multiple dates of acquisitions of, or distributions with respect to, the PFIC stock). In that case, complete Schedules K-2 and K-3, Part VI, with the first of such entries for a PFIC and attach a statement including the remaining entries for each such PFIC to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, with Attachments 5 and/or 6 completed.

If the S corporation has additional PFICs for which to report information that does not fit on single Schedules K-2 and K-3, Part VI, it can attach additional Parts VI of Schedules K-2 and K-3, as needed.

Section 1. General Information on Passive Foreign Investment Company (PFIC), Qualified Electing Fund (QEF), or Qualifying Insurance Corporation (QIC)

Columns (a) through (c).

Enter the name, U.S. EIN or reference ID number, and address of each PFIC held directly or indirectly by the S corporation during its tax year. Do not enter "FOREIGNUS" or "APPLIED FOR. "

For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 8621.

Columns (d) and (e).

Enter the beginning and end of the PFIC’s tax year using the format YYYYMMDD.

Column (f).

Enter each class of shares in the PFIC owned by the S corporation using the following codes.

Codes for Classes of PFIC Shares

Code Class of PFIC Shares
COM Common or Ordinary Shares
PRE Preferred Shares
OTH Other Equity Interest
VAR Multiple Classes of Shares or Equity Interests
 

Column (g).

If the S corporation acquired any PFIC shares during its tax year, provide the date(s) of acquisition of such shares using the format YYYYMMDD. If the S corporation acquired no shares in a particular PFIC during its tax year, leave this column blank with respect to that PFIC.

Note.

If the S corporation acquired shares in a PFIC on multiple dates during the tax year, append a completed Attachment 5 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing such dates.

Attachment 5

Additional Information for Part VI, Section 1
General
Information
Annual Information
(a) Name of PFIC (b) EIN or reference ID number (g) Dates PFIC shares acquired during tax year (if applicable)
     
     
     
     
     
     
 

Column (h).

Enter the total number of all classes of shares of the PFIC the S corporation owned at the end of its tax year.

Column (i).

Enter the total value of all shares in the PFIC held by the S corporation at the end of its tax year. If the PFIC shares are not publicly traded, the S corporation may rely upon periodic account statements provided at least annually to determine the value of a PFIC unless the S corporation has actual knowledge or reason to know based on readily accessible information that the statements do not reflect a reasonable estimate of the PFIC's value and the information provides a more reasonable estimate of the PFIC's value.

Note.

A shareholder may need additional information not required to be reported on this Schedule K-2, Part VI (or the shareholder’s Schedule K-3, Part VI) from the S corporation with respect to the value of the PFIC shares as of a particular date to aid the shareholder in making certain elections under Regulations section 1.1291-10, 1.1297-3, or 1.1298-3.

Column (j).

If the S corporation has made any of the following elections with respect to the PFIC, indicate which election was made using the following codes. If the S corporation has not made an election with respect to the PFIC, leave this column blank with respect to that PFIC.

S Corporation Election Codes

Code S Corporation Election Type
QEF Qualified Electing Fund Election
MTM Mark-to-Market Election
QIC Qualifying Insurance Corporation Election
 

Note.

If the S corporation has made a pedigreed QEF, MTM, or QIC election with respect to a PFIC, and the S corporation files Form 8621 for that PFIC, it is not required to report information regarding that PFIC on Schedule K-2 or K-3, Part VI.

Column (k).

Check the box if the foreign corporation has indicated that it has documented eligibility to be treated as a QIC. See section 1297(f) and Regulations section 1.1297-4 for additional information on QICs.

Column (l).

Check the box if the PFIC has indicated that its shares are "marketable stock." See section 1296(e) and Regulations section 1.1296-2 for additional information on "marketable stock."

Column (m).

Check the box if the PFIC also constitutes a CFC within the meaning of section 957 (PFIC/CFC).

Note.

If the PFIC is a PFIC/CFC, a shareholder may need certain additional information with respect to the PFIC/CFC’s E&P not required to be reported on this Schedule K-2, Part VI (or the shareholder’s Schedule K-3, Part VI) from the S corporation to aid the shareholder in making certain elections under Regulations sections 1.1291-9, 1.1297-3, or 1.1298-3.

Column (n).

Complete column (n) in the following manner.

IF... THEN...
  • this is the first year of the S corporation’s holding period in stock of the foreign corporation, and

  • the S corporation has determined (directly or otherwise) that the foreign corporation is a PFIC under the income test or asset test of section 1297(a),

check the box.
  • the foreign corporation was a PFIC in a prior tax year of the S corporation’s holding period, and

  • the S corporation has not determined (directly or otherwise) the foreign corporation is a "former PFIC" within the meaning of Regulations section 1.1291-9(j)(2)(iv),

check the box.
  • the foreign corporation was a PFIC in a prior tax year of the S corporation’s holding period, and

  • the S corporation has determined (directly or otherwise) the foreign corporation is a "former PFIC" within the meaning of Regulations section 1.1291-9(j)(2)(iv),

do not check the box.

Note.

If the foreign corporation is a "former PFIC" within the meaning of Regulations section 1.1291-9(j)(2)(iv), a shareholder may need additional information not required to be reported on this Schedule K-2, Part VI (or the shareholder’s Schedule K-3, Part VI) from the S corporation with respect to the PFIC to aid the shareholder in making certain elections under Regulations section 1.1298-3.

Section 2. Additional Information on PFIC or QEF General Information

Columns (a) and (b).

Enter the name and U.S. EIN (or reference ID number) of each PFIC held directly or indirectly by the S corporation during its tax year. Do not enter "FOREIGNUS" or "APPLIED FOR."

QEF Information

Columns (c) and (d).

Enter the S corporation’s share of the total ordinary earnings and net capital gain (as defined in Regulations section 1.1293-1(a)(2)) of the PFIC for the S corporation’s tax year in which or with which the tax year of the PFIC ends in columns (c) and (d), respectively. The PFIC should provide the S corporation with a statement that provides information to assist the S corporation in determining these amounts. See Regulations section 1.1295-1(g) for additional information on annual PFIC statements. The S corporation must complete columns (c) and (d) only for PFICs with respect to which it has made a pedigreed QEF election but for which it does not file Form 8621, and for any PFIC it has elected to treat as an unpedigreed QEF.

Note.

If the S corporation has made a pedigreed QEF election with respect to a PFIC, and if the S corporation files Form 8621 for that PFIC, the S corporation is not required to report information regarding that PFIC on Schedule K-2, Part VI, or Schedule K-3, Part VI. The S corporation should report its inclusion of its share of the QEF’s ordinary earnings and net capital gain on Schedule K, and report the shareholders’ shares of such amounts on Schedule K-1, Part III.

MTM Information

Columns (e) and (f).

Enter the fair market value of the PFIC stock at the beginning and end of the S corporation’s tax year in columns (e) and (f), respectively. If any shares of the PFIC were acquired during the tax year for which the Form 1120-S is being filed, the fair market value in column (e) should reflect the fair market value of those shares as of the date of acquisition. The S corporation must complete columns (e) and (f) only for PFICs with respect to which it has made an MTM election but for which it does not file Form 8621.

Note.

If the S corporation has made an MTM election with respect to a PFIC, and if the S corporation files Form 8621 for that PFIC, the S corporation is not required to report information regarding that PFIC on Schedule K-2, Part VI, or Schedule K-3, Part VI. The S corporation should report its MTM gain or loss on Schedule K, and report the shareholders’ shares of such amounts on Schedule K-1, Part III.

Note.

If the S corporation has made an MTM election with respect to a PFIC but does not file Form 8621 for that PFIC, a shareholder may need additional information not required to be reported on this Schedule K-2, Part VI (or the shareholder’s Schedule K-3, Part VI) regarding its share of the S corporation’s adjusted tax basis in the S corporation’s MTM PFIC stock in order to complete Form 8621.

Section 1291 and Other Information

Note.

Generally, this information is to assist shareholders of section 1291 funds in satisfying any information reporting obligations and in figuring income inclusions with respect to section 1291 funds. However, this information may be relevant to PFICs with respect to which a pedigreed QEF, MTM, or other election has been made by the S corporation, shareholder, or other indirect PFIC shareholder. Accordingly, the S corporation must complete columns (g) through (o) with respect to each PFIC for which reporting on Schedule K-2, Part VI, and Schedule K-3, Part VI, is required. However, note the instructions for column (k) regarding reporting distributions from PFICs with respect to which the S corporation has made a pedigreed QEF or MTM election and for which the S corporation does not file Form 8621.

Column (g).

Enter the date(s) on which the S corporation initially acquired each block of stock in the PFIC using the format YYYYMMDD.

Note.

If the S corporation initially acquired various blocks of stock in a PFIC on multiple dates, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing such dates.

Column (h).

Enter the amount of each distribution of cash and/or the fair market value of any other property distributed to the S corporation by the PFIC during the tax year, if any.

Note.

Deemed distributions by QEFs do not need to be reported on this Schedule K-2 (or the shareholder’s Schedule K-3). However, shareholders which have made, or intend to make, an election under section 1294, and which are deemed to have received a distribution from the QEF, may require this information to complete any computations under section 1294 (including for Form 8621, if required). See section 1294(f) and Regulations section 1.1294-1T for additional information.

Note.

If the S corporation received distributions from a PFIC on multiple dates during the tax year, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the amount and/or fair market value of each distribution.

Column (i).

Enter the date(s) of distribution of the amounts entered in column (h) using the format YYYYMMDD.

Note.

If the S corporation received distributions from a PFIC on multiple dates during the tax year, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the dates of each distribution.

Column (j).

Enter the total creditable foreign taxes attributable to a distribution from the PFIC. See section 1291(g) and the Instructions for Form 8621, Part V, line 16d, for additional information on creditable foreign taxes attributable to PFIC distributions, including apportioning creditable foreign taxes to the portion of a distribution that constitutes an excess distribution and certain rules related to creditable foreign taxes on a disposition of PFIC stock.

Note.

If the S corporation received distributions from a PFIC on multiple dates during the tax year, attach a statement with Attachment 6 completed to this Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the amount of any foreign taxes attributable to each distribution.

Column (k).

Enter the total amount of distributions the S corporation received from the PFIC in the 3 preceding tax years, or, if shorter, the total amount of distributions the S corporation received during its holding period of the PFIC stock. However, do not enter any amount in this column with respect to a PFIC for which the S corporation has made a pedigreed QEF or MTM election and for which the S corporation does not file Form 8621.

Column (l).

Enter the date(s) on which the S corporation disposed of any block of stock in the PFIC during the S corporation’s tax year, if any, using the format YYYYMMDD.

Note.

If the S corporation disposed of stock in a PFIC on multiple dates during the tax year, attach a statement with a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the dates of each disposition.

Column (m).

If the S corporation disposed of any block of stock in the PFIC during the S corporation’s tax year, enter the amount realized by the S corporation on each disposition.

Note.

If the S corporation disposed of stock in a PFIC on multiple dates during the tax year, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the amount realized by the S corporation on each disposition.

Column (n).

If the S corporation disposed of any block of stock in the PFIC during the S corporation’s tax year, enter the S corporation’s tax basis in the shares of the PFIC on the date of disposition.

Schedule K-3.

Enter the shareholder’s share, through its ownership in the S corporation, of the S corporation’s tax basis in the PFIC shares.

Note.

If the S corporation disposed of stock in a PFIC on multiple dates during the tax year, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the tax bases to the S corporation and shareholders with respect to each disposition.

Column (o).

Enter the S corporation’s gain or loss on the disposition of PFIC shares. This equals column (m) minus column (n).

Note.

If the S corporation disposed of stock in a PFIC on multiple dates during the tax year, append a completed Attachment 6 to Schedule K-2, Part VI, and its corresponding Schedules K-3, Part VI, providing the gain or loss to the S corporation and shareholders on each disposition.

Attachment 6

Additional Information for Part VI, Section 2
General Information Section 1291 and Other Information
(a) Name of PFIC (b) EIN or reference ID number (g) Dates PFIC shares were acquired (h) Amount of cash and fair market value of property distributed by PFIC during the current tax year (if applicable) (i) Dates of distribution (j) Total creditable foreign taxes attributable to distribution by PFIC (l) Dates PFIC shares disposed of during tax year (if applicable) (m) Amount realized on disposition of PFIC shares (n) Tax basis of PFIC shares on date of disposition (o) Gain or (loss) on disposition of PFIC shares
                   
                   
                   
                   
                   
                   
 

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))

Note.

Shareholders will use the following information to figure a deemed paid foreign tax credit on Form 1118.

Reporting currency.

Report all amounts on Part VII in functional currency.

The S corporation must complete a separate Schedule K-2, Part VII, for each CFC with respect to which it has a direct or indirect interest, unless the S corporation does not have a shareholder that is eligible to make a section 962 election to claim a deemed paid foreign tax credit with respect to such CFC. An indirect interest means that the CFC is owned by the S corporation through one or more partnerships.

Schedule K-3, Part VII, must be completed and provided to shareholders who may be eligible to make a section 962 election to claim a deemed paid foreign tax credit.

An S corporation that does not have or receive sufficient information or notice regarding a shareholder must presume the shareholder is eligible to claim the indirect credit and must complete the Schedules K-2 and K-3, Part VII, accordingly.

In general, if a section 962 election is in effect, a U.S. shareholder of a CFC is deemed to pay all or a portion of the foreign income taxes paid or accrued by the CFC that are properly attributable to subpart F income or tested income of the CFC that the U.S. shareholder includes in its gross income. See section 960(a) and (d).

To figure the foreign taxes deemed paid by the U.S. shareholder, the income, deductions, and taxes of the CFC must be assigned to separate categories of income and then included in income groups within those separate categories using Schedule Q (Form 5471). See Regulations section 1.960-1(c)(1). The applicable separate categories of income are general category income, passive category income, and section 901(j) income. The income groups include the subpart F income groups, the tested income group, and the residual income group. Each single item of foreign base company income as defined in Regulations section 1.954-1(c)(1)(iii) is a separate subpart F income group. See Regulations section 1.960-1(d)(2)(ii)(B). The tested income group consists of tested income within a section 904 category. See Regulations section 1.960-1(d)(2)(ii)(C). The residual income group consists of any income not in the other income groups or in a PTEP group. See Regulations section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)(2) with respect to the PTEP groups. The PTEP groups are not reported on this Part VII.

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 has already figured its net income in each of these groups on Schedule Q (Form 5471), and the S corporation need only report its share of such amount on Schedule K-2 and the shareholder’s share of such amounts on Schedule K-3.

Do not include on line 1 (or lines 1(a) through 1(i), lines (1), (2), etc., under line 1) any amounts excluded from subpart F income under the high-tax exception in section 954(b)(4) ("subpart F high-tax exception"); these amounts are reported on line 4 (and on lines (1), (2), etc., under line 4).

Also do not include on line 3 (or lines (1), (2), etc., under line 3) any amounts excluded under the GILTI high-tax exclusion in Regulations section 1.951A-2(c)(7) ("GILTI high-tax exclusion"); these amounts are reported on line 4 (and on lines (1), (2), etc., under line 4).

The PTEP groups are not reported on Part VII. Do not report by unit with respect to the following subpart F income groups: (i) international boycott income; (ii) bribes, kickbacks, and other payments; and (iii) section 901(j) income. Also do not report by unit with respect to the recaptured subpart F income group.

Columns (i) and (ii).

On Schedule K-2, Part VII, the S corporation reports in column (ii) its share of the CFC's net income by income groups and by units as reported on Schedule Q (Form 5471), column (xi). In column (i), consistent with the reporting requirement on Form 1118, enter the two-letter code (from the list at IRS.gov/CountryCodes) of each foreign country and U.S. possession within which income is sourced and/or to which taxes were paid or accrued. Do not enter "various" or "OC" for the country code. Do not enter a country in column (i) of line 5. See the instructions for line D for further information.

On Schedule K-3, Part VII, the S corporation reports each shareholder's share of the net income in the income group by unit and country.

Column (iii).

Do not enter amounts in column (iii).

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 a Form 5471 for each CFC with respect to which it has an interest.

Line B.

The S corporation must file separate Schedules K-2 and K-3, Part VII, to report the net income or loss of the CFC in each separate category. Use the applicable code from the table below.

Category of Income Codes

Code Category of Income
PAS Passive Category Income
901j Section 901(j) Income
GEN General Category Income
 

Line C.

With respect to passive category income, separate Schedules K-2 and K-3, Part VII, must be completed for each applicable grouping under Regulations section 1.904-4(c). This includes the groups in Regulations section 1.904-4(c)(3) reported on the Schedule Q (Form 5471).

The S corporation should use the following codes to report each of these groupings for each QBU.

Passive Grouping Codes

Code Passive Group
i All passive income received during the tax year that is subject to a withholding tax of 15% or greater must be treated as one item of income. See Regulations section 1.904-4(c)(3)(i).
ii All passive income received during the tax year that is subject to a withholding tax of less than 15% (but greater than zero) must be treated as one item of income. See Regulations section 1.904-4(c)(3)(ii).
iii All passive income received during the tax year that is subject to no withholding tax or other foreign tax must be treated as one item of income. See Regulations section 1.904-4(c)(3)(iii).
iv All passive income received during the tax year that is subject to no withholding tax but is subject to foreign tax other than a withholding tax must be treated as one item of income. See Regulations section 1.904-4(c)(3)(iv).
 

Example 5.

In Year 1, USC, an S corporation, wholly owns foreign corporation, CFC, with reference ID number 1234. The CFC owns a foreign disregarded entity organized in Country X. CFC has two separate units, the foreign disregarded entity and the CFC itself. For the Year 1 tax year, the two units have the following foreign source income.

Example 5, Foreign Source Income

  Tax Country Code Net Income
Country X Foreign Disregarded
Entity (FDE) Passive Interest Income
20% withhold-
ing tax
XX 100u
CFC Passive Rental Income 10% withhold-
ing tax
YY 50u
CFC General Category Tested Income No tax ZZ 300u
 


USC completes Schedule K-2, Part VII, as follows.

Example 5, USC’s 1st Schedule K-2, Part VII

A 1234    
B PAS    
C i    
    (i) Country Code (ii) S corporation’s Share of Net Income
1 Subpart F Income Groups    
a Dividends, Interest, Rents, Royalties, & Annuities (Total)    
(1) Country X FDE XX 100u
 

USC completes another Schedule K-2, Part VII, as follows.

Example 5, USC’s 2nd Schedule K-2, Part VII

A 1234    
B PAS    
C ii    
    (i) Country Code (ii) S corporation’s Share of Net Income
1 Subpart F Income Groups    
a Dividends, Interest, Rents, Royalties, & Annuities (Total)    
(1) CFC YY 50u
 

USC completes a third Schedule K-2, Part VII, as follows.

Example 5, USC’s 3rd Schedule K-2, Part VII

A 1234    
B GEN    
    (i) Country Code (ii) S corporation’s Share of Net Income
3 Tested Income Group (Total)    
(1) CFC ZZ 300u
 

USC also completes Schedule K-3, Part VII, with each shareholder’s share of the S corporation’s net income in each income group.

Line D.

If net income in an income group is sourced from more than one country, check the box on line D, and attach a statement to Schedules K-2 and K-3 to indicate that you have expanded Part VII to report these additional countries on both Form 1120-S and Schedule K-3 (for shareholder’s share).

Example 6.

In Year 1, USC, an S corporation, wholly owns foreign corporation, CFC, with reference ID number 1234. USC has two U.S. citizen shareholders. CFC has only one QBU, the CFC itself, and no other separate units. CFC has general category foreign source foreign base company sales income (FBCSI) sourced in Country A of 100u and general category foreign source FBCSI sourced in Country B of 50u and general category foreign source FBCSI sourced in Country C of 30u. The country code for Country A is "AA," the country code for Country B is "BB," and the country code for Country C is "CC."

USC completes Schedule K-2, Part VII, as follows.

Example 6 Table

A 1234    
B GEN    
D    
    (i) Country Code (ii) S corporation’s Share of Net Income
1 Subpart F Income Groups    
f Foreign Base Company Sales Income (Total)   180u
(1) CFC AA 100u
(2) CFC BB 50u
 

USC attaches to Schedule K-2 the following schedule to expand 1f to include another line under 1f.

Example 6 Attachment (Expansion)

A 1234    
B GEN    
D    
    (i) Country Code (ii) S corporation’s Share of Net Income
1 Subpart F Income Groups    
f Foreign Base Company Sales Income (Total)   180u
(3) CFC CC 30u
 

USC also completes Schedule K-3, Part VII, with each shareholder's share of the S corporation's net income in the subpart F income group. USC attaches to Schedule K-3 the same schedule it attaches to Schedule K-2, with each shareholder's share of the subpart F income groups by country.

Line E.

The S corporation should check the box and complete a separate Part VII for U.S. source income in each separate category.

Line F.

If the foreign corporation has foreign oil and gas extraction income (FOGEI) or foreign oil-related income (FORI), the S corporation should check the box and complete a separate Part VII indicating the amount of FOGEI and FORI in each grouping. The S corporation should check box 2 on Part I and complete Schedule I (Form 1118). See the instructions for Part I, box 2.

S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S) - Additional Material

Index

A

Attachment 1,
Attachment 2,
Attachment 3,
Attachment 4,
Attachment 6,

C

Capital gains and losses, Lines 11 through 15 and 27 through 30. Capital gains and losses.
Charitable contributions, Line 38. Charitable contributions.
Codes for types of tax, Column (a).
Computer-generated schedules K-2, Computer-Generated Schedules K-2 and K-3
Country codes, Country code.
Currency, Reporting currency.

F

Foreign branch category income, Foreign branch category income.
Foreign oil and gas taxes, Box 2. Foreign oil and gas taxes.
Foreign tax translation, Box 4. Foreign tax translation.
Foreign taxes deductible but not creditable, Line 45. Foreign taxes not creditable but deductible., F.
Foreign taxes paid or accrued to sanctioned countries, Foreign taxes paid or accrued to sanctioned countries.
Foreign taxes related to PTEP resourced by treaty, Foreign taxes related to PTEP resourced by treaty.
Form 5471 information, Box 8. Form 5471 information.
Form 8621information, Schedule K-2, Part VI, and Schedule K-3, Part VI (Information To Complete Form 8621)
Form 8858 information, Box 7. Form 8858 information.

G

Gains on sale of certain personal property, Box 1. Gain on personal property sale.
Gross income, Section 1. Gross Income

H

High-taxed income, Box 5. High-taxed income.

I

Identifying information, Schedule K-2, Identifying Information
Identifying information, S corporation, Schedule K-2, Identifying Information, Items A and B.
Identifying information, shareholder, Items C and D.
Income resourced by treaty, Income resourced by treaty.
Interest expense apportionment factors, Section 2. Interest Expense Apportionment Factors
Interest expense specifically allocable under Regulations section 1.861-10 and -10T, Lines 39 and 40. Interest expense specifically allocable under Regulations sections 1.861-10 and -10T.
Interest expense, other, Lines 41 through 43. Other interest expense.
International transactions, Box 12. Other international transactions.

L

Loan, downstream , Downstream loan.
Loan, upstream , Upstream loan.

N

Name of S corporation, Schedule K-2, Identifying Information

R

R&E expenses, Line 32. R&E expenses.
R&E expenses apportionment factors, Section 1. R&E Expenses Apportionment Factors
Rental income, Lines 3 and 4. Rental income.

T

Table 1. Information on Personal Property Sold, Table 1
Table 2. Downstream Loans, Downstream loan.
Table 3. Upstream Loans, Upstream loan.
Taxes assigned to section 951A category, Column (b). Taxes assigned to section 951A category.
Total gross income, Line 24. Total gross income.

U

Upstream loan, Upstream loan.

W

When to file, When and Where To File
Where to file, When and Where To File