More Guidance on K2 and K3 Forms

As expected we have already gotten some comments and questions related to our last post on the new Schedule K-2 and K-3.

Here is one of those questions:

On this K-2 and K-2 reporting requirement, if you know all your owners will be under the $300/$600 amounts and you can elect not to file Form 1116, does this get you out of the filing of K-2 and K-2 at the business return level?

The answer is yes. As long as you know all of the partner’s information regarding their requirement to file Form 1116 you can skip the Schedule K2/K3 if it does not apply at their level. This form is normally required to be filed if the taxpayer will have more than $300 of foreign taxes ($600 for married couples). If the taxpayer is under this level, then the taxpayer can make the election to simply report these foreign taxes as a credit and thus no Form 1116 is required.

Therefore, if you know all of the partners have less than these levels and Form 1116 is not required for each partner, no Form K2 or K3 is required to be filed with the partnership or S corporation return.

Here is the next question:

If the Partnership or S Corporation does not have any foreign transactions, are we required to file the K-1 and K-2 if we don’t know if the partners have a filing requirement or not? We prepare a few partnership returns that have multiple partners and we don’t prepare all of the individual returns so I am unaware of their filing requirements.

The information required to be reported on Schedule K2/K3 has always been required to be reported on Schedule K-1 even though in many cases it never has been reported. If you don’t know any of the partners or shareholders information, you are required to file this form even though all of the income and expenses are only from US sources.

Even if all of the income and expense is US sourced, this needs to be reported on Schedule K2/K3 since this income and expense is needed to properly prepare Form 1116 for the individual partner or shareholder.

Again, the bottom line is unless you know all of the partners Form 1116 reporting requirements you are required to prepare Schedule K2/K3. But the preparation of this form for most farm partnerships and S corporations is not that difficult after you have done a few of these.