On February 16, the IRS released 17 FAQs regarding the filing requirements for Schedules K-2 and K-3. Specifically, FAQ 15 provides guidance on when taxpayers can avail themselves of the K-2 and K-3 filling relief that was announced by the IRS on February 15.
Certain partnerships and S corporations can be exempted from filing Schedules K-2 and K3 for the tax year 2021 if they meet certain qualifications. FAQ 15 lists these qualifications:
- In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
- In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
- In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
- Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
- Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
FAQ 15 goes on to say that if a partnership/S corporation qualifies, it does not need to file Schedules K-2 and K-3 with the IRS or with its partners/shareholders. However, if it is subsequently notified by a partner/shareholder that they need any of the information contained on Schedule K-3 in order to complete their tax return, then the partnership/S corporation must provide this information.
The exception doesn’t apply if a partner/shareholder notifies the partnership/S corporation before the partnership/S corporation files its return. In this case, the partnership/S corporation must provide the Schedule K-3 to the partner/shareholder and file the Schedules K-2 and K-3 with the IRS.
In summary
No K-2 and K-3 filing is required in 2021 for domestic (no foreign source income and no foreign owners) pass-through entities as long as no owners request this information and, on its 2020 income tax return, the pass-through entity did not provide any foreign tax credit information to its owners. This is welcome relief and will reduce the tax compliance burden for many pass-through entities.
If you need further assistance interpreting any of the FAQs or the relief guidance and how it impacts your pass-through entity, contact Wipfli.
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