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Are you impacted by S corporation Schedule K-2/K-3 filing requirements?

Jul 18, 2022
By: Meghan Gardner

At the height of the housing market, my fiance and I were able to buy a house and sell his current one over the course of a two-week period. Aside from a couple of hiccups, the process ran as smoothly as it could. However, with a big move on the horizon, the inevitable decluttering and packing period began.

Over the past 15 years, I have moved a dozen times, so I am no stranger to the process. I began to realize there are certain things you never get rid of, and for me that includes my prior year tax returns dating back to longer than I care to admit. (Side note, the IRS recommends keeping tax returns on file for five years.)

When I was younger, my tax returns were basic. One year I had invested in a fund that had foreign stock ownership, on which it paid foreign tax, generating a foreign tax credit on my individual return. A foreign tax credit is common and a lot of times will be the only foreign reporting on an individual’s tax return. That may also be the case for S corporation shareholders, especially if the S corp does not have foreign activities.

The IRS issued guidance requiring pass-through entities whose shareholders have any foreign filings in their individual tax returns to file Schedules K-2 and K-3 with the S corporation tax return. Forms K-2 and K-3 will need to be filed by every S corporation if: 1) the entity has foreign source income, assets generating foreign source income or foreign taxes paid or accrued, 2) the entity has a foreign shareholder, 3) or the entity has a shareholder in need of the information supplied on Schedule K-3 to aid in filing their individual tax returns (i.e., they claim a foreign tax credit).

Filing Schedule K-2/K-3 can be avoided if information is obtained from each direct and indirect shareholder that they will not be required to file a foreign tax credit form (Form 1116 or 1118) on their individual tax returns. If no shareholder indicates they need the information, filing of Schedule K-2 and K-3 will not be necessary.

This begins with tax year 2022, so now is the time to determine whether filing is required.

Please reach out to your Wipfli advisor to help determine how you may be impacted by the new filing requirement and potential next steps.

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Meghan Gardner, CPA
Senior Manager
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