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On December 2, 2022, the IRS released revised instructions for the 2022 Schedules K-2 and K-3. Schedule K-2 reports items of international tax relevance at the partnership level, while Schedule K-3 breaks down an individual’s share of global income, credits and other deductions.
The most important changes included in these instructions relate to the domestic filing exceptions, which provide guidance on circumstances that would relieve filing requirements for the 2022 tax year.
The domestic filing exception has four requirements that must be met for an entity to opt out of filing Schedules K-2 and K-3: No (or limited) foreign activity; partners must fit certain parameters; partners must be notified of lack of filing; and no partners requested a K-2 and K-3.
In previous drafts of the instructions, there was a two-month deadline for partnerships to inform partners of the non-requirement to file Forms K-2 and K-3. This deadline has now been removed. Partnerships may provide this notice as late as the filing of the 2022 tax return (August 15, 2023, for the 2022 tax year). The notice may be provided as an attachment or statement with Schedule K-1. Partnerships that notify in this manner would still be exempt from filing if all other requirements are met.
The deadline for partners to request a K-3 filing has not been removed but has been altered. Previously, partners were required to request a K-3 up to one month before the filing date of the partnership’s Form 1065. If a partnership did not receive any requests and all other requirements were met, the domestic filing exception applied. While this deadline has not been removed, it has been altered slightly.
In the event that a partner makes a timely request, a partnership is required to provide Schedule K-3 for all partners. If a partner requests a Schedule K-3 after the one-month deadline has passed and no other request was received, a partnership is not required to file the 2022 Schedules K-2 and K-3 but is required to provide a K-3 to the requesting partner, either by the date of filing or within one month of such request, whichever is later.
The updated instructions also provide required criteria for qualifying direct partners.
Any partnerships with a second-tier partnership as a partner do not currently qualify under the domestic filing exception. If you have any questions about your filing requirements, the tax group at Schneider Downs is available to assist.
Schneider Downs’ tax advisors have experience and expertise in a wide range of industries, including Automotive, Construction, Real Estate, Manufacturing, Energy & Resources, Higher Education, Not-for-profits, Transportation and others. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives.
To learn more, visit our dedicated Tax Services page.