Domestic Partnerships Get a Break on Tax Forms With New IRS Instructions

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Recently, we wrote about new draft guidance from the IRS that makes it easier for partnerships and S corporations to qualify for an exception to filing Schedules K-2 and K-3. Since then, the IRS released its final instructions, confirming those guidelines.

Background

To summarize, pass-through entities, such as partnerships and S corporations, are required to file K-1, K-2, and K-3 forms for partners and shareholders to use when filing their personal taxes. K-2 and K-3 report the entity’s foreign income or loss and the shareholder’s proportional share, respectively.

Filing K-2 and K-3 forms can be burdensome, however, and tax practitioners had called on the IRS to provide relief to entities with little or no foreign activity.

The result was draft instructions released on October 25, 2022, created a domestic filing exception for Schedules K-2 and K-3 for a partnership meeting four requirements for its 2022 tax year. This draft said that partnerships would have to notify their partners by Jan. 15, 2023, that they would not send them Schedule K-3 information unless they requested it.

These were followed by a second set of draft instructions released December 2, 2022, which added two categories of partners that a partnership can have and still qualify for the exception. These instructions said that partnerships would have until one month before the partnership filed its Form 1065 to notify its partner, instead of January 15.

Final instructions confirming the December 2 guidelines were released December 29, 2022.

Criteria

Domestic partnerships are not required to furnish K-2s and K-3s to the IRS or send forms to their partner(s) if they meet all of the following criteria:

  • The partnership has no foreign activity or is limited to passive income generating no more than $300 of taxes subject to the foreign tax credit
  • All shareholders are US citizens or resident aliens
  • Partners/shareholders are notified that they will not receive Schedule K-3 unless requested “at the latest when the partnership furnishes the Schedule K-1 to the partner.”
  • The partnership doesn’t receive a request from a partner for Schedule K-3 information on or before the “1-month” date.

Is Your Business Affected?

If your domestic partnership or S corporation has no foreign activity for 2022, you may not have to file Schedules K-2 and K-3. However, you will need to file them if requested by a partner or shareholder. If you are a partner or shareholder, you may need the K-3 to complete your personal returns.

If you need assistance understanding your obligations and filing appropriately, the CPAs at Tonneson + Co are here to help. Contact us today.

Contact us at Tonneson + Co today to learn how we can help.

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