August 2020 Foodman website and JD Supra

On July 14, 2020, the US Treasury Department and the IRS released a proposed redesigned partnership form for tax year 2021 (filing season 2022). The two proposed forms SCHEDULE K-2 (Form 1065) and Schedule K-3 (Form 1065) are designed to provide “greater” clarity to partnerships on how to compute their US income tax liability with respect to items of international tax relevance, including claiming deductions and credits.

The redesigned forms and instructions are meant to provide guidance to partnerships on how to report international tax information to their partners in a standardized format

The proposed forms apply when a partnership that is required to file Form 1065 has items of international tax relevance (foreign activities or foreign partners). The changes do not affect a domestic partnership that has no international tax items to report.

Why the change?

Currently, a partnership is required to report international tax information on their tax returns on several tax forms and schedules. A Partner obtains the information required to be reported from their partnerships (through narrative statements attached to K-1s). Those statements are then compiled in a variety of formats; making it challenging for partners to translate onto their own returns.  The purpose of the proposed changes is intended to ease this burden through a “standard format”, offering greater clarity to both partnerships and their partners. 

The standard format of the proposed partnership schedules K-2 and K-3 is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, allowing partners to more easily prepare their tax returns and the IRS to more efficiently verify taxpayer compliance.  All of the information to be reported on the new schedules is already necessary for the partnership to provide to partners or is available to the partnership.

  • The proposed parts included in the new Schedule K-2 “Partners’ Distributive Share Items – International” is replace portions of the existing Form 1065, Schedule K, lines 16(a) through 16(r).
  • The proposed parts included in new Schedule K-3 “Partner’s – Share of Income, Deductions, Credits, etc. – International” replaces portions of Schedule K-1, Part III, Boxes 16 and 20, and provides information to the partner generally in the format of the following forms that might be completed by the partner:
    • Form 1040 (U.S. Individual Income Tax Return)
    • Form 1040-NR (U.S. Nonresident Alien Income Tax Return),
    • Form 1116 (Foreign Tax Credit (Individual, Estate, or Trust)),
    • Form 1118 (Foreign Tax Credit – Corporations),
    • Form 1120 (U.S. Corporation Income Tax Return)
    • Form 1120-F (U.S. Income Tax Return of a Foreign Corporation),
    • Form 4797 (Sales of Business Property)
    • Form 8949 (Sales and Other Dispositions of Capital Assets)
    • Form 8991 (Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts),
    • Form 8992 (U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)), and
    • Form 8993 (Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)).

Similar other revisions coming for the 2021 Tax Year

The US Treasury Department and the IRS plan similar revisions to:

  • Form 1120-S (U.S. Income Tax Return for an S Corporation)
  • Form 8865 (Return of U.S. Persons with Respect to Certain Foreign Partnerships)

The US Department of Treasury and the IRS are looking for international tax compliance

Although the proposed changes to the partnership form are promoted to ease “taxpayer burden”, when all is said and done, the IRS is looking to efficiently verify “taxpayer compliance”.  That said, Taxpayers with international interests ought to make sure that they are in compliance with their reporting.  If not, consult with your international tax advisor.