The Form 1065 Schedule K-2 reports items of international tax relevance and is an extension of the Form 1065, Schedule K. It replaces line 16a-r, portions of line 20, and numerous unformatted statements attached to prior versions of the Schedule K. Form 1065 Schedule K-3 reports a partner’s distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1. It replaces line 16, portions of line 20, and numerous unformatted statements attached to prior versions of the Schedule K-1 Form 1065, Schedule K-1. In tax years beginning in 2021, flow-through entities with items of international tax relevance must complete the new schedules, as described in the instructions. International tax relevance is determined under each part of the new schedules. Similar revisions apply for the Forms 1120-S and 8865. Only use the schedules that are applicable.
- Schedule K
- Foreign Transactions (K-2)
Part I of Schedule K-2 (and Part I of Schedule K-3) are used to report international tax items not reported elsewhere on Schedule K-2 or K-3.
Part I - Corporation Other Current Year International Information
Check the box that indicates the international tax items that are applicable in the tax year.
Country code - Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. possession with respect to which the gross income is sourced.
Part II of Schedule K-2 (and Part II of Schedule K-3) is used to figure the partnership’s income or loss by source and separate category of income and to report the partner’s distributive share of such income or loss. Partners will use the information to figure and claim a foreign tax credit on Form 1116 or 1118.
Part II Section 1 - Gross Income - For each line, report the total for each country
Part II Section 2 - Deductions - Separate reporting is required because each type of deduction may be allocated and apportioned according to a different methodology.
Part III of Schedule K-2 (and Part III of Schedule K-3). Used to report information necessary for the partner to determine the allocation and apportionment of research and experimental (R&E) expense, interest expense, and the foreign-derived intangible income (FDII) deduction for the foreign tax credit limitation.
Part III Section 1- R&E Expense Apportionment Factors -In general, R&E expenses are allocated and apportioned by the partner and reported in column (f).
Part III Section 2 - Interest Expense Apportionment Factors - This section requires the partnership to report information that a partner will use to allocate and apportion its interest expense for foreign tax credit limitation purposes.
Part III Section 3 - Foreign-Derived Intangible Income (FDII) Deduction Apportionment Factors - This section requires the partnership to report information that a partner will use to
Part III Section 4 - Foreign Taxes - the partnership assigns foreign taxes paid or accrued (including on U.S. source income) to a separate category and source. Include taxes paid or accrued to foreign countries or to U.S. possessions.
Part III Section 5 - Report the section 743(b) income adjustments allocated to you by source, separate category, and class of gross income.
Part IV - Information to Complete Form 8993 - A domestic corporate partner should use this section to calculate the partner's FDII on Form 8993.
Part V - Distributions From Foreign Corporations to Partnership. Use Part V to determine your share of distributions by foreign corporations to the partnership. For more information click here.
Part VI - Information on Partner’s Section 951(a)(1) and Section 951A Inclusion. Use Part VI to include in gross income the appropriate amount of subpart F income inclusion and/or section 951(a)(1)(B) inclusion, and to complete Form 8992.
Part VII - Information to Complete Form 8621. U.S. persons may be required to complete and file Form 8621 and/or include amounts in income, with respect to PFICs owned through a partnership.
Part VIII - Partner’s Share of Partnership’s Interest in Foreign Corporation Income (Section 960) Note. Amounts on this part are reported in foreign currency.
Part IX - Partner’s Information for Base Erosion and Anti-Abuse Tax (Section 59A) If you are a corporate partner of a partnership, use this part from the partnership to determine your BEAT liability, if any.
Part X - Foreign Partner’s Character and Source of Income and Deductions. Use this part if you are a foreign person that earns ECI from U.S. and/or foreign sources and/or U.S. source FDAP to determine if you have a U.S. tax obligation for the applicable tax year.
Part XI - Section 871(m) Covered Partnerships If you are a U.S. or foreign person that has entered into a section 871(m) transaction that references units in the partnership, use this part to determine your U.S. withholding tax and reporting obligations with respect to those transactions under section 871(m) and related sections, including for purposes of determining the amounts to report on Forms 1042 and 1042-S.