An S corporation filing Form 1120-S must complete Schedules K-2 and K-3 if it has items in the return that relate to the international provisions of the Internal Revenue Code. The S corporation's shareholder(s) need this information to properly complete their individual tax returns.
Schedule K-2 is an extension of Schedule K, while Schedule K-3 is an extension of Schedule K-1 and reports the shareholder's share of the items on Schedule K-2.
Schedules K-2 and K-3 consist of seven parts. Parts II through VII cover the most common international tax provisions of the IRC, while Part I is used to indicate any attachments to the schedules.
- Part I - Includes a number of check boxes that indicate to the shareholder that there is or should be an attachment providing more detail regarding information in one or more of the other parts.
- Part II - Figures the S corporation's income or loss by both source and category of income. The shareholder will use this information to figure the foreign tax credit.
- Part III - Reports the information the shareholder will use to allocate and apportion research and experimental expense and interest expense for the foreign tax credit limitation.
- Part IV - Reports the information the shareholder needs to determine if a distribution from the foreign corporation is to be treated as a dividend or whether to exclude the distribution from income due to it being attributable to the corporation's previously taxed earnings and profits (PTEP). This part also is used to report the amount of foreign currency gain or loss on the PTEP that the shareholder is required to recognize under IRC section 986(c) and report on their Form 1040.
- Part V - Reports the information the shareholder needs to determine any inclusions under sections 951(a)(1) and 951A.
- Part VI - Reports information related to a passive foreign investment company (PFIC) that the shareholder will use to complete Form 8621 and determine any income inclusions related to the PFIC.
- Part VII - For a corporate shareholder, this part reports the foreign corporation's net income in the income groups for the calculation of deemed paid taxes with respect to income inclusions under sections 951(a)(1) and 951A.
Only the parts relevant to the S corporation's international activities need to be completed, and when the form or return is printed only the first page and the parts that include information are printed. Penalties may apply if required information is missing. You are encouraged to consult the Schedules K-2 and K-3 instructions.
To enter the information for Schedules K-2 in TaxSlayer Pro, from the Main Menu of the S corp return (Form 1120-S) select:
- Schedule K
- Foreign Transactions (K-2)
Additional Information:
IRS: S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S)