This article applies to partnerships that may have foreign activities or foreign partners.
Abstract: The IRS recently provided information about, and copies of, two new draft forms for 2021, as well as draft versions of the instructions to those forms. This article offers an early look at the forms, particularly proposed parts of Schedules K-2 and K-3.
The IRS recently provided information about, and copies of, two new draft forms for 2021, as well as draft versions of the instructions to those forms. The forms would apply to partnerships required to file Form 1065 only if they have items of international tax relevance (generally, foreign activities or foreign partners).
New Forms, Proposed Parts
The new forms are designed to provide greater clarity for partners on how to calculate their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits. The new forms wouldn’t be used by domestic partnerships with no international tax items to report.
The new forms are:
- Form 1065, Schedule K-2, “Partners’ Distributive Share Items — International,” and
- Form 1065, Schedule K-3, “Partner’s Share of Income, Deductions, Credits, etc. — International.”
The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r) (Foreign Transactions).
The proposed parts included in new Schedule K-3 (Form 1065) replace portions of Schedule K-1, Part III, Boxes 16 (Foreign Transactions) and 20 (Other Information). Also, the proposed parts provide 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).”
The format of the new forms 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. It’s intended that information to be reported on the new forms is already required to be provided by partnerships to their partners.
The IRS plans similar revisions to Form 1120-S, “U.S. Income Tax Return for an S Corporation,” and Form 8865 “Return of U.S. Persons With Respect to Certain Foreign Partnerships.”
Given the sweeping nature of the changes, the IRS is planning a series of listening events to take comments and answer questions about the forms. The agency will post more details about these events as soon as they’re finalized. Contact us if you have any questions.
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