Category: International Tax
In 2022, the IRS unveiled new rules for Schedule K2 and Schedule K3 reporting that has dramatically impacted tax reporting for many businesses in Florida and throughout the rest of the United States. Because the new guidelines take effect for the 2021 tax year, getting quick answers to questions regarding these forms is essential for many businesses. Read on to learn more about Schedules K2 and K3, who needs to file them, and how Kerkering Barberio can help you comply with the new rules.
Schedule K2 is a 19-page form that reports items of international tax relevance for certain businesses. Schedule K3 breaks down an individual's share of global income, credits, and deductions. These forms were both introduced in July 2020. Then, the IRS unveiled the revised versions earlier this year. To fill out these forms, affected companies must gather a lot of data.
IRS Schedules K2 and K3 have been introduced to make federal income tax liability more transparent for partners and shareholders who share ownership in companies. Before the release of these forms, companies often did not provide detailed breakdowns, which meant that many partners and shareholders lacked a clear understanding of their obligations. As a result, these individuals found it difficult to accurately determine how international tax items and information affected their tax liability in the U.S. Now companies must all provide the same and more detailed information. Those who share in ownership will have more information to correctly determine their individual filing requirements, foreign tax credits available and determine if additional taxes are owed in the U.S. These filings also help the IRS to verify additional information reported and to ensure compliance.
Information reported on IRS Schedule K2, and Schedule K3 is used to complete the following tax forms:
The straightforward answer is that any company that has foreign partners, international investments, international activities (i.e. sales, use of contractors overseas, etc), or partners that may need additional information for foreign tax credit filings must now include Schedules K2 and K3 with their U.S. Income Tax Returns.
These forms include:
• Form 1065, U.S. Return of Partnership Income for a business partnership that has international pass-through income
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships for U.S. persons who are partners in a foreign partnership
• Form 1120-S, U.S. Income Tax Return for an S Corporation
Not necessarily. Although Schedules K2 and K3 relate to international tax items and information, accountants find that even some companies that do not have foreign transactions are being affected. As a result, partnerships and S corps should seek the advice of an international tax accountant familiar with the new rules like a member of the team for advice about whether or not they need to complete the forms. The new filing requirements are not solely attached to Partnership & S-corporations. This is may also affect trusts, estates and C-corporations with international tax issues or investments and those reporting pass-through activity from US Partnerships and S-corporation investments required to file Schedule K2 and K3.
To prepare for completing Schedules K2 and K3, you should first have all of your partners or shareholders fill out a Form W-9 or Form W-8 (or Form W-8-BEN-E as applicable) and review the forms when submitted to ensure they are complete. This will allow you to confirm if any partners or shareholders are foreign or U.S. partners/shareholders. You will also need to review all of your business transactions for 2021 and confirm investments your business may have, both inside and outside the U.S. Because this will be a time-consuming process, you can enlist the help of an international tax accountant from our firm to assist you. Many individual taxpayers were not able to file their tax returns on time causing the need to file extensions and may cause further delay in filing while waiting for additional information to be reported to them from Schedules K3.
Failing to complete Schedules K2 and K3 correctly could lead to penalties and other consequences. However, for 2021, the IRS has provided penalty relief for 2021 as the “transition year” for those taxpayers who attempt to complete the new schedules to the best of their ability. This penalty relief is not automatically available to all filers. The IRS' ruling on the extension states that companies and individuals must have made a good faith effort to complete their taxes on time to qualify for the waiver of penalties.
The new international tax laws that put Schedules K2 and K3 in place are complex and new. Simply following the Schedule K2 instructions and Schedule K3 instructions provided by the IRS is complex, and as explained, businesses may have unexpected tax liabilities because of the new rules. What's more, individuals who prepare Form 1116 may need to file an extension because of the timing of information to be received due to the new regulations. Fortunately, filing an extension does not increase the likelihood of an audit and can eliminate the need for future amended returns.
An international tax accountant specialist from Kerkering Barberio can help ensure that you comply with the new tax laws whether you're representing an S corp, partnership, foreign partnership, or are an individual. Our team understands the details and ramifications of the new rules and can handle filling out the paperwork. Contact our international tax accountant Sarasota, Tampa, or Lakewood Ranch locations for more information at 941-365-4617 or 800-966-8676.
Our firm provides the information in this website post for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Articles posted on our website are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
