K2/K3 Draft Instructions are good news!

[BulldogTom]

Got this from a Spidell post on LinkedIn.

2022-47: K-2/K-3 draft form instructions provide welcome filing relief

October 27, 2022

The updated draft Partnership Instructions for Schedules K-2 and K-3 (Form 1065) for the 2022 taxable year provide a new domestic partnership filing exception. This is welcome relief for tax professionals working with most domestic partnerships.

The exception states that a partnership is not required to complete Schedules K-2 and K-3 and file them with the IRS if:

The partnership has no or limited foreign activity, which is specifically defined in the instructions and includes domestic partnerships whose only foreign activity is passive category foreign income that:

Only generates $300 or less of taxes subject to the Foreign Tax Credit; and

Is shown on a payee statement such as Form 1099-DIV;

All partners are U.S. citizens or resident aliens, domestic decedent estates, or certain domestic trusts;

The partnership sends specific notification to the partners by two months before its filing deadline, without extensions (January 15 for calendar-year partnerships); and

No partners specifically request Schedule K-3 from the partnership prior to one month before the entity’s filing deadline, without extensions (February 15 for calendar-year partnerships). If the information is requested after February 15, then the partnership only has to provide the information to the requesting partner and does not have to file the K-2 and K-3 with the IRS.

Note: The draft K-2/K-3 (Form 1120S) instructions have not yet been released. We assume similar relief will be provided in these draft instructions. We will issue another Flash E-mail if this is not the case.

The draft Partnership Instructions for Schedules K-2 and K-3 (Form 1065) can be found at:

www.irs.gov/pub/irs-dft/i1065s23–dft.pdf

Tom
Longview, TX

[mcbreck]

All that drama and rushed training for essentially nothing.

[Lee B]

"Similar to the 2022 instructions for partnerships, the IRS has expanded relief and clarity by adding a new "domestic filing exception" for S corporations' draft instructions for the 2022 tax year schedules K-2 and K-3. 

The domestic filing exception for S corporations is very similar to the one for partnerships. However, unlike the four criteria partnerships must meet, S corporations are required to meet three tests. The one requirement omitted relates to U.S. citizens and resident alien individuals, domestic trusts and estates; S corporations aren't permitted to have the latter entities as shareholders."

https://www.irs.gov/pub/irs-dft/i1065s23--dft.pdf

[WITAXLADY]

The partnership sends specific notification to the partners by two months before its filing deadline, without extensions (January 15 for calendar-year partnerships); and

No partners specifically request Schedule K-3 from the partnership prior to one month before the entity’s filing deadline, without extensions (February 15 for calendar-year partnerships). If the information is requested after February 15, then the partnership only has to provide the information to the requesting partner and does not have to file the K-2 and K-3 with the IRS.

 

 

Meaning we need to have our partnerships / S corps send letters to the partners? Shareholders asking if they want one... ?!! Explain that to them.. by Jan 1?

WI Tax Lady

per a Naea class on S Corps this week.

[Lion EA]

I gave my PTEs letters this past season to have their partners/shareholders sign to the company plus a letter for the company to sign to me directing me that they polled their partners/shareholders and do not require Forms K-2 and K-3 and to not prepare those forms. Actually, in 3/4 of my PTEs, I either also prepare returns for the individuals or meet with the individuals as part of my duties to the company (think H/W partnerships/S-corporation) so handed the letters to the individuals as well as to the company rep and collected them myself. CYA. The 2022 instructions give us more outs.

[Lee B]

Second Draft of Form  1065 K-2, K-3 Instructions has some improvements:

 

https://www.currentfederaltaxdevelopments.com/

[Medlin Software, Dennis]

The 22 final K1/2/3 forms were posted overnight.  No final instructions were posted yet.

[joanmcq]

I was in a class yesterday talking about the Jan. 15 loophole when another person in the class got an email: partnerships don’t need to send Jan. 15 letter, but S corps still do.

[Lee B]

Final Instructions have been issued for S Corporations:

https://www.currentfederaltaxdevelopments.com/blog/2022/12/21/final-s-corporation-schedules-k-2-and-k-3-instructions-issued-for-2022-returns

"Consider the Option to Just Prepare the Forms

Advisers may wish to consider the other alternative to qualifying the S corporation to meet either the Domestic Filing Exception or the Form 1116 Exemption Exception—just preparing the Schedules K-2 and K-3 for an S corporation with only domestic activities.

*Several professional tax software publishers have added the option to check a box that tells the software that the entity has only United States operations. When the box is checked the software uses the information entered on the forms to complete the rest of the Form 1120-S to populate Parts II and III of Schedules K-2 and K-3 based on the normal allocation information for profits and losses for the return, as well as the average book value for assets reported on the corporation’s depreciation schedule.

For many simple S corporations, this procedure will produce either a correct Schedule K-2 and K-3, or a starting point for quickly creating proper Schedules K-2 and K-3 for the corporation. In that case, taking the additional steps to meet the requirements to meet either exceptions may consume far more professional time than simply preparing these forms for filing with the Form 1120-S and providing the appropriate Schedule K-3 to each shareholder.:

[BulldogTom]

I heard this at an update seminar last week.   It may be good advice.

Tom
Longview, TX

[mcbreck]

Why would an S-corp have a different set of rules to this extent from that of a partnership?

I don't have any clients with foreign business so I'm not worried.

[Lee B]

25 minutes ago, mcbreck said:

Why would an S-corp have a different set of rules to this extent from that of a partnership?

Trying to apply common sense to what the IRS does, just creates stress and frustration.

29 minutes ago, mcbreck said:

I don't have any clients with foreign business so I'm not worried.

Neither do I, but the instructions either require the letter or file the K-2 & K-3 and yes the 1065 instructions are different from the 1120 S instructions.

The question is which approach is more efficient and takes less time. If I can avoid sending out letters that's way better for me!

 

[EricF]

Will ATX provide a standard attachment to K-1s to let owners know a K-3 is not coming unless requested, or at least a box to check for it to be included, or will we have to type the statement in each return to attach to the K-1s?

[BulldogTom]

27 minutes ago, EricF said:

Will ATX provide a standard attachment to K-1s to let owners know a K-3 is not coming unless requested, or at least a box to check for it to be included, or will we have to type the statement in each return to attach to the K-1s?

As I have gone through my updates and CPE this year, I think the consensus of the "experts" is to just include the K2/K3 and reduce your liability.   There is too much outside of your control to use the exceptions.   That is what I am going to do.   Paper is cheaper than the hassle.

Tom
Longview, TX