On December 2, 2022, the IRS released updated 2022 draft instructions for Schedules K-2 and K-3 that modified a new exception to filing and furnishing Schedules K-2 and K-3 to partners for tax year 2022.
As of this writing (January 3, 2023), these changes are still in draft form and are subject to change. This update provides a high-level overview of the December 2, 2022 updated draft of the 2022 K-2 / K-3 form instructions, particularly related to the domestic filing exception.
If partnerships meet the requirements listed below, they are not required to file Schedules K-2 and K-3 under the revised exception.
Filing exemption requirements:
- No or limited foreign activity. The domestic partnership does not have to file Schedule K-2 and K-3 if it meets the following tests and its only foreign activity is from a passive investment account with less than $300 foreign tax paid or accrued. A “foreign activity” includes foreign income taxes paid or accrued, foreign-source income or loss, and ownership interests in foreign partnerships, corporations, branches or disregarded entities.
- U.S. citizen / resident alien partners. During 2022, all the direct partners in the domestic partnership must be domestic individuals, trusts, estates, S-corporations with a sole shareholder, or single member LLCs. There does not seem to be any exception for partnerships with other types of entities as partners.
- Partner notification. Partnerships are required to notify their partners that they will not receive a Schedule K-3. Previous versions of the draft instructions indicated that notification had to be made by January 15, 2023. The revised draft instructions allow the notice to be made all the way up to the filing date (September 15, 2023). The notice can also be attached to K-1s.
- No Requests. The partnership must not receive a request for schedule K-3s from any partner on or before the one-month date. The “one-month date” is one month before the partnership files its return. The latest one-month date for 2023 is August 15, 2023. Partners can still request a schedule K-3 after the one-month date, but the request will not cause the partnership to fail the domestic filing exception tests.
Smith + Howard will carefully evaluate this exception for all applicable entities and will not file schedules K-2 or K-3 unless the flow-through entity is required to do so or receives a request from a partner. Please contact a member of our tax team if you have any new foreign activity in 2022 or any questions on the content above.
Smith + Howard’s tax team will continue to monitor this evolving matter and will provide updates as appropriate. If you have any questions on whether your partnership meets the requirements listed above, please contact a Smith + Howard advisor today.