The IRS has released drafts of two new partnership tax forms for 2020 partnership returns, adding new Schedules K-2[1] (20 pages) and K-3[2] (22 pages) along with draft instructions for Schedules K-2[3] (25 pages) and K-3[4] (11 pages).  The IRS announced these new forms on their website on July 14, 2020.[5]

The IRS in the announcement provides the following reason for issuing these new forms:

The Treasury Department and the IRS are proposing updates to the partnership form for tax year 2021 (filing season 2022). The updates will provide greater clarity for partners on how to compute their U.S. income tax liability with respect to international tax matters, including how to compute deductions and credits. The redesigned form and instructions also give useful guidance to partnerships on how to provide international tax information to their partners.  This proposed form would apply to a partnership required to file Form 1065, but only if the partnership has items of international tax relevance (generally foreign activities or foreign partners). The proposed changes would not affect domestic partnerships with no items of international tax relevance.

The partnership instructions provide the following information regarding who will be required to file these forms:

The partnership need not complete this schedule if the partnership does not have items of international tax relevance (typically, international activities or foreign partners).

Any partnership required to file Form 1065 and that has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Internal Revenue Code must complete the relevant parts of Schedule K-2 and Schedule K-3. See each part and section for a more detailed description of who must file each part and section. Penalties may apply for filing Form 1065 without all required information or for furnishing Schedule K-3 to partners without all required information.[6]

Schedule K-2, Partners’ Distributive Share Items—International (Draft), contains the following sections, each providing detail on items previously found on pre-2020 Schedule K:

• Part I - Partnership’s Share of Current Year International Transaction Information

• Part II - Foreign Tax Credit Limitation

  • Section 1—Gross Income

  • Section 2—Deductions

• Part III Other Information for Preparation of Form 1116 or 1118

  • Section 1—R&E Expenses Apportionment Factors

  • Section 2—Interest Expense Apportionment Factors

  • Section 3—Foreign Taxes

• Part IV Other Foreign Transaction Information for U.S. Partners

  • Section 1—Information on Partners’ Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)

  • Section 2—Other Tax Information

  • Section 3—Distributions From Foreign Corporations to Partnership

• Part V Information on Partners’ Section 951(a)(1) and Section 951A Inclusions

• Part VI Information To Complete Form 8621

  • Section 1—General Information on Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF)

  • Section 2—Additional Information on PFIC or QEF

• Part VII Partnership’s Interest in Foreign Corporation Income (Section 960)

• Part VIII Partners’ Information for Base Erosion and Anti-Abuse Tax (Section 59A)

  • Section 1—Applicable Taxpayer

  • Section 2—Base Erosion Payments and Base Erosion Tax Benefits

• Part IX Foreign Partners’ Character and Source of Income and Deductions

  • Section 1—Gross Income

  • Section 2—Deductions, Losses, and Net Income

  • Section 3—Allocation and Apportionment Methods for Deductions

  • Section 4—Section 871(m) Covered Partnerships

The Schedule K-3 to be provided to each partner contains the following sections:

• Part I Partner’s Share of Current Year International Transaction Information

• Part II Foreign Tax Credit Limitation

  • Section 1—Gross Income

  • Section 2—Deductions

• Part III Other Information for Preparation of Form 1116 or 1118

  • Section 1—R&E Expenses Apportionment Factors

  • Section 2—Interest Expense Apportionment Factors

  • Section 3—Foreign Taxes

• Part IV Other Foreign Transaction Information for U.S. Partners

  • Section 1—Information on Partner’s Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)

  • Section 2—Other Tax Information

  • Section 3—Distributions From Foreign Corporations to Partnership

• Part V Information on Partner’s Section 951(a)(1) and Section 951A Inclusions

• Part VI Information To Complete Form 8621

  • Section 1—General Information on Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF)

  • Section 2—Additional Information on PFIC or QEF

• Part VII Partner’s Share of Partnership’s Interest in Foreign Corporation Income (Section 960)

• n  Part VIII Partner’s Information for Base Erosion and Anti-Abuse Tax (Section 59A)

  • Section 1—Applicable Taxpayer (see instructions)

  • Section 2—Base Erosion Payments and Base Erosion Tax Benefits

• Part IX Foreign Partner’s Character and Source of Income and Deductions

  • Section 1—Gross Income

  • Section 2—Deductions, Losses, and Net Income

  • Section 3—Allocation and Apportionment Methods for Deductions

  • Section 4—Section 871(m) Covered Partnerships

• Part X Foreign Partner’s Distributive Share of Deemed Sale Items on Transfer of Partnership Interest

The IRS is looking for comments on these new forms.  As the posting on the website states:

The IRS is seeking comments from stakeholders during a 60-day period which will begin on the date of the press release.  Those interested are invited to send comments to lbi.passthrough.international.form.changes@irs.gov with the subject line: “International Form Changes.”

Given the sweeping nature of the changes, the Treasury Department and the IRS are also planning a series of listening events to take comments and answer questions about the form.  More details about participating in these events will be posted as soon as they are finalized.  Please check back for further updates

[1] Schedule K-2, Partners’ Distributive Share Items—International (Draft), July 8, 2020, https://www.irs.gov/pub/irs-utl/DRAFT-Sch-K-2-Form-1065.pdf (retrieved July 17, 2020)

[2] Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International (Draft), July 8, 2020, https://www.irs.gov/pub/irs-utl/DRAFT-Sch-K-3-Form-1065.pdf (retrieved July 17, 2020)

[3] Partnership Instructions for Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065) (Draft), July 9, 2020, https://www.irs.gov/pub/irs-utl/DRAFT-Sch-K-2-Instructions-Form-1065.pdf (retrieved July 17, 2020)

[4] Partner’s Instructions for Schedule K-3 (Form 1065) (Draft)

[5] “Proposed International Changes to Form 1065, U.S. Return of Partnership Income for Tax Year 2021,” IRS website, July 14, 2020, https://www.irs.gov/businesses/1065-form-changes (retrieved July 17, 2020)

[6] Partnership Instructions for Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065) (Draft), p. 1