Final instructions for 2022 Schedules K-2 and K-3 were recently released, providing a new domestic filing exception for those who qualify. These additional schedules first appeared in 2021 and are used to report items of international tax relevance from passthrough entity operations.

The schedules can be lengthy, but for tax years beginning in 2022, a domestic passthrough entity does not need to complete and file Schedules K-2 and K-3 if each of the following criteria are met:

1. There is no or “limited” foreign activity during tax year 2022. “Limited” is defined as passive category foreign income upon which not more than $300 of foreign income taxes allowable as a credit are treated as paid or accrued by the passthrough and shown on a payee statement.
2. For partnerships only: During 2022, all direct partners are U.S. citizens/resident aliens. Having an entity as a partner disqualifies the partnership from the general filing exception, unless that entity is an S corporation with a sole shareholder or a SMLLC with an owner meeting the preceding eligible owner types; having a domestic estate or trust as a partner is allowed.
3. Entities that satisfy criteria 1 & 2 send owners notification by the time the entity sends a Schedule K-1 to owners that no Schedule K-3 will be provided unless requested. This notice can be an attachment to the Schedule K-1.
4. No owner requests Schedule K-3 on or before one month of the passthrough return’s filing. For 2022 calendar year passthrough entities the latest 1-month date is 2/15/23 with no extension, or 8/15/23 with an extension. If an owner requests a Schedule K-3 after the 1-month date, it must be provided to that owner the later of the date the entity return is filed or one month from the date of request – however it does not need to be filed with the IRS or to non-requesting owners.

If the domestic filing exception is not met, there is also a Form 1116 exemption to filing, along with exemptions for filing certain sections of the schedules when neither the two previously mentioned exceptions apply.

As a reminder, at this time there is no transition filing penalty relief as there was for 2021, so it’s important to prepare Schedules K-2 and K-3 where required.

Please reach out to your RubinBrown representative with questions or concerns.

Published: 1/23/2023

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