Draft Partnership Forms to Provide Greater Clarity on International Tax Reporting for Flow-Throughs
On July 14, the U.S. Department of the Treasury (Treasury) and IRS released a proposed redesigned partnership form for tax year 2021 (filing season 2022). The proposed form is designed to structure the process for partners to compute their tax liability when international items, such as income, deductions, and credits, are involved. The proposed form and instructions are the IRS’ attempt to streamline its ability to match a partnership’s international activity to a partner’s return.
Previously, partnerships would attach various footnotes indicating the financial effects of international operations as they relate to the partnership. However, these footnotes would vary in format, detail, and structure, making it difficult for the IRS to match the international financial effects to a partner’s return. Given there wasn’t a standard footnote template for partnerships to use, the IRS released Schedules K-2 and K-3 to standardize this process and ultimately allow them to match partnership returns to a partner’s return as it relates to international financial activity. Furthermore, taking footnotes and incorporating them into their own returns can be difficult for partners, let alone the IRS to match said amounts. Thus, Treasury and the IRS’ intent was to enhance this information reporting process for both partnerships and partners to accurately complete returns and match information. Arguably, this adds to the already burdensome international reporting requirements many taxpayers face.
As it relates to the new forms, the goal of Schedule K-2 (Form 1065), Partners’ Distributive Share Items—International, and Schedule K-3 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.—International, according to the instructions, is to “replace, supplement, and clarify the former Form 1065, U.S. Return of Partnership Income, Schedule K, Partners’ Distributive Share Items, line 16, Foreign Transactions, and Schedule K-1 (Form 1065), Part III, Partner’s Share of Current Year Income, Deductions, Credits, and Other Items, line 16, Foreign Transactions.” In addition, the forms lay out in detail the necessary information for partners to gather their pro rata share of international activity for foreign tax credits (including gross income by baskets and allocable expenses), Section 250 deduction with respect to FDII, Subpart F inclusions, GILTI inclusions, PFICs, §59A (BEAT) information, and ECI.
The IRS is seeking comments from stakeholders during a 60-day period that will begin on the date of the press release. Consequently, Treasury and the IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Links to the forms and instructions are outlined below:
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