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2021 draft partnership returns – international revisions

Authored by Alyssa Sihelnik and Jim Alajbegu

In mid-July, the Treasury Department and the IRS released a proposed redesigned partnership form for tax year 2021 (for the 2022 filing season). The goal of the proposed form is to clarify for partners how they compute U.S. income tax liability for items related to international tax.

Key takeaways

  • The IRS released Form 1065, Schedules K-2 and K-3 in draft form as well as the instructions for Schedules K-2 and K-3.
  • Any partnership required to file Form 1065, U.S. Return of Partnership Income, 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 IRC must complete the relevant parts of Schedule K-2 and Schedule K-3.
  • The Treasury Department 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.
  • The new designed partnership form creates additional complexities and increased tax compliance in partnership reporting as well as additional costs of preparation. The draft schedules do not replace existing U.S. international tax information reporting requirements of the partnership but are intended to provide additional information to their partners to satisfy tax-filing obligations.

Discussion

The redesigned form and instructions provide guidance to partnerships on how to report international tax information to their partners in a standardized format. Currently, partners are required to report international tax information on their returns on several tax forms and schedules. Partners generally obtain the information required for reporting from their partnerships, usually through footnotes attached to K-1s.

The proposed parts included in new Form 1065, Schedule K-2 replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r), and the new Form 1065, Schedule K-3 replaces portions of Schedule K-1, Part III, Boxes 16 and 20. Additionally, Schedule K-3 provides information to the partner in the same general format that might be completed by the partner on the following forms:

  • Form 1040, U.S. Individual Income Tax Return
  • Form 1040-NR, U.S. Nonresident Alien Income Tax Return
  • Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)
  • Form 1118, Foreign Tax Credit- Corporations
  • Form 1120, U.S. Corporation Income Tax Return
  • Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
  • Form 4797, Sales of Business Property
  • Form 8621, Passive Foreign Investment Company or Qualified Electing Fund
  • Form 8949, Sales and Other Dispositions of Capital Assets
  • Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts
  • Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
  • Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)

Schedule K-2 will be attached to a partnership’s Form 1065 and filed by the due date (including extensions) for that return. Schedule K-3 will be provided to the partners in according to the timeline for providing the Schedule K-1.

It is expected that final versions of the partnership return will be released later in 2020. Please refer to the following IRS links for the new Schedule K-2 and Schedule K-3.

The Treasury Department and the IRS released the draft returns early to afford time for stakeholder input and engagement. The Treasury and IRS welcome comments from affected stakeholders through Sept. 14, 2020, and written comments should be sent to the following email address: [email protected] with the subject line “International Form Changes.”

In addition, both agencies are planning a series of listening events to take comments and answer questions about the proposed form. More details about participating in these events will be posted by the IRS as soon as they are finalized.

Please reach out to your Baker Tilly international tax advisor to discuss how these changes may affect your tax situation.

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For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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