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#1 Posted : Wednesday, December 14, 2022 11:40:17 PM(UTC)

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Last year the IRS introduced two new schedules for Form 1065. These were Schedule K-2 and K-3. The K-2 gave the IRS much more information on a partnerships foreign activity. The K-3 showed each individual partner's share of foreign activity. After 2 changes in instructions by the IRS after tax returns started being accepted, ICLUBcentral decided to include these schedules in all club tax filings. This made club tax returns very long, often hundreds of pages.
The current draft instructions for Schedules K-2 and K-3 have expanded the exemptions from including these schedules with a form 1065. Four criteria must be met.

1. The partnership has no or limited foreign activity.
a. If there is activity, it must be passive (such as investment income).
b. Taxes paid (or withheld) and/or accrued must be less than $300.
c. A payee statement (such as a brokerage firm's Form 1099) must be received
2. The partnership's partners are restricted to the following:
a. U.S or resident alien individuals.
b. Domestic trusts (grantor or non-grantor).
c. Domestic estates of deceased persons.
d. Not a foreign estate or trust.
e. Not a foreign individual (an individual who does not have resident alien status).

3. All partners must be notified the partnership intends to exclude Schedule K-3 from its Form 1065 filing no later than when a club furnishes schedule K-1 to partners.
4. No partner requests a Schedule K-3 before one month prior to the club filing form 1065.

Item 3 is an action the club must take. So inform all your club members that schedule K-3 will not be supplied unless the schedule is requested by a member. Most club members will not need a schedule K-3. If a member uses form 1116 to report foreign tax withheld on their personal income tax return, they might need a schedule K-3.

ICLUBcentral recently added a feature to myICLUB to allow clubs to inform members the club intends not to include schedule K-3 in the club form 1065. To access this feature go to the Taxes tab. The link is in the Important updates section near top of the Taxes page. A screenshot of the section is attached to this post. When this feature is used, myICLUB will confirm the notice was sent and when.

The IRS has changed the draft instructions once already. Fortunately, the change was to give more time for partnerships to give partners notice, as per requirements 3 and 4 above. We will monitor the instructions and keep you informed of changes when the final version is completed.

Russell Malley

K-3 notice.pdf (181kb) downloaded 2 time(s).

Edited by user Wednesday, December 14, 2022 11:58:59 PM(UTC)  | Reason: correct attachment

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