The Treasury Department and the IRS proposed and released draft Form 1065 Schedule Ks on July 14, 2020. The changes to the forms are intended to standardize international tax reporting for partnerships and their partners.
A partnership files a Form 1065 Schedule K-1 with the IRS to report each partner’s share of the partnership’s tax items, such as income, deductions, credits.
The new Form 1065 would involve moving parts of Schedule K-1 to new schedules:
- draft Schedule K-2 (Form 1065), Partners’ Distributive Share Items – International; and
- draft Schedule K-3 (Form 1065), Partner’s – Share of Income, Deductions, Credits, etc. – International.
The proposed Form 1065 would be in effect for tax year 2021, filing season 2022.
Treasury and the IRS seek comments from taxpayers and others affected by the proposed changes no later than September 14, 2020.
Separate Reporting of International Tax Items for Partnerships
Partnerships have to report international tax information when they have:
- foreign activities; and/or
- foreign partners.
The redesigned Form 1065 and instructions would give partnerships and partners a “standardized format” for reporting international tax information.
According to the IRS, partners usually obtain international tax information from their partnerships through narrative statements attached to Schedule K-1s.
Changes Made to Form 1065 in the New Draft
Taxpayers report foreign transactions in Box 16 of Part III in Schedule K-1.
Box 20 serves as a sort of catch all box where partnerships report “Other Information”.
The new schedules both include the foreign reporting done in Box 16. Schedule K-3 includes additional information from Box 20.
Draft Schedule K-2: Foreign Tax Credit (FTC) Information
The draft new Schedule K-2 replaces Codes A through R for Box 16 on the existing Schedule K-1. On these lines, partnerships provide information for partners to fill out and file Form 1116, Foreign Tax Credit.
The information a partnership reports on lines 16(a) through 16(r) includes:
- name of country or U.S. possession;
- gross income information;
- sourcing of foreign gross income at the partnership level;
- allocation and apportionment of deductions at the partner level; and
- foreign taxes paid and accrued.
Draft Schedule K-3: FTCs and “Other Information”
The draft new Schedule K-3 would replace both Box 16 and Box 20 on the Schedule K-1.
In Box 20, partnerships report items such as:
- investment income and expenses;
- the recapture of various credits, including the fuel tax credit;
- section 179 deduction information; and
- look-back interest.
The draft Schedule K-3 formats the information reported in Box 20 to make it easier for partners to complete various tax forms, including:
- 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 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)), and
- Form 8993 (Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)).
Comments on Draft Form 1065 Schedule K-2 and Schedule K-3
Filing for the 2019 tax year hadn’t ended when the IRS released the draft Form 1065 for the 2021 tax year. The IRS explained the early release as intending to give partnerships and other stakeholders time to:
- consider the changes in the draft Schedules; and
- give feedback that can be taken into account for the final versions of the schedules and instructions.
“The Treasury Department and the IRS will be actively engaged with stakeholders to solicit input on these proposed changes before the forms are finalized later in 2020.” (IR-2020-155)
The IRS set aside a 60-day period beginning July 14, 2020, and ending September 14, 2020 to receive comments.
Submitting Comments on New Draft Schedules
Submit written comments to the email address: email@example.com with the subject line: “International Form Changes.”
By Lisa Lopata, J.D.