Starting in tax year 2021 the IRS updated the Schedule K-1 to include a new Schedule K-3 to report the partner's share of international transactions. This replaces and adds more detail to the codes that appeared on 1065 Schedule K-1, line 16 in prior years.
This article will help you:
- Enter info from the K-3, parts II and III, on an individual return;
- Generate the foreign tax credit Form 1116; and
- Understand where items from other parts of the Schedule K-3 may need to be reported.
You may be able to use the information reported on Sch. K-3 to figure your foreign tax credit. For more information, see Form 1116, Foreign Tax Credit and IRS Pub. 514 for Individuals.
To enter K-3 parts II and III:
- Go to Screen 20, Passthrough K-1's.
- On the left-side menu, select the partnership or S corporation who issued this K-3.
- Scroll down to the section for your K-1 type:
- Partnership: Line 16 - International Tax (Schedule K-3 - Form 1065)
- S Corporation: Line 14 - International Tax (Schedule K-3 - Form 1120-S)
- Enter the following info for each country where foreign taxes were paid or accrued:
- Form 1116 Name - leave this field blank unless you want to link the entry to an existing form on Screen 35.1.
- Name of Country must be selected for any line you're not linking to an existing Form 1116.
- Select the Category of Foreign Income (if not linking to an existing 1116).
- Enter the Partner's foreign gross income for this category.
- Enter any Interest Expense Allocated to Foreign Sources from Part III, section 2.
- Enter any Other Foreign Deductions Apportioned or Allocated from Part III.
- Enter the amount of Foreign Tax Withheld (US Dollars) from Part III, section 4.
- Enter the amount of Foreign Tax Withheld (Foreign Currency) if applicable.
- Enter the Date Paid or Accrued.
- Select the Type of Income Withheld On.
- Repeat these steps for any other countries.
Where do I enter the K-3 gross income from all sources?
To have the Schedule K-3 gross income from all sources affect the calculation of Form 1116, line 3e, follow these steps:
- Go to Screen 35, Foreign Tax Credit (1116).
- On the left side menu, select the Gen. Info/Elections hyperlink.
- Enter the amount in Gross income from all sources [A].
Where do I enter other parts of the K-3?
Schedule K-3 parts IV - XII aren't used to calculate the foreign tax credit, but provide information you may need for other forms in the return. See the Schedule K-3 instructions for additional information.
For tax year 2020 and prior:
Enter any amounts reported in Box 16 of Schedule K-1 on Screen 20.1, Partnership Information, in the applicable fields below:
Use the information reported as codes A through N, code Q, and attached schedules to figure your foreign tax credit. For more information, see Form 1116, Foreign Tax Credit and IRS Pub. 514 for Individuals. Most of the time, you do not have to make entries in Screen 35, Foreign Tax Credit. An entry is only necessary in 1116 Name or Number when you wish to link this information to a pre-existing 1116.
Starting in tax year 2020, the IRS introduced new partnership box 16 codes AA–AI
These codes report gross receipts and base erosion tax benefits under Regulations 1.59A-7(e)(2) (Base Erosion Tax 8991).
Business entity partners (corporations, LLCs, and partnerships) will generate multiple codes for current year and prior year gross receipts, as well as base erosion tax information. These items will populate automatically in the Partnership module if the Partner is a Partnership, LLC, or Corporation, and can't be suppressed.
These items are for informational purposes to help the K-1 recipient complete their tax return, and they don't mean that any foreign income or activity is present on the partnership's return.
The program automatically enters these amounts based on the Form 1065 Schedule K-1 instructions. They can be specially allocated to the partners.
