The Internal Revenue Service, along with the U.S. Treasury Department, has released a draft version of a proposed new-and-improved partnership form for tax year 2021. The aim is to provide “greater clarity for partners on how to compute their U.S. income tax liability,” especially in areas where international tax is relevant, including claiming deductions and credits.
The redesigned form and its instructions provide guidance to partnerships on just how to report international tax information to their partners in a standardized way. The revised form would apply to a partnership that’s required to file Form 1065 only if the partnership has items of international tax relevancy — usually foreign activities or foreign partners.
The proposed changes won’t come into play for domestic partnerships with no international tax items to report.
The IRS is seeking comments on the draft Schedule K-2.
The IRS says this early release is intended to afford time for stakeholder input and engagement. Treasury and IRS are inviting comments from affected stakeholders through Sept. 14, 2020. Written comments should be sent to the following email address: firstname.lastname@example.org with the subject line: "International Form Changes."
The Treasury Department and the IRS will be “actively engaged” with stakeholders to solicit input on the proposed changes before the forms are finalized later this year.
At present, partners are required to report international tax information, but on several different tax forms and schedules. Partners generally get the information to be reported from their partnerships, usually in narrative statements attached to a K-1. Those statements are compiled in a variety of formats and may be difficult for partners to translate into their own returns.
The proposed changes seek to ease the burden using a standard format offering greater clarity to partners and partnerships alike.
What are the changes in the draft Schedule K-2?
IRS and Treasury intend to release the new draft Schedule K-2, Partners’ Distributive Share Items - International and Schedule K-3 (Form 1065), Partner’s - Share of Income, deductions, Credits, etc. - International, both for tax year 2021 (filing season 2022), and the draft instructions, to allow partnerships and other stakeholders time to consider the proposed changes and to provide comments that will be taken into account in finalizing the schedules and instructions.
The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r). The proposed schedule provides for international tax information to be reported in a standardized manner generally corresponding to the tax forms already listed.
The proposed parts included in the new Schedule K-3 (Form 1065) replaces portions of Schedule K-1, Part III, Boxes 16 and 20, and provides information to the partner generally in the format of these forms that might be completed by the partner:
- 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).
The Treasury Department and the IRS plan similar revisions, where they apply, 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). Comments are welcomed on similar changes to be made to Forms 1120-S and 8865 for the 2021 tax year.