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17945: 1120-S - Schedules K-2 and K-3


1120S S corporation

Overview

Schedules K-2 and K-3 are used to report detailed information about an S corporation's foreign transactions, however, they may be needed even if there is no foreign information to report. These international-related schedules are required to be filed (starting in 2021) with S corp returns and distributed to shareholders with their Schedules K-1. These forms are designed to provide more clarity for shareholders on how to calculate their US income tax liability when considering potential international-related deductions, credits, and miscellaneous items. Although these forms contain a greater level of detail, most of this information was already required to be included with previous Schedules K-1 as white paper attachments. With the Schedules K-2 and K-3, the information is now being required in a standardized format with the additional level of detail. 

Requirements

An S corporation does not need to complete and file with the IRS the Schedules K-2 and K-3, or furnish to a shareholder* the Schedule K-3 if all of the following are true:

  • No or limited foreign activity.

  • All shareholders must be notified that they will not receive Schedule K-3 from the s-corporation unless they request the schedule.

  • No shareholders submit a request to receive Schedule K-3 to the s-corporation 1 month before the date the S corporation files the return. *See the instructions for details on this request and what to do if a request is received.

Data Entry

Selections are available on the K screen > Credits tab > line 14. The options are as follows:

  • Schedules K-2 and K-3 are not required.

    • Schedule K, box 14 is not marked.

    • The following message is printed below box 14: Qualified for exception to filing Schedule K-2.

    • Schedules K-2 and K-3 are not produced.

    • A statement page, K3EX STM, is produced for each Schedule K-1 to notify the shareholders that they will not receive Schedule K-3. This wording cannot be changed, but you can use screen K3G to provide additional information to the shareholders.

    • Note 822 is generated.

  • Schedule K-2 is required. Schedules K-3 are required and will be produced for all shareholders.

    • Must make additional entries on the applicable K-2 screens (located on the right side of the SBS K,K1K2K3 tab).

    • Schedule K, box 14 is marked.

    • Schedules K-2 and K-3 are produced. Note that Schedule K-3 is printed for each shareholder in their K-1 set.

    • Note 823 is generated.

  • Schedule K-2 is required. Produce Schedules K-3 for applicable shareholders indicated on screen K1.

    • See the F1 field help for more info on this option.

    • Schedule K-2 is printed.

    • Schedule K-3 is included in the K1 set for each shareholder that has a K-3 Print Option marked on screen K1E.

    • Note 824 is generated.

  • Schedule K-2 is NOT required. Produce Schedules K-3 for applicable shareholders indicated on screen K1E.

    • See the F1 field help for more info on this option.

    • Schedule K-2 is not produced.

    • Schedule K-3 is included in the K-1 set for any shareholder that has the Shareholder Only box marked on screen K1E.

    • Note 825 is generated.

Once you have selected the appropriate option, ensure that required entries have been made on the screens under K-2 Information - International on the SBS K,K1K2K3tab. Note that a Schedule K-2/K-3 will not generate unless a selection is made in the Country code or Other Source of Information drop down on the II1 screen. The K2EX STM is transmitted to the IRS, if completed in data entry. An override for foreign taxes paid or accrued is located on screen K > AMT and Basis tab > line 16f.

NOTE  A Schedule K-2/K-3 will not generate unless a selection is made in the Country code or Other Source of Information drop down on the II1 screen. The K2EX STM is transmitted to the IRS, if completed in data entry.

See KB 18600 for details about entering information for shareholders that received Schedule K-3.


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