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Tax Update Regarding K-2 and K-3’s

S Corporation and Partnership business owners may be able to breathe a little easier this year. That’s because the IRS released new guidance which gives many taxpayers and tax professionals relief from having to file the K-2 and K-3 this year. As noted in McKonly & Asbury’s previous article, Tax issues, issues … and more issues, the K-2 and K-3 would have made it impossible for many taxpayers to be able to file their business tax returns on time.

The IRS has provided additional exceptions for tax year 2021:

  • In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates or foreign trusts.
  • In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
  • In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
    • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
    • Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

If a business doesn’t meet these exceptions, they will still have to file a K-2 and K-3. However, this change dramatically reduced the number of S Corporation and Partnership business owners that have to file these forms. Additional details can be found on the IRS website.

Please contact us if you have questions about how this change may impact your organization or reach out to Mark Heath, Partner and Director of McKonly & Asbury’s Tax Practice, or any of our experienced professionals – we are here to help. You can also learn more about our Tax Practice by visiting our website.

About the Author

McKonly & Asbury

McKonly & Asbury is a Certified Public Accounting Firm serving companies across Pennsylvania including Camp Hill, Lancaster, Bloomsburg, and Philadelphia. We serve the needs of affordable housing, construction, family-owned businesses, healthcare, manufacturing and distribution, and nonprofit industries. We also assist service organizations with the full suite of SOC services (including SOC 2 reports), ERTC claims, internal audits, SOX compliance, and employee benefit plan audits.

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