- Recent revisions clarify the requirements for qualifying for the domestic filing exception.
On Dec. 2, the IRS released revisions to draft instructions for the Schedule K-2, “Partners’ Distributive Share Items – International,” and Schedule K-3, “Partner’s Share of Income, Deductions, Credits, etc. – International,” which originally were released on Oct. 25. One of the revisions to the draft instructions clarifies the domestic filing exception, which generally provides that domestic partnerships in which all domestic partners meet certain other requirements are not required to file the Schedule K-2 and Schedule K-3. Draft instructions for Form 1120-S, “U.S. Income Tax Return for an S Corporation,” also include a domestic filing exception for the Schedule K-2 (Form 1120-S), “Shareholders’ Pro Rata Share Items – International,” and Schedule K-3 (Form 1120-S), “Shareholder’s Share of Income, Deductions, Credits, etc. – International.” In 2023, partnerships and S corporations will be required to include Schedule K-2 and Schedule K-3 when they file their 2022 tax returns.
Generally, partnerships and S corporations must have limited foreign activity to meet the domestic filing exception. In addition, partnerships and S corporations using the domestic filing exception must provide notification to their partners and shareholders that they will not receive a Schedule K-3 unless they request one. The updated instructions did not change the standards for determining whether there is limited foreign activity. However, the rules relating to notification and requests for Schedule K-3 information did change.