Partnership Schedule K-3 reporting for exempt organizations

Since tax year 2021, the IRS has required supplemental international information to be distributed to partners in partnerships on a Schedule K-3, “Partner’s Share of Income, Deduction, Credits, Etc. – International.” Schedule K-3 and the corresponding Schedule K-2, “Partners’ Distributive Share Items – International,” are intended to provide the IRS and partners with standardized information about partnership items of international tax relevance that replaces, supplements, and clarifies information previously reported on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, Etc.,” line 16, “Foreign transactions”; line 20, “Other information”; and the footnotes. However, not all parts of these forms are relevant to partners classified as an exempt organization (EO). Determining which parts are applicable requires extensive analysis of the additional information provided in Schedule K-3.

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In general, Schedule K-3 reporting will be relevant to EOs in the following scenarios:

For domestic partnership investments with foreign activities, EOs might see Schedule K-3 information provided in addition to what’s provided on the typical Schedule K-1.
For foreign partnership investments that are required to be filed on a Form 1065, “U.S. Return of Partnership Income,” or Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships,” EOs also might see Schedule K-3 information provided in addition to what’s provided on the typical Schedule K-1.
For partnership investments with a Form 8865 Cat 1 or 2 filing, EOs might have requirements to complete Schedule K-2 and Schedule K-3.

Schedule K-3 has 13 parts, with Part XII reserved for future use. These parts and their potential relevance to EOs are as follows:

Form part	Potential relevance to EOs	Notes
Part I – Partner’s Share of Partnership’s Other Current Year International Information	Helps EOs identify additional filing requirements	This section can indicate if the EO partner might have additional filing requirements. For example, Form 8858, Form 5471, or Form 8992.
Part II – Foreign Tax Credit (FTC) Limitation	For EOs that plan to claim the FTC	EOs may choose to claim either the FTC or a deduction for eligible foreign taxes paid or accrued. The choice is made annually. Generally, an EO must be in a net unrelated business taxable income position to claim the FTC.
Part III – Other Information for Preparation of Form 1116 or 1118	For EOs that plan to claim the FTC	EOs organized as corporations file Form 1118 to compute their FTC for certain taxes paid or accrued to foreign countries or U.S. possessions. Other EOs organized as trusts file Form 1116 to claim the FTC for certain taxes paid or accrued to foreign countries or U.S. possessions.
Part IV – Information on Partner’s Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)	For EOs that plan to take a deduction with respect to FDII	EOs organized as corporations generally must be in a net unrelated business taxable income (UBTI) position to take the deduction, and the FDII would need to be taxable as unrelated business income. EOs organized as trusts are not eligible for the deduction.
Part V – Distributions From Foreign Corporations to Partnership	Provides EOs with information to prepare Form 5471, if applicable	EOs should determine their filing requirements for Form 5471 based on their specific facts and circumstances.
Part VI – Information on Partner’s Section 951(a)(1) and Section 951A Inclusions	Provides EOs with information to prepare Form 5471 and Form 8992, if applicable	EOs should determine their filing requirements for Form 5471 and Form 8992 based on their specific facts and circumstances.
Part VII – Information to Complete Form 8621	Provides EOs with information to prepare Form 8621, if applicable	According to the regulations under Section 1298(f), Form 8621 generally is required to be filed by an EO only if the income derived with respect to the passive foreign investment company is taxable to the EO as UBTI.
Part VIII – Partner’s Interest in Foreign Corporation Income (Section 960)	Provides EOs with information about indirect foreign corporations	This section provides information for each foreign corporation in which an EO has a certain ownership interest, generally greater than 10%.
Part IX – Partner’s Information for Base Erosion and Anti-Abuse Tax (Section 59A)	Provides EOs with information to prepare Form 8991, if applicable	EOs with more than $500 million in gross receipts are subject to the base erosion and anti-abuse tax under Section 59A.
Part X – Foreign Partner’s Character and Source of Income and Deductions	Provides information to foreign EOs that are partners	This section provides information for foreign EO partners that are subject to U.S. tax on their share of effectively connected income and U.S.-sourced fixed, determinable, annual, or periodic income.
Part XI – Section 871(m) Covered Partnerships	Provides information to EOs that are partners in publicly traded partnerships (PTPs)	EOs with an interest in a PTP that is treated as a covered partnership under Section 871(m) use this information to determine the U.S. withholding tax and reporting obligations with respect to certain transactions.
Part XII	Reserved for future use	Reserved for future use.
Part XIII – Foreign Partner’s Distributive Share of Deemed Sale Items on Transfer of Partnership Interest	Provides information to foreign EOs that are partners	Foreign EO partners use this information to complete Form 4797 and Form 8949.