1120-S Schedule K-2 and K-3 – Domestic Filing Exception
1
Per the IRS instructions, a 2023 S corporation does not need to complete and file with the IRS Schedules K-2 and K-3 or furnish to the shareholder(s) their Schedule K-3 if each of the following 3 criteria are met:
No or limited foreign activity
Foreign activity is defined as
Foreign income taxes paid or accrued,
Foreign source income or loss,
Ownership interest in a foreign S corporation,
Ownership interest in a foreign corporation
Ownership of a foreign branch, or
Ownership interest in a foreign entity that is treated as disregarded as an entity separate from its owner.
If there is foreign activity, it must be limited to passive category foreign income, which is not more than $300 of foreign income taxes allowable as a credit under Section 901 are treated as paid or accrued by the S corporation, and such income and taxes are shown on a payee statement that is furnished to the S corporation.
Shareholders must receive notification from the S corporation
If the S corporation satisfies criteria 1, the shareholders must receive notification from the S corporation that the shareholders will not receive Schedule K-3 from the S corporation unless the shareholders request the schedule. At the latest, the notification must be furnished when the S corporation furnishes the Schedule K-1 to the shareholder. The notice can be provided as an attachment to the Schedule K-1. See this FAQ: Schedule K-2 Domestic Filing Exception - Entering in Program for how to attach notification to the Schedule K-1.
There were no 2022 Schedule K-3 requests by the 1-month date
To qualify, the S corporation has not received a request from any shareholder for Schedule K-3 information on or before the 1- month date (1 month before the date the S corporation files Form 1120-S). For calendar year filers, the latest 1-month date for tax year 2023 is August 15, 2024, if the S corporation files an extension.
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