Domestic Filing Exception for 2022 Schedules K-2 and K-3
February 6, 2023
What Is The Domestic Filing Exception, and How Does It Affect Partnerships Filing Schedules K-2 and K-3?
The Internal Revenue Service (IRS) recently published draft instructions for 2022 Schedules K-2 and K-3 for partnerships and S corporations on its website. Both documents include a new domestic filing exception that is intended to provide relief to those partnerships and S corporations that meet certain criteria by not requiring those entities to file Schedules K-2 and K-3 with their 2022 tax returns.
What Are the Benefits of The Domestic Filing Exception?
A partnership or S corporation that meets the domestic filing exception does not need to: (a) complete and file the Schedules K-2 and K-3 with the IRS, or (b) furnish the Schedule K-3 to its partners or shareholders (except when requested by a partner or shareholder after the One Month Date). The One Month Date is defined as one month before the date the Form 1065, in the case of partnerships, or Form 1120S, in the case of S corporations, is filed.
Who Is Eligible for The Domestic Filing Exception?
To meet the domestic filing exception for 2022, the domestic partnership or S corporation must either have had no foreign activity during the 2022 tax year. However, if it did have foreign activity, it was limited to passive category foreign income upon which no more than $300 of foreign income taxes allowable as a credit is treated as paid or accrued by the partnership or S corporation and such income and taxes are shown on a payee statement that is furnished to the partnership or S corporation.
With respect to S corporations that meet the above criterion, the shareholders must receive notification from the S corporation no later than the date the S corporation furnishes the Schedules K-1 to the shareholders. The notification must state that the shareholders will not receive a Schedule K-3 from the S corporation unless the shareholders request one.
Exception Criteria
In the case of domestic partnerships, there is an additional criterion that must be met. During the 2022 tax year, all the direct partners must be:
- Individuals who are U.S. citizens or resident aliens,
- Domestic decedent’s estates,
- Domestic grantor trusts that have solely U.S. citizen or resident alien individual grantors and beneficiaries,
- Domestic non-grantor trusts that have solely U.S. citizen or resident alien individual beneficiaries,
- S corporations with a sole shareholder, and/or single-member LLCs, where the LLC’s sole member is one of the persons described in (a) through (e), and the LLC is disregarded as an entity separate from its owner.
In the case of S corporations, no such requirement applies because the shareholders must all be individuals who are U.S. citizens or resident aliens.
With respect to domestic partnerships that meet both of the above criteria, the partners must receive notification from the partnership by no later than the date that the partnership furnishes the Schedules K-1 to the partners. The notification must state that the partners will not receive a Schedule K-3 from the partnership unless the partners request one.
Provided that all applicable criteria have been met and that notification to the partners or shareholders has been timely made and the domestic partnership or S corporation does not receive a request from any partner or shareholder for Schedule K-3 information on or before the One Month Date, the domestic filing exception will have been met, and Schedules K-2 and K-3 are not required to be filed with the IRS. In the case of calendar year partnerships and S corporations, the One Month Date cannot be later than August 15, 2023, if extension requests were timely filed, and cannot be later than February 15, 2023, if extension requests were not timely filed.
It should be noted that if a partnership or S corporation receives a request from a partner or shareholder after the One Month Date, the partnership or S corporation must provide the Schedule K-3, complete with the requested information. The information should be shared on the later date on which Form 1065, in the case of partnerships, or Form 1120S, in the case of S corporations, is filed or one month from the date on which the request was received.
Summary: Exception to Filing 2022 Schedules K-2 and K-3
The domestic filing exception can be met by many partnership and S corporations, but to do so, they must determine whether they will qualify for 2022. If these pass-through entities wish to avoid filing Schedules K-2 and K-3, they must notify their partners and shareholders that they will not receive Schedule K-3, unless specifically requested, by no later than the date that the partnership or S corporation provides them with the Schedule K-1. This notification can be attached to Schedule K-1. If no partner or shareholder requests Schedule K-3 on or before the One Month Date, only then will the domestic filing exception be deemed to have been met.
Related Guidance