January 25, 2023
Michael Chandler - George Bagley & Company L.L.C.
Eligible Partners/Shareholders that qualify for Form 1116 exemption exception can make life easier for closely held Partnerships and S Corporations that have little or no foreign activity
The Internal Revenue Service released updated filing instructions in December 2022 on the “Domestic Filing Exception” and “Form 1116 Exemption Exception” which are exceptions to filing the Schedules K-2/K-3 for the 2022 tax year. Please begin by referencing pages 3-4 of the attached partnership and S Corporation instructions along with this article..
In short, if the domestic partnership or S Corporation meets all of 4 requirements they do not need to file Schedules K-2/K-3 for this year. Those requirements are
1) No (or limited) foreign activity as defined in the instructions;
2) Only U.S. citizen/resident alien owners {automatically met by S Corporations because of eligible shareholder rules};
3) Notification is made to each owner; and
4) No 2022 Schedule K-3 requests are made by owners to the entity 1 month prior to filing the entity return.
Note, for those that do not qualify for the above domestic filing exception, there also is a Form 1116 exemption exception as explained on page 10 of the attached partnership version of the instructions and page 9 of the attached S Corporation version of the instructions.
Thus, if you’re an individual owner of closely held domestic partnerships or S Corporations, and you are certain that you’ll only have passive foreign income reported to you on a payee statement such as a 1099-DIV or 1099-INT and total foreign taxes not more than $300 or $600 for the 2022 year (single and married filing joint, respectively) please consider notifying your closely held domestic businesses as soon as possible to help them avoid needing to prepare a Schedule K-3 for your ownership interest. Your notification could look similar to the basic template suggested below. The Partnership/S Corporation is only spared from having to file your specific Schedule K-3 if they receive your notification by the “1-month date” which is defined as 1 month prior to the date the Partnership or S Corporation files its 2022 tax return. Since both Partnerships and S Corporations are due March 15, 2023 this year, consider sending your notification to them as soon as possible before February 15, 2023 if the entity may be able to file without filing an extension. Further, if the Partnership/S Corporation receives such notifications from all owners by the 1-month date they wouldn’t have to prepare any Schedules K-2 or K-3 for the 2022 year.
[Individual Owner Name & Social Security Number]
[Partnership/S Corporation Name & Employer Identification Number]
Notification of Form 1116 Exemption Exception
Dear [Partnership/S Corporation appropriate representative]:
Under IRC §904(j) certain partners are not required to file a Form 1116. I assert that I have determined with my [Certified Public Accountant/Tax Return Preparer/Advisor, etc.] that I am eligible for the Form 1116 exemption in 2022. I am providing this notification to you so you are relieved from completing a Schedule K-3 for my ownership interest.
Please contact me with any questions.
Sincerely,
[Owner name]
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.