Vorm 1120-S Juhised ajakavade K-2 ja K-3 jaoks
S Corporation Instructions for Schedules K-2 and K-3 (vorm 1120-S), Aktsionäride Pro Rata Aktsialiigid — rahvusvaheline ja aktsionäride osa tulust, mahaarvamistest, krediitidest jne Rahvusvaheline
Rev. 2023
Seotud vormid
- Vorm 1120-S loend K-2 - Aktsionäride Pro Rata Aktsiad Rahvusvaheline
- Vorm 1120-S loend K-3 - Aktsionäride osa tulust, mahaarvamistest, krediitidest jne. Rahvusvaheline
Department of the Treasury
Internal Revenue Service
2023
S Corporation Instructions
for Schedules K-2 and K-3
(Form 1120-S)
Shareholders' Pro Rata Share Items—International and Shareholder's Share of
Income, Deductions, Credits, etc.—International
Section references are to the Internal Revenue Code unless
otherwise noted.
General Instructions
Contents
Page
The Instructions for Form 1120-S and the Instructions for
Schedule K-1 (Form 1120-S) generally apply to the Schedules
K-2 and K-3. These instructions provide additional instructions
with respect to the Schedules K-2 and K-3 for tax years
beginning in 2023.
Purpose of Schedules K-2 and K-3
Schedule K-2 is an extension of Form 1120-S, Schedule K, and
is used to report items of international tax relevance from the
operation of an S corporation.
Schedule K-3 is an extension of Schedule K-1 (Form 1120-S)
and is generally used to report to shareholders their shares of
the items reported on Schedule K-2. Shareholders must include
the information reported on Schedule K-3 on their tax or
information returns.
Part I. Corporation’s Other Current Year
Part III. Other Information for Preparation of
Who Must File
Part IV. Distributions From Foreign
Any S corporation that is required to file Form 1120-S and that
has items relevant to the determination of the U.S. tax or
reporting obligations of its shareholders under the international
provisions of the Internal Revenue Code (Code) must complete
the relevant parts of Schedules K-2 and K-3. See each part and
section for a more detailed description of who must file each part
and section. Penalties may apply for filing Form 1120-S without
all required information or for furnishing Schedule K-3 to
shareholders without all required information. The penalties that
apply with respect to Form 1120-S and Schedule K-1 apply with
respect to the Schedules K-2 and K-3, respectively. See the
Interest and Penalties section of the Instructions for Form
1120-S.
Part V. Information on Shareholders' Section
Part VI. Information Regarding Passive
Part VII. S Corporation's Interest in Foreign
Future Developments
For the latest information about developments related to
Schedule K-2 (Form 1120-S) and Schedule K-3 (Form 1120-S),
and their instructions, such as legislation enacted after they were
Except as otherwise required by statute, regulations, or other
IRS guidance, an S corporation is not required to obtain
information from its shareholders to determine if it needs to file
each of these parts.
What’s New
An S corporation is only required to complete and file the
relevant portions of Schedules K-2 and K-3, as applicable. For
example, if the S corporation does not own (within the meaning
of section 958) an interest in a foreign corporation other than
solely by reason of applying section 318(a)(3) (providing for
downward attribution) as provided in section 958(b), it is not
required to complete Schedule K-2, Parts IV, V, VI, and VII or the
corresponding Schedule K-3 parts.
Domestic filing exception. A domestic filing exception that
allows an exception for filing and furnishing Schedules K-2 and
Part VII. Part VII includes two new columns: column (iii) for the
foreign corporation’s total net income, and column (iv) for the
foreign corporation’s current year foreign taxes for which credit is
allowed. Part VII also requests the functional currency of the
foreign corporation. These additions will allow the preparer to
include all information necessary for the section 960
Schedules K-2 and K-3 consist of the most common
international tax provisions of the Code. However, not all
provisions are specifically identified on these schedules. To the
extent that an international provision is implicated that is not
otherwise specifically identified, the S corporation should check
box 13 in Schedules K-2 and K-3, Part I, and attach a statement
to both Schedules K-2 and K-3 (for shareholder's share).
computation in Part VII without attaching Schedule Q (Form
5471), CFC Income by CFC Income Groups.
Jan 5, 2024
Cat. No. 74486Y
Note. An S corporation with no foreign source income, no
assets generating foreign source income, and no foreign taxes
paid or accrued may still need to report information on
Schedules K-2 and K-3. For example, if a shareholder claims a
credit for foreign taxes paid or accrued by the shareholder, the
shareholder may need certain information from the S corporation
to complete Form 1116, Foreign Tax Credit (Individual, Estate, or
Trust). See each part for applicability.
1-month date, the domestic filing exception is met and the S
corporation is not required to file the tax year 2023 Schedules
K-2 and K-3 with the IRS or furnish the tax year 2023
Schedule K-3 to the non-requesting shareholders. However, the
S corporation is required to provide the tax year 2023
Schedule K-3, completed with the requested information, to the
requesting shareholder on the later of the date on which the S
corporation files the Form 1120-S or 1 month from the date on
which the S corporation receives the request from the
and file tax year 2024 Schedules K-2 and K-3 with respect to the
requesting shareholder by the tax year 2024 Form 1120-S filing
deadline if that shareholder is still a shareholder in tax year
2024.
Domestic Filing Exception (Exception To Filing
Schedules K-2 and K-3)
An S corporation does not need to (i) complete and file with the
IRS the Schedules K-2 and K-3, or (ii) furnish to a shareholder
the Schedule K-3 (except where requested by a shareholder
after the 1-month date (defined in criterion 3)) if each of the
following are met with respect to the S corporation’s tax year
2023.
Note for S corporations that satisfy criteria 1 and 2, but do
not satisfy criterion 3. If the S corporation received a request
from a shareholder for Schedule K-3 information on or before the
1-month date and therefore the S corporation does not satisfy
criterion 3, the S corporation is required to file the Schedules K-2
and K-3 with the IRS and furnish the Schedule K-3 to the
requesting shareholder. The Schedules K-2 and K-3 are required
to be completed only with respect to the parts and sections
relevant to the requesting shareholder. For example, if a
1. No or limited foreign activity. During an S corporation’s tax
year 2023, the S corporation either has no foreign activity (as
defined later), or if it does have foreign activity, such foreign
activity is limited to:
Passive category foreign income (determined without regard
•
to the high-taxed income exception under section 904(d)(2)(B)
(iii)),
shareholder requests the information reported in Part III, Section
2 (Interest Expense Apportionment Factors), the S corporation is
required to complete and file Schedule K-2, Part III, Section 2,
with respect to the S corporation’s total assets and
Upon which 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
Schedule K-3, Part III, Section 2, with respect to the requesting
shareholder’s pro rata share of the assets. On the date that the S
corporation files Schedules K-2 and K-3 with the IRS, the S
corporation must provide a copy of the filed Schedule K-3 to the
requesting shareholder. The S corporation does not need to
complete, attach, file, or furnish any other parts or sections of the
Schedules K-2 and K-3 to the IRS, the requesting shareholder,
or any other shareholder. The S corporation should keep records
Such income and taxes are shown on a payee statement (as
•
defined in section 6724(d)(2)) that is furnished or treated as
furnished to the S corporation.
Foreign activity. For purposes of the domestic filing
exception, foreign activity means any of the following.
Foreign income taxes paid or accrued (as defined in section
•
901 and the regulations thereunder).
Foreign source income or loss (as determined in sections 861
•
through 865, and section 904(h), and the regulations
thereunder).
If an S corporation receives requests from shareholders for
Schedule K-3 information both on or before the 1-month date
and after the 1-month date, the S corporation is required to file
Schedules K-2 and K-3 as described in the prior paragraph only
with respect to the shareholder requests received on or before
the 1-month date. With respect to requests received after the
1-month date, the S corporation is required to provide the
Schedule K-3, completed with that shareholder’s requested
information, on the later of the date on which the S corporation
files the Form 1120-S or 1 month from the date on which the S
corporation receives the request from the shareholder. See
Examples 2 and 3, later.
Example 1. Domestic filing exception met—Issuance of
Schedule K-3 not required. A married couple, U.S. citizens,
each own a 50% interest in SC, an S corporation. SC and the
married couple has a tax year end of December 31. SC invests
in a regulated investment company. With respect to tax year
2023, SC receives a Form 1099 from the regulated investment
company reporting $100 of creditable foreign taxes paid or
accrued on passive category foreign source income. SC does
not have any foreign activity other than that from the regulated
investment company. The married couple receive notification
from SC as an attachment to Schedule K-1 that they will not
receive the Schedule K-3 unless they so request. The married
couple do not request Schedule K-3 from SC for tax year 2023.
SC qualifies for the domestic filing exception, and, as such, SC
need not complete Schedules K-2 and K-3.
Ownership interest in a foreign partnership (as defined in
•
sections 7701(a)(2) and (5)).
Ownership interest in a foreign corporation (as defined in
•
sections 7701(a)(3) and (5)).
Ownership of a foreign branch (as defined in Regulations
•
section 1.904-4(f)(3)(vii)).
Ownership interest in a foreign entity that is treated as
•
disregarded as an entity separate from its owner (as defined in
Regulations section 301.7701-3).
2. Shareholder notification. With respect to an S corporation
that satisfies criterion 1, shareholders receive a notification from
the S corporation at the latest 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. The notification must
state that shareholders will not receive Schedule K-3 from the S
corporation unless the shareholders request the schedule.
3. No 2023 Schedule K-3 requests by the 1-month date.
The S corporation does not receive a request from any
shareholder for Schedule K-3 information on or before the
1-month date. The 1-month date is 1 month before the date the
S corporation files the Form 1120-S. For tax year 2023 calendar
year S corporations, the latest 1-month date is August 15, 2024,
if the S corporation files an extension. Any request from a
shareholder for Schedule K-3 information for a year prior to tax
year 2023 will be considered a request for a tax year 2023
Schedule K-3 as well.
Example 2. Domestic filing exception not met. The facts
are the same as in Example 1 except that the married couple
each own a 40% interest in SC, and A, a U.S. citizen, owns a
20% interest in SC. A requests Schedule K-3 from SC for tax
year 2023 and SC receives this request on February 1, 2024.
Note. If an S corporation receives a request from a shareholder
for the Schedule K-3 information after the 1-month date for the
tax year 2023 and has not received a request from any other
shareholder for Schedule K-3 information on or before the
2
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
After requesting an extension, SC files Form 1120-S on August
31, 2024. SC does not qualify for the domestic filing exception
because A requested the Schedule K-3 by the 1-month date
(July 31, 2024). As such, SC must complete and file with the IRS
the parts and sections of the Schedules K-2 and K-3 that are
relevant to A. With respect to the Schedules K-2 and K-3 filed
with the IRS, SC does not need to complete, attach, or file any
parts or sections relevant to the married couple. SC must provide
a copy of the filed Schedule K-3 to A on the date that SC files its
Form 1120-S. SC does not need to furnish a Schedule K-3 to the
married couple.
Example 3. Domestic filing exception met—Issuance of
Schedules K-3 still required. The facts are the same as in
Example 2 except that SC receives the request from A on August
20, 2024. SC qualifies for the domestic filing exception because
A requested the Schedule K-3 after the 1-month date. SC is not
required to file the tax year 2023 Schedules K-2 and K-3 with the
IRS or furnish the Schedule K-3 to the married couple. However,
SC is required to provide the Schedule K-3, completed with the
requested information, to A on September 20, 2024, the later of
the date on which SC files the Form 1120-S or 1 month from
August 20, 2024. Because A requested a Schedule K-3 for tax
year 2023, SC must file tax year 2024 Schedules K-2 and K-3
with the IRS with respect to the information requested by A to the
extent that A is still a shareholder in tax year 2024.
reprints the most recent applicable revenue procedure. Pub.
to Form 1120-S and the Schedule K-1 (Form 1120-S) apply for
purposes of the Schedules K-2 and K-3.
How To Complete Schedules K-2 and K-3
Reporting currency. Report all amounts in U.S. dollars except
where specified otherwise.
Form references. These instructions refer to other forms. If the
referenced form has been succeeded by another form, the
references to those prior forms encompass any successor forms.
References in these instructions to Form 1040, U.S. Individual
Income Tax Return, are intended, if applicable, to include Form
1040-SR, U.S. Tax Return for Seniors, as well as other tax
returns for noncorporate shareholders such as Form 1041, U.S.
Income Tax Return for Estates and Trusts.
Uses of the parts of Schedules K-2 and K-3, in general.
Part I of Schedule K-2 (and Part I of Schedule K-3). Used
to report international tax items not reported elsewhere on
Schedule K-2 or K-3.
Part II of Schedule K-2 (and Part II of Schedule K-3).
Used to figure the S corporation's income or loss by source and
separate category of income, and to report the shareholder's
share of such income or loss. Shareholders will use the
information to figure and claim a foreign tax credit on Form 1116
or Form 1118, Foreign Tax Credit—Corporations.
Part III of Schedule K-2 (and Part III of Schedule K-3).
Used to report information necessary for the shareholder to
determine the allocation and apportionment of research and
experimental (R&E) expense and interest expense for the foreign
tax credit limitation. Also used to report foreign taxes paid or
accrued by the S corporation and the shareholder's share of
such taxes. Shareholders will use the information to figure and
claim a foreign tax credit on Form 1116.
Part IV of Schedule K-2 (and Part IV of Schedule K-3).
Used to report information the shareholder needs, in
combination with other information known to the shareholder, to
determine the amount of each distribution from a foreign
corporation that is treated as a dividend or excluded from gross
income because the distribution is attributable to previously
taxed earnings and profits (PTEP) in the shareholder’s annual
PTEP accounts with respect to the foreign corporation, and the
amount of foreign currency gain or loss on the PTEP that the
shareholder is required to recognize under section 986(c).
Note. If an S corporation does not meet the domestic filing
exception, it may meet the Form 1116 exemption to filing the
When and Where To File
Attach Schedules K-2 and K-3 to your Form 1120-S and file both
by the due date (including extensions) for that return.
Provide Schedule K-3 to your shareholders according to the
timeline for providing the Schedule K-1. See the Instructions for
Form 1120-S.
See the Instructions for Form 1120-S for requirements with
respect to recordkeeping.
See the Instructions for Form 1120-S for instructions
concerning amendments or adjustments to Schedules K-2 and
K-3.
Computer-Generated Schedules K-2 and K-3
Generally, all computer-generated forms must receive prior
approval from the IRS and are subject to an annual review.
However, see the Exception later. Requests for approval may be
may be mailed to:
Shareholders will report the dividends and foreign currency
gain or loss on Form 1040.
Part V of Schedule K-2 (and Part V of Schedule K-3).
Used to provide information the shareholder needs to determine
any inclusions under sections 951(a)(1) and 951A. Shareholders
will use the information to complete Form 8992, U.S.
Shareholder Calculation of Global Intangible Low-Taxed Income
(GILTI), and Form 1040, with respect to subpart F income
inclusions, section 951(a)(1)(B) inclusions, and section 951A
inclusions.
Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:P:TP
1111 Constitution Ave. NW, Room 6554
Washington, DC 20224
Part VI of Schedule K-2 (and Part VI of Schedule K-3).
Used to provide information needed by shareholders to
complete Form 8621, Information Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing
Fund, and to provide shareholders with information to determine
income inclusions with respect to the passive foreign investment
company (PFIC).
Part VII of Schedule K-2 (and Part VII of Schedule K-3).
Used to provide the foreign corporation's net income in the
income groups for purposes of the shareholder's deemed paid
taxes computation with respect to inclusions under sections
951A and 951(a)(1). Shareholders will use the information to
figure and claim a deemed paid foreign tax credit on Form 1118.
Exception. If computer-generated Schedules K-2 and K-3
conform to and do not deviate from the official form and
schedules, they may be filed without prior approval from the IRS.
Important. Be sure to attach the approval letter to
computer-generated Schedules K-2 and K-3. However, if the
computer-generated form is identical to the IRS prescribed form,
it does not need to go through the approval process, and an
attachment is not necessary.
Every year, the IRS issues a revenue procedure to provide
guidance for filers of computer-generated forms. In addition,
every year, the IRS issues Pub. 1167, General Rules and
Specifications for Substitute Forms and Schedules, which
3
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
international tax information reporting forms or other international
tax forms that may impact the shareholders tax returns.
This part is used to report information for international tax
items not reported elsewhere on the Schedule K-2. Check the
box to indicate whether any of the following international tax
items are applicable in the tax year. If applicable, attach
statements, as described later, to the Schedule K-2.
If applicable, the S corporation must also complete
Schedule K-3, Part I, and include with the Schedule K-3 the
attachment(s) as described later with the shareholder's share of
the amounts.
Specific Instructions
If the information required in a given section exceeds the
space provided within that section, do not enter “See
!
CAUTION
attached” in the section or leave the section blank.
Instead, complete all entry spaces in the section and attach the
remaining information on additional sheets. For all attachments,
include the part, section, line number, and column of the relevant
portion of Schedules K-2 and K-3. The additional sheets must
conform with the IRS version of that section.
Box 1. Gain on personal property sale. In general, income
from the sale of personal property is sourced according to the
residence of the seller; see section 865. For purposes of section
904, personal property sold by the S corporation is treated as
sold by the shareholders; see section 865(i)(5) and section
1373(a). A U.S. citizen or resident alien individual with a tax
home (as defined in section 911(d)(3)) in a foreign country is
treated as a nonresident with respect to the sale of personal
property only if an income tax of at least 10% of the gain derived
from the sale is actually paid to a foreign country, with respect to
that gain; see section 865(g). In addition, if a U.S. resident
maintains an office or other fixed place of business in a foreign
country, income from the sale of personal property attributable to
such office or other fixed place of business is foreign source only
if an income tax of at least 10% of the income from the sale is
actually paid to a foreign country with respect to such income;
see section 865(e)(1).
Schedule K-2, Identifying Information
At the top of each new page, enter the name of the S corporation
as it appears on the Form 1120-S. At the top of each new page,
enter the EIN of the S corporation as it appears on the Form
1120-S.
Item A—Part applicability. Check the “Yes” box to indicate the
applicable parts of Schedules K-2 and K-3. Complete and attach
each applicable part to Form 1120-S and Schedule K-1 (Form
1120-S). Check the “No” box to indicate the inapplicable parts of
Schedules K-2 and K-3. Do not complete and attach the
inapplicable parts to the filed Form 1120-S or the Schedule K-3.
Schedule K-3, Identifying Information
Items A and B. Items A and B should be the same as reported
on Schedule K-1 (Form 1120-S), Part I, Items A and B.
If the S corporation has income from the sale of personal
property (other than inventory, depreciable personal property,
and certain intangible property excepted from the general rule of
section 865(a)) and the S corporation pays income tax to a
foreign country with respect to income from the sale or the
income is eligible for re-sourcing under an applicable treaty, it
must check box 1 and attach a statement to Schedules K-2 and
K-3 (for shareholder’s share) with Table 1, Information on
Personal Property Sold. Each item of property sold must be
listed separately with Table 1 completed. The S corporation may
combine sales of stock property by country. Otherwise, do not
combine sales of property. In column (b), if the gain is capital,
enter “long-term” or “short-term.” For column (f), enter the
enter “various” or “OC” for the country code. If the property sale
is taxed by more than one country, complete a separate line for
that country, but denote in some manner (for example, a
footnote) that the property entered on both lines is the same
property.
Items C and D. Items C and D should be the same as reported
on Schedule K-1 (Form 1120-S), Part II, Items E and F.
Item E. Item E should correspond to Schedule K-2, Identifying
Information, Item A.
Schedule K-2, Part I (Corporation’s
Other Current Year International
Information), and Schedule K-3, Part I
(Shareholder's Share of Corporation's
Other Current Year International
Information)
Note. Shareholders will use the information reported in the
attachments with respect to boxes 1 through 5 and 10 to claim
and figure a foreign tax credit on Form 1116 or 1118. Section
1373(a) treats an S corporation as a partnership for purposes of
sections 901 through 909 and sections 951 through 965.
Box 2. Foreign oil and gas taxes. A separate foreign tax credit
limitation is applied with respect to foreign oil and gas taxes. See
section 907(a) and Regulations section 1.907(a)-1 for details. If
the S corporation has such taxes, it must check box 2 and attach
a completed Schedule I (Form 1118), Reduction of Foreign Oil
and Gas Taxes, to the Schedules K-2 and K-3 (with the
shareholder’s share). The S corporation need not complete
Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through
4; or Part III, lines 1 and 3. The S corporation must attach
Schedule I (Form 1118) because the limitation applies to
individuals eligible to claim a foreign tax credit.
Note. Shareholders will also use the information reported in
attachments with respect to box 6 to prepare their tax returns
(Form 1040) by taking into account that under section 267A they
are not allowed deductions for the amounts listed in the
statement with respect to box 6.
Note. Shareholders will use the information reported in
attachments with respect to boxes 7 through 9 to identify any
Table 1—Information on Personal Property Sold (for use with Schedules K-2 and K-3 (Form 1120-S), Part I, box 1)
(f) Taxing country
(enter two-letter country
code)
(a) Property
description
(d) Amount of tax paid in
(e) Amount of tax paid
(b) Long-term/Short-term
(c) Gains
local currency
in U.S. dollars
4
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Note. The S corporation attaches a partially completed
Schedule I (Form 1118), so that the shareholder has the
information it needs to complete Form 1116. The S corporation
is not attaching Schedule I (Form 1118), as a form required to be
filed by the S corporation for purposes of the S corporation
determining creditable taxes because an S corporation cannot
claim a foreign tax credit.
4. Amount of related income on which such taxes were paid
or accrued in the origin year of the splitter arrangement.
5. The two-letter code for the country to which the taxes
not enter “various” or “OC” for the country code.
6. The separate category and source of income to which the
taxes are assigned if determinable by the S corporation.
Box 3. Splitter arrangements. Foreign taxes with respect to a
foreign tax credit splitting event are suspended until the related
income is taken into account by the taxpayer. See section 909.
There is a foreign tax credit splitting event with respect to foreign
taxes of a payor if in connection with a splitter arrangement, as
defined in Regulations section 1.909-2(b), the related income
was, is, or will be taken into account by a covered person. See
Regulations section 1.909-2(a). A covered person, as defined in
Regulations section 1.909-1(a)(4), includes, for example, any
entity in which the payor holds, directly or indirectly, at least a
10% ownership interest (determined by vote or value). A payor,
as defined in Regulations section 1.909-1(a)(3), includes, for
example, a person that takes foreign income taxes paid or
accrued by an S corporation into account pursuant to section
1373(a).
The S corporation must report foreign taxes that are
potentially suspended on Schedule K-2, Part III, Section 3,
line 2E, and each shareholder's share of such taxes on
Schedule K-3, Part III, Section 3, line 2E. An S corporation may
not be able to determine whether taxes are suspended and
whether related income is taken into account. However, where
the S corporation is able to determine that taxes are potentially
suspended, or potentially unsuspended, it must report such
taxes and the information requested in these instructions for
box 3.
For example, where an S corporation owns a reverse hybrid
and the foreign country assesses tax on the S corporation with
respect to income earned by the reverse hybrid, the S
corporation should report such taxes as potentially suspended
taxes.
Check box 3 and attach a statement to both Schedules K-2
and K-3 that includes the following for each arrangement in
which the S corporation participates that would qualify as a
splitter arrangement under section 909 if one or more
shareholders are covered persons with respect to an entity that
took into account related income from the arrangement.
Section 1 of attached statement—Potentially suspended
taxes.
7. Amount of related income taken into account in the
current tax year and the amount of taxes originally paid that
relate to that portion of the related income if determinable by the
S corporation.
Box 4. Foreign tax translation. If the S corporation reports any
foreign taxes in Schedules K-2 and K-3, Part III, Section 3, it
must check the box for item 4 and attach to Schedules K-2 and
K-3 the statement described in the instructions for those
sections.
Box 5. High-taxed income. If the S corporation has passive
income, the S corporation must check box 5 and attach a
statement to Schedules K-2 and K-3 with Attachment 1 or 2, or
both, completed. These attachments will provide the
shareholder with the information to determine whether its
passive income is high-taxed passive income.
Income received or accrued by a U.S. person that would
otherwise be passive income is not treated as passive income if
the income is determined to be high-taxed income. See section
904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
a shareholder must group its shares of passive income from an S
corporation according to the rules in Regulations section
1.904-4(c)(3), except that the portion, if any, of the share of
income attributable to income earned by an S corporation
through a foreign qualified business unit (QBU) is separately
grouped under the rules of Regulations section 1.904-4(c)(4).
See also Regulations section 1.904-4(c)(5)(ii). For this purpose,
a foreign QBU is a qualified business unit (as defined in section
989(a)), other than a controlled foreign corporation (CFC) or
noncontrolled 10%-owned foreign corporation, that has its
principal place of business outside the United States. See
Regulations section 1.904-4(c)(3).
Note. Passive income is not treated as subject to a withholding
tax or other foreign tax when a credit is disallowed in full for such
foreign tax, for example, under section 901(k).
Example 4. Part I, box 5. High-taxed income. USC is an S
corporation, with two U.S. citizen individual shareholders with
equal interests in the S corporation. In Year 1, USC receives
$100 of passive dividend income from a noncontrolled
1. Explanation of the splitter arrangement (for example,
reverse hybrid owned by the S corporation).
2. Amount of taxes paid or accrued by the S corporation in
connection with the splitter arrangement.
10%-owned foreign corporation subject to a 15% withholding
tax. USC also receives $150 of passive interest income from an
unrelated person subject to a 30% withholding tax. USC incurs
$80 of expenses that are allocable to the interest income. USC
also receives $50 of passive dividend income from a CFC, which
is not subject to tax. No expenses are allocable to the dividend
income. USC's branch operation in Country X that is treated as a
QBU under section 989(a) receives $100 of passive dividend
income subject to a 15% withholding tax. Finally, USC earns
$400 of passive income with respect to its branch operation in
Country X that is treated as a QBU under section 989(a). Such
income is subject to foreign tax (but not withholding tax) of $40.
Expenses of $120 are allocable to the share of branch income.
No expenses are allocable to the dividend income.
3. Amount of related income on which such taxes were paid
or accrued.
4. The two-letter code for the country to which the taxes
not enter “various” or “OC” for the country code.
5. The separate category and source of income to which the
taxes are assigned if determinable by the S corporation.
Section 2 of attached statement—Potentially
unsuspended taxes.
1. Origin year of the splitter arrangement.
2. Explanation of the splitter arrangement (for example,
For Year 1, USC checks box 5 in Part I of Schedule K-2 (Form
1120-S) and attaches Attachments 1 and 2 to Form 1120-S,
Schedule K-2.
reverse hybrid owned by the S corporation).
3. Amount of taxes paid or accrued by the S corporation in
connection with the splitter arrangement in the origin year of the
splitter arrangement.
5
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Attachment 1 for Schedule K-2, Part 1, Box 5
I. Passive Income Net of
Allocable Expenses
II. Taxes
A
B
C
D
Passive income subject to withholding tax of 15% or more
Passive income subject to withholding tax of less than 15% but greater than zero
Passive income not subject to any foreign tax
Passive income subject to no withholding tax, but subject to other foreign tax
Reference: Regulations section 1.904-4(c)(3)
Attachment 2 for Schedule K-2, Part 1, Box 5
Name of foreign QBU:
I. Passive Income Net of
Allocable Expenses
II. Taxes
Complete a separate Attachment 2 for each foreign QBU.
A
B
C
D
Passive income subject to withholding tax of 15% or more
Passive income subject to withholding tax of less than 15% but greater than zero
Passive income not subject to any foreign tax
Passive income subject to no withholding tax, but subject to other foreign tax
Reference: Regulations section 1.904-4(c)(4)
Schedule-B-Other-Information-Question-22 for additional
information regarding section 267A. In addition, for each
shareholder that is disallowed a deduction under section 267A,
the corporation should check box 6 in Part I of the specific
shareholder’s Schedule K-3 and attach to the Schedule K-3 a
statement titled “Section 267A Disallowed Deduction” that
separately lists the following information.
USC completes the same attachments with the shareholder
shares and attaches those attachments to each Schedule K-3
provided to the shareholders.
Box 6. Section 267A disallowed deduction. Shareholders
will also use the information from box 6 to prepare their tax
returns (Form 1040) by taking into account that under section
267A they are not allowed deductions for the amounts listed in
the statement with respect to box 6.
Check box 6 if the S corporation paid or accrued any interest
or royalty for which the S corporation knows, or has reason to
know, that one or more of its shareholders is not allowed a
deduction under section 267A. See the instructions for Form
1065, Schedule B, line 22, and FAQs for section 267A at
The amount of interest paid or accrued by the S corporation
•
for which the shareholder is not allowed a deduction under
section 267A.
The amount of royalty paid or accrued by the S corporation for
•
which the shareholder is not allowed a deduction under section
267A.
The extent to which information reported in other parts of the
•
Schedule K-3 (for example, a line in Part II, Section 2) reflects
Attachment 1 for Example 4
I. Passive Income Net of
Allocable Expenses
II. Taxes
A
B
C
D
Passive income subject to withholding tax of 15% or more
$170
0
$60
0
Passive income subject to withholding tax of less than 15% but greater than zero
Passive income not subject to any foreign tax
50
0
0
Passive income subject to no withholding tax, but subject to other foreign tax
0
Reference: Regulations section 1.904-4(c)(3)
Attachment 2 for Example 4
Name of foreign QBU: Country X QBU
I. Passive Income Net of
Allocable Expenses
II. Taxes
Complete a separate Attachment 2 for each foreign QBU.
A
B
C
D
Passive income subject to withholding tax of 15% or more
$100
0
$15
0
Passive income subject to withholding tax of less than 15% but greater than zero
Passive income not subject to any foreign tax
0
0
Passive income subject to no withholding tax, but subject to other foreign tax
280
40
Reference: Regulations section 1.904-4(c)(4)
6
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
interest or royalty for which the shareholder is not allowed a
deduction under section 267A.
Note. If the S corporation attached any of the forms identified in
boxes 7, 8, and 9 to the Form 1120-S, the S corporation need not
attach them again to the Schedule K-2. See Other Forms and
Statements That May Be Required in the Instructions for Form
1120-S.
When completing other parts of Schedules K-2 and K-3
(for example, a line in Part II, Section 2), list an amount
!
CAUTION
without regard to whether the shareholder is disallowed
a deduction under section 267A for the amount.
Box 10. Shareholder loan transactions. Check box 10 and
attach a statement with the information in the applicable Table 2
or Table 3, if the S corporation knows or has reason to know that
it (i) received a loan from its shareholder (“downstream loan”), as
described in Regulations section 1.861-9(e)(8), or (ii) loaned an
amount to its shareholder (“upstream loan”), as described in
Regulations section 1.861-9(e)(9).
Downstream loan. On an attachment to both the Schedules
K-2 and K-3, provide the details with respect to any downstream
loans from its shareholder, including the amount of interest
expense paid or accrued by the S corporation. Report the
information separately for each separate loan. The reporting
should be as follows in Table 2.
Note for boxes 7, 8, and 9. If the filer meets an exception,
such as the multiple filer exception, to filing Forms 5471, 8865,
and/or 8858, the filer is not required to complete and attach
those forms. However, the filer must still attach to the Form
1120-S any required statements to qualify for the exception to
filing the Forms 5471, 8865, and/or 8858.
Box 7. Form 8858 information. Check box 7 and ensure that
Form(s) 8858 is attached to the Form 1120-S if the S corporation
filed one or more Forms 8858, Information Return of U.S.
Persons With Respect to Foreign Disregarded Entities (FDEs)
and Foreign Branches (FBs), or if another person filed the
Form(s) 8858 on behalf of the S corporation. With respect to
Schedule K-3, the S corporation should check box 7 if the S
corporation checked box 7 on the Schedule K-2. The S
corporation need not attach Form 8858 to the Schedules K-1 or
K-3.
Table 2. Downstream Loans
Name of lender
Lender’s TIN
Date of loan
Amount of loan Interest expense
for year
Box 8. Form 5471 information. Check box 8 and attach
Form(s) 5471 to Form 1120-S and Schedule K-1 (Form 1120-S)
if either of the following apply.
Upstream loan. On an attachment to both the Schedules K-2
and K-3, provide the details with respect to any upstream loans
to its shareholder, including the amount of interest income
received or accrued by the S corporation. Report the information
separately for each separate loan. The reporting should be as
follows in Table 3.
The S corporation filed one or more Forms 5471, Information
•
Return of U.S. Persons With Respect to Certain Foreign
Corporations.
The S corporation received Form(s) 5471 as an attachment to
•
a Schedule K-3 issued to the S corporation.
Table 3. Upstream Loans
Form 5471 does not need to be attached to the Schedules
K-1 or K-3 if the S corporation knows or has reason to know that
its direct shareholder (and any indirect shareholder) does not
need the information on Form 5471 to prepare its tax return. For
example, the S corporation would not need to attach the Form
5471 to Schedules K-3 for certain tax-exempt shareholders.
A pass-through entity shareholder that receives a Form 5471
with a Schedule K-1 or K-3 must provide the relevant portions of
Form 5471 to its shareholder unless the pass-through entity
knows or has reason to know that its direct shareholder (and any
indirect shareholder) does not need the information on the Form
5471 to prepare its tax return.
Name of
borrower
Borrower’s TIN
Date of loan
Amount of loan
Interest income
for year
Box 11. Entity treatment for certain S corporations. Check
box 11 if the S corporation has made an election under
Proposed Regulations section 1.958-1(e)(2), to be treated as
owning stock of a CFC within the meaning of section 958(a).
Box 12. Box 12 is reserved for future use on Schedule K-2. Box
12 is used for Form 8865 information on Schedule K-3. If the S
corporation filed one or more Forms 8865, Return of U.S.
Persons With Respect to Certain Foreign Partnerships, check
box 12 on Schedule K-3 and attach such form(s) to Form
1120-S. The Form(s) 8865 need not be attached to the
Schedules K-3.
If a shareholder only needs certain information from the Form
5471, such as the Schedule Q, the S corporation need only
attach that portion to the Schedule K-3, and not the complete
Form 5471.
Box 9. Other forms. Check box 9 if the S corporation filed any
other international tax forms, or if another person filed these
forms on behalf of the S corporation, or if the S corporation
received these forms as an attachment to a Schedule K-1 or K-3
issued to the S corporation. Attach those form(s) to Form 1120-S
and Schedule K-3, if applicable to the shareholder. This
includes, but is not limited to, the following forms.
Box 13. Other international items. If the S corporation has
transactions, income, deductions, payments, or anything else
that implicates the international tax provisions of the Code and
such events are not otherwise reported in this part or other parts
of Schedules K-2 and K-3, report that information on an
attachment to the Schedules K-2 and K-3 and check box 13. As
an example, an S corporation should attach Form 926, Return by
a U.S. Transferor of Property to a Foreign Corporation.
Form 5713, International Boycott Report.
•
Form 8833, Treaty-Based Return Position Disclosure Under
•
Section 6114 or 7701(b).
Schedule K-2, Parts II and III, and
Schedule K-3, Parts II and III
Form 8621, Information Return by a Shareholder of a Passive
•
Foreign Investment Company or Qualified Electing Fund.
Exception for Form 8621. With respect to Schedule K-3, the
S corporation should check box 9 if the S corporation checked
box 9 on the Schedule K-2. The S corporation should indicate in
an attachment to the Schedule K-3 that Form(s) 8621 is attached
to Schedule K-2. The S corporation need not attach Forms 8621
to the Schedule K-1 or K-3.
Note. Shareholders will use the following information to claim
and figure a foreign tax credit on Form 1116 or 1118.
If the S corporation does not qualify for the Domestic Filing
Exception, Schedules K-2 and K-3, Parts II and III, must be
completed unless (a) the S corporation does not have a direct or
indirect shareholder that is eligible to claim a foreign tax credit, or
7
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
(b) no direct or indirect shareholder would have to file a Form
1116 or 1118 to claim the foreign tax credit.
shareholder. In addition, some expenses of the S corporation are
allocated and apportioned by the shareholder. Because of this
shareholder determination, it is not possible for the shareholder
to assume that all income of the S corporation is U.S. source and
all expenses of the S corporation reduce U.S. source income.
Also, the allocation and apportionment of certain shareholder
expenses take into account their shares of assets and income of
the S corporation that are not otherwise reported on the
Schedule K-1.
Shareholders Eligible To Claim Credit
A shareholder that is eligible to claim a foreign tax credit includes
(i) a U.S. citizen or resident, and (ii) a U.S. citizen or resident
beneficiary of domestic trusts and estates. See sections 901 and
906.
Form 1116 Exemption Exception
For example, for purposes of section 904, personal property
sold by the S corporation is treated as sold by the shareholders;
see section 865(i)(5) and section 1373(a). Generally, income
from the sale of certain personal property (excluding inventory) is
sourced according to the residence of the seller. In cases in
which the shareholder is a pass-through entity, the S corporation
might not know the ultimate residence of the first
Under section 904(j), certain shareholders are not required to file
Credit - How to Figure the Credit on IRS.gov. An S corporation is
not required to complete Schedules K-2 and K-3 if all
shareholders are eligible for the Form 1116 exemption and the S
corporation receives notification of the shareholders’ eligibility for
such exemption by the 1-month date (as defined earlier). If an S
corporation receives notification from only some of the
non-pass-through shareholder. The S corporation is not required
to separately state gain from the sale of personal property on
Schedules K and K-1 since it is generally included in ordinary
income. However, the gain is separately reported in Schedules
K-2 and K-3, Part II.
As another example, the shareholder’s R&E expense (which
includes the share of the S corporation’s R&E expense) is
allocated and apportioned by the shareholder; see Regulations
section 1.861-17(f). R&E expense is allocated and apportioned
based on the gross receipts by Standard Industrial Classification
Manual (SIC) code. R&E expense by SIC code is not reported on
Schedules K and K-1, but is reported in Schedules K-2 and K-3,
Part II. Also, the shareholder needs Schedule K-3, Part III,
Section 1, for the shareholder’s share of the S corporation’s
gross receipts by SIC code for purposes of allocating and
apportioning R&E expense.
In some cases, the shareholder will be able to use the
information reported in Parts II and III to increase the foreign tax
credit limitation, and the amount of available foreign tax credit to
the shareholder. For example, Part III, Section 2, provides the
shareholder with the tax book value of the assets of the S
corporation. In general, a shareholder apportions interest
expense to reduce U.S. source income or foreign source income
based on the tax book value of its assets, including its share of
the S corporation’s interest expense and assets; see section
864(e)(2) and Regulations section 1.861-9(e). Taking into
account the assets of an S corporation generating solely U.S.
source income would result in more expense allocated to reduce
U.S. source income and less expense allocated to reduce
foreign source income. Additional foreign source income
increases the shareholder’s foreign tax credit limitation, and the
ability of the shareholder to claim foreign tax credits. Schedules
K and K-1 contain net amounts but do not include separately
stated reporting for the S corporation’s interest expense for
international tax reporting purposes, or the tax book value of the
assets; see Regulations section 1.861- 9(e). See the instructions
for Part II, lines 39 through 43, and Part III, Section 2, for further
guidance.
Example 6. Parts II and III required for S corporation
with no foreign activity. U.S. citizens A and B own equal
interests in SC, an S corporation. SC has no foreign activity. In
Year 1, A pays $2,000 of foreign income taxes on passive
category income other than capital gains reported to A on a
payee statement. A has interest expense of $5,000 and SC does
not have interest expense. None of A’s interest expense is
directly allocable. A does not have an overall domestic loss in tax
year 2023.
shareholders that they are eligible for the Form 1116 exemption,
the S corporation need not complete the Schedule K-3 for those
exempt shareholders but must complete the Schedules K-2 and
K-3 with respect to the other shareholders to the extent that the
S corporation does not qualify for the domestic filing exception.
An S corporation that does not have or receive sufficient
information or notice regarding a direct or indirect shareholder
must presume such shareholder is eligible to claim a foreign tax
credit and such shareholder would have to file a Form 1116 to
claim a credit. As such, the S corporation must complete the
Schedules K-2 and K-3, including Parts II and III, accordingly.
Example 5. Form 1116 exemption. A married couple, U.S.
citizens, each own a 50% interest in SC, an S corporation. The
couple and SC each have a calendar tax year. SC invests in a
regulated investment company. SC receives a Form 1099 from
the regulated investment company reporting $400 of creditable
foreign taxes paid or accrued on passive category foreign source
income. SC’s only foreign activity is that from the regulated
investment company. The couple do not pay or accrue any
foreign taxes other than their pro rata share of SC’s foreign taxes.
The couple also do not have any other foreign source income.
The couple qualify for the Form 1116 exemption and notify SC by
the 1-month date that they do not need the Schedule K-3. Even
though SC does not qualify for the domestic filing exception
because the creditable foreign taxes paid or accrued by SC are
greater than $300, because the couple notify SC by the 1-month
date that they do not need the Schedule K-3 under the Form
1116 exemption, SC need not complete Schedules K-2 and K-3.
S corporations with limited or no foreign activity. In many
instances, an S corporation with no foreign source income, no
assets generating foreign source income, and no foreign taxes
paid or accrued may still need to report information on
Schedules K-2 and K-3. For example, if the shareholder claims
the foreign tax credit, the shareholder generally needs certain
information from the S corporation in Schedule K-3, Parts II and
III, to complete Form 1116. This information should have been
reported in prior years, including before the Tax Cuts and Jobs
Act, with the Schedules K and K-1, and is information the
shareholder needs to figure the foreign tax credit limitation,
which determines the amount of foreign tax credit available to
Section 904 generally limits the foreign tax credit to the
portion of U.S. tax liability attributable to foreign source taxable
income. Foreign source taxable income is foreign source gross
income less allocable expenses. In general, the S corporation
must complete the Schedules K-2 and K-3, Parts II and III,
because the S corporation’s gross income, gross receipts,
expenses, assets, and foreign taxes paid may affect the foreign
tax credit available to the shareholder. The source of certain
gross income and gross receipts is determined by the
Because A must complete Form 1116 to claim a foreign tax
credit, A requests a Schedule K-3 by the 1-month date, and
therefore the domestic filing exception does not apply to SC with
respect to A. SC must complete the relevant portions of Parts II
and III of Schedules K-2 and K-3 (for A). The tax book value of
8
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
SC’s assets is $100,000 (reported on Schedule K-2, Part III,
Section 2, column (a)) and A’s share of those assets is $50,000
(reported on Schedule K-3, Part III, Section 2, column (a)). Not
including A’s pro rata share of the assets of SC, the tax book
value of A’s assets is $50,000. Of A’s assets, $10,000 generates
passive category foreign source income and $40,000 generates
U.S. source income. A has passive category foreign source
taxable income before interest expense of $8,000. A’s U.S. tax
rate is 25%. A’s interest expense and SC’s assets are
Because A and SC do not have R&E expense or interest
expense, and because SC did not pay or accrue any foreign
taxes, SC does not need to complete Schedules K-2 and K-3,
Part III.
Note. A shareholder may need the share of the S corporation’s
gross income for purposes of allocating and apportioning
expenses other than those described in Regulations section
1.861-8(e)(9).
characterized in the same category under sections 163 and 469
for purposes of Temporary Regulations section 1.861-9T(d). A
uses the tax book value (as opposed to the alternative tax book
value) to allocate and apportion interest expense.
General filing instructions. In Schedules K-2 and K-3, Parts II
and III, the S corporation reports its gross income, gross
receipts, cost of goods sold (COGS), certain deductions, and
taxes by source and separate category. The S corporation also
reports information that the shareholders will need to allocate
and apportion expenses and determine the source of certain
items of gross income and gross receipts. Unless specifically
noted later, the S corporation reports in Schedule K-3, Parts II
and III, the shareholder's share of the S corporation's gross
receipts, gross income, COGS, certain deductions, and taxes by
source and separate category. The shareholder adds its share of
the S corporation's foreign source gross receipts, gross income,
COGS, certain deductions, and taxes by separate category to its
other foreign source gross receipts, gross income, COGS,
certain deductions, and taxes in that separate category to figure
its foreign tax credit. The S corporation also reports on the
Schedule K-3 the share of expenses and the allocation and
apportionment factors so that the shareholder may determine
expenses allocated and apportioned to foreign source income.
A’s interest expense is apportioned between U.S. source and
foreign source income ratably based on the tax book value of A’s
U.S. source and foreign source assets. Without taking into
account the pro rata share of SC’s assets, the amount of A’s
interest expense that would reduce passive category foreign
source income is $1,000 ($5,000 x $10,000 / $50,000).
Therefore, A’s passive category foreign source taxable income
would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A
may only use $1,750 (25% x $7,000) of the $2,000 of foreign
taxes. See section 904.
Taking into account the pro rata share of SC’s assets, the
amount of A’s interest expense that reduces passive category
foreign source income is $500 ($5,000 x $10,000 / $100,000).
Therefore, A’s passive category foreign source taxable income
would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, A may
use $1,875 (25% x $7,500) of the $2,000 of foreign taxes—an
additional foreign tax credit amount of $125 after taking into
account A’s share of the tax book value of the S corporation
assets.
S corporation determination. The source and separate
category of certain gross income, gross receipts, COGS, as well
as the allocation and apportionment of certain deductions, can
be determined by the S corporation. This includes deductions
that are definitely related to certain gross income and gross
receipts of the S corporation. See Regulations section
1.861-8(b)(1). See Schedule K-2, Part II, columns (a) through
(e), and Part III, Section 1, columns (a) through (e). In Part III,
Section 2, columns (a) through (e), some S corporation assets
may be characterized by source and separate category by the S
corporation. This includes certain assets that attract directly
allocated interest expense under Temporary Regulations section
1.861-10T(b) and (c). See Temporary Regulations section
1.861-10T(d)(2).
In Part III, Section 3, in the U.S. and foreign columns, the S
corporation assigns foreign taxes paid or accrued to a separate
category and source.
The shareholder's share of the amounts determined by the S
corporation are reported on equivalent columns in Schedule K-3,
Parts II and III.
B does not request a Schedule K-3 from SC for tax year
2023. Under the domestic filing exception, SC does not need to
complete Schedule K-3 for B.
Example 7. Part II, not Part III, required for S corporation
with no foreign activity. The facts are the same as in
Example 6, except that A has $5,000 of deductions that are not
definitely related to any gross income as described in
Regulations section 1.861-8(e)(9), and A and SC have no other
expenses. Further, A’s share of SC’s gross income is $50,000.
Not including A’s pro rata share of the income of SC, A’s gross
income is $50,000. Of A’s gross income, $5,000 is passive
category foreign source gross income and $45,000 is U.S.
source gross income. SC does not have any gross income the
source of which is determined by the shareholder.
A’s expenses must be ratably apportioned based on A’s gross
income (including A’s pro rata share of the income of SC); see
Regulations section 1.861-8(c)(3). Therefore, SC must complete
Schedule K-2, Part II, and Schedule K-3, Part II (for A). Before
taking into account the pro rata share of SC’s gross income, the
amount of A’s expenses described in Regulations section
1.861-8(e)(9) that reduce foreign source income is $500 ($5,000
x $5,000/$50,000). Therefore, A’s foreign source taxable income
would be $4,500 ($5,000 − $500). At a 25% U.S. tax rate, A may
only use $1,125 (25% x $4,500) of the $2,000 of foreign taxes.
See section 904.
Taking into account the pro rata share of SC’s gross income,
the amount of A’s expenses described in Regulations section
1.861-8(e)(9) that reduce foreign source income is $250 ($5,000
x $5,000/$100,000). Therefore, A’s foreign source taxable
income would be $4,750 ($5,000 − $250). At a 25% U.S. tax
rate, A may use $1,187.50 (25% x $4,750) of the $2,000 of
foreign taxes in Year 1—an additional foreign tax credit amount
of $62.50 after taking into account A’s pro rata share of the gross
income of SC.
Certain gross income, gross receipts, COGS, assets,
deductions, and taxes are not assigned to a source or separate
later.
Foreign branch category income. An S corporation itself
does not have foreign branch category income. However, report
all amounts that would be foreign branch category income of its
shareholders as if all shareholders were U.S. persons that were
not pass-through entities. See Schedule K-2, Part II, column (b);
Part III, Sections 1 and 2, column (b); and Part III, Section 3,
column (c). The shareholder's share of the amounts determined
by the S corporation are reported in equivalent columns in
Schedule K-3, Parts II and III.
Section 901(j) income. Income derived from each sanctioned
country is subject to a separate foreign tax credit limitation. If the
S corporation derives such income, enter code 901j on the line
after category code. See Schedule K-2, Part II, column (e); Part
III, Sections 1 and 2, column (e); Part III, Section 3, column (f).
The shareholder's share of the amounts determined by the S
9
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
corporation are reported on equivalent columns in Schedule K-3,
Parts II and III. See the Instructions for Form 1116 for the
potential countries to be listed with the section 901(j) category of
income.
In Schedule K-2, Part III, Section 3, in the shareholder
column, enter the foreign taxes that are assigned to a source of
income by the shareholder. This includes taxes imposed on
certain sales income. The shareholder's share of the amounts
determined by the S corporation are reported on equivalent
columns in Schedule K-3, Parts II and III.
Note. At the time these instructions went to print, section 901(j)
is the only category reported in Part II, Sections 1 and 2, column
(e), and Part III, Sections 1 and 2, column (e).
Schedule K-2, Part II, and
Schedule K-3, Part II (Foreign Tax
Credit Limitation)
Section 951A category income. Section 951A category
income is any amount of Global Intangible Low-Taxed Income
(GILTI) includible in gross income under section 951A (other
than passive category income). If the S corporation pays or
accrues tax on the receipt of a distribution of PTEP assigned to
the reclassified section 951A PTEP or section 951A PTEP
groups, the S corporation must assign those taxes to section
951A category income. The S corporation will enter these taxes
in Part III, Section 3, column (b). Section 951A category income
is not otherwise reported on the Schedules K-2 and K-3.
Section 1—Gross Income
Lines 1 through 24. Form 1116 requires an individual to
separately report gross income and gross receipts by source
and separate category. See sections 861 through 865 (and
section 904(h) and, in some cases, U.S. income tax treaties).
See also sections 1366 and 1373(a). Therefore, shareholders
will report line 24 by country on their Form 1116, Part I, line 1a.
Section 1 also generally follows the types of gross income and
gross receipts separately reported on Form 1120-S, Schedule K.
Shareholders making a section 962 election, in addition to
completing the Form 1116, complete the Form 1118 solely with
respect to the deemed paid credit for inclusions under sections
951(a) and 951A.
Note. An S corporation may have an income inclusion under
section 951A if it made an election under Proposed Regulations
section 1.958-1(e)(2), to be treated as owning stock of a CFC
within the meaning of section 958(a).
Income resourced by treaty. If a sourcing rule in an applicable
income tax treaty treats any U.S. source income as foreign
source, and there is an election to apply the treaty, the income
will be treated as foreign source. This category applies if the S
corporation pays or accrues foreign taxes on receipt of a
distribution of PTEP that is sourced from an annual PTEP
account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) or 951A
and resourced as foreign source income under a treaty.
For each line, report the total for each country in column (g).
Country code. Forms 1116 and 1118 require the taxpayer to
report the foreign country or U.S. territory with respect to which
the gross income and gross receipts are sourced. On lines 1
through 24, for each gross income and gross receipts item, enter
on a separate row (A, B, or C) the two-letter code from the list at
IRS.gov/CountryCodes for the foreign country or U.S. territory
within which the gross income and gross receipts are sourced. If
a type of income is sourced from more than three countries,
attach a schedule with the information required in Schedule K-2,
Part II, and Schedule K-3, Part II, for that type of income.
The designations below are only relevant for Part III, Section
3, column (f).
Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
category income, and there is an election to apply the treaty,
enter code RBT PAS.
If income is U.S. source, enter “US.” Do not enter “various” or
“OC” for the country code.
Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general
category income, and there is an election to apply the treaty,
enter code RBT GEN.
Note. For Part II, column (f), enter the code XX if the S
corporation cannot determine the country or U.S. territory with
respect to which the gross income and gross receipts are
sourced because the source is determined by the shareholder.
However, do not enter the code XX for Part II, column (f), if an
income tax of at least 10% of the gain derived from the sale is
actually paid to a foreign country with respect to that gain. See
sections 865(e) and 865(g). Instead, enter for Part II, column (f),
the foreign country to which the S corporation paid the tax of at
least 10% of the gain.
Code RBT 951A. If an applicable income tax treaty treats any
U.S. source section 951A category income as foreign source
section 951A category income, and there is an election to apply
the treaty, enter code RBT 951A.
Shareholder determination. In Schedule K-2, Part II, Section
1, column (f), and Part III, Section 1, column (f), enter the gross
income, income adjustments, and gross receipt of the S
corporation that is required to be sourced by the shareholder.
This includes income from the sale of most personal property
other than inventory, depreciable property, and certain intangible
property sourced under section 865. See sections 1366 and
1373(a). This also includes certain foreign currency gain on
section 988 transactions. See the Instructions for Form 1116 and
Pub. 514, Foreign Tax Credit for Individuals, for additional
details. Attach a statement to the Form 1120-S, to identify the
separate category of income under section 904(d) of the
amounts listed in Part II, Section 1, column (f).
In Schedule K-2, Part II, column (f), include deductions that
are allocated and apportioned by the shareholder. This includes
most interest and R&E expense. See Regulations sections
1.861-9(e) and 1.861-17(f).
In Schedule K-2, Part III, Section 2, column (f), enter the
assets that are assigned to a source and separate category by
the shareholder.
Each gross income and gross receipts item (for example,
sales vs. interest income) may have different countries listed on
rows A, B, C, etc., given that the S corporation might not have
sales income and interest income, for example, from the same
country. Line 24 should sum each country's total income
reported in Part II, regardless of the line on which such income is
reported, whether A, B, C, etc.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to regulated investment companies and section 863(b).
See the instructions to the Forms 1116 and 1118 for these
exceptions that apply in completing the Schedules K-2 and K-3,
Parts II and III. Do not enter a foreign country or U.S. territory (to
report on a country-by-country basis) for lines 16 through 18.
Note. Schedules K-2 and K-3 request that gross income and
gross receipts be reported by country or U.S. territory because
10
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
such information is requested on Forms 1116 and 1118. Income
and taxes are reported by country on the Forms 1116 and 1118
so that, for example, the IRS may initially evaluate whether
taxpayers are claiming credits for compulsory payments to
foreign governments.
Foreign Source
Description
(a) U.S. source
(c) Passive category
income
11
Net short-term capital gain
Example 8. Part II. Multiple country sources—Gross
income. In Year 1, USC, an S corporation, has employees who
perform services in Country X and Country Y. USC earns
$25,000 of general category services income, $10,000 with
respect to Country X, and $15,000 with respect to Country Y.
The two-letter code for Country X is AA and the two-letter
country code for Country Y is YY. USC makes the following
entries on the first two rows of Schedule K-2, Part II, under line 2.
A
US
FR
CA
HA
$1,000
B
C
D
$400
(300)
(200)
Line 12. Net long-term capital gain. Report net long-term
capital gain on line 12. Do not include gains reported on lines 13,
14, and 15 on line 12.
Example 8 Table
Foreign source
Line 13. Collectibles (28%) gain. Report collectibles gain on
Description
(d) General category
line 13 and not on line 12.
income
Line 14. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 14 and not on line 15. Include
an attachment indicating the amount of unrecaptured section
1250 gain that is also net section 1231 gain.
2
Gross income from performance of
services
A
B
AA
YY
$10,000
$15,000
Line 15. Net section 1231 gain. Report net section 1231 gain
on line 15 and not on line 12 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 14.
Lines 3 and 4. Rental income. These lines are reported
separately because they are reported separately on Form
1120-S, Schedule K. The sourcing rule may be the same for both
types of rental income.
Lines 16 and 46. Section 986(c) gain and loss. Include the S
corporation’s share of a lower-tier pass-through entity’s section
986(c) gain or loss, and the amount of section 986(c) gain or
loss on distributions of PTEP sourced from the S corporation’s
annual PTEP accounts. This is not reported as a net amount but,
rather, total section 986(c) gains for the year are reported on
line 16. Total section 986(c) losses for the year are reported on
line 46.
Lines 7 and 8. Ordinary dividends and qualified dividends.
Enter only ordinary dividends on line 7 and only qualified
dividends on line 8. Do not include as ordinary dividends or
qualified dividends the amount of any distributions received to
the extent that they are attributable to PTEP in annual PTEP
when an S corporation might have an income inclusion with
respect to a foreign corporation.
Note. An S corporation is only responsible for figuring and
reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
account of the S corporation. It is not responsible for figuring or
reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
account of a person other than the S corporation (for example, a
shareholder).
Note. The amount of distributions that are attributable to PTEP
in annual PTEP accounts of a person other than the S
corporation (for example, a shareholder) is not determined by the
S corporation and therefore is not taken into account for
purposes of determining the ordinary dividends to be entered on
line 7 or the qualified dividends to be entered on line 8.
Lines 11 through 15 and 27 through 30. Capital gains and
losses. These lines generally match the types of gains and
losses reported separately on Form 1120-S, Schedule K.
Further, section 904(b)(2)(B) contains rules regarding
adjustments to account for capital gain rate differentials (as
defined in section 904(b)(3)(D)) for any tax year.
Lines 17 and 47. Section 987 gain and loss. The source of
section 987 gain or loss is generally determined by reference to
the source of the income or asset giving rise to such gain or loss.
An S corporation may also obtain section 987 gain or loss
information from Form 8858. This is not reported as a net
amount but rather total section 987 gains for the year are
reported on line 17. Total section 987 losses for the year are
reported on line 47.
Example 9. Parts II and III. Capital gains and losses. S
corporation has the following amounts for the tax year 2023.
Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer
shareholder, the section 988 gain and loss would be reported in
column (f).
Short-term capital gains (losses)
Total
$900
1,000
400
U.S. source
Passive category (France)
Passive category (Canada)
Passive category (Haiti)
(300)
(200)
Line 19. Section 951(a) inclusions. Report section 951(a)
inclusions if the S corporation takes into account such income.
An S corporation may not have subpart F income inclusions with
respect to a foreign corporation for tax years of the foreign
corporation beginning on or after January 25, 2022, under
Regulations section 1.958-1(d)(1) if the S corporation has not
S corporation reports these amounts on Schedule K-2, Part II,
Section 1, line 11, as follows.
11
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
made an election to be treated as owning stock of the foreign
corporation within the meaning of section 958(a) under
Proposed Regulations section 1.958-1(e)(2). An S corporation
may not have subpart F income inclusions with respect to a
foreign corporation for tax years of the foreign corporation
beginning before January 25, 2022, if the S corporation has not
made an election to be treated as owning stock of a foreign
corporation within the meaning of section 958(a) under
Proposed Regulations section 1.958-1(e)(2) and, pursuant to
Regulations section 1.958-1(d)(4)(i), applies Regulations section
1.958-1(d)(1) through (3) to such tax years.
income generated by such S corporation property. See
Temporary Regulations section 1.861-9T(e)(1).
Lines 41 through 43. Other interest expense. A
shareholder's share of an S corporation's interest expense that is
not directly allocable to income from specific S corporation
property is generally allocated and apportioned by the
shareholder, subject to certain exceptions, and included in
column (f); see Temporary Regulations section 1.861-9T(e)(1).
Interest expense incurred by certain individuals, estates, and
trusts is characterized based on the categories of interest
expense in sections 163 and 469: active trade or business
interest, investment interest, or passive activity interest, adjusted
for any interest expense directly allocated under Temporary
Regulations section 1.861-10T; see Regulations section
1.861-9T(d). The amounts in each category of interest expense
Exception. See Regulations sections 1.861-9(e)(8) and (9)
for a special rule for S corporation loans. See also the
instructions for box 10 of Part I.
Line 20. Other income. Attach a statement to the Schedules
K-2 and K-3 describing the amount and type of other income.
Line 21. Section 951A(a) inclusions. Report section 951A(a)
inclusions if the S corporation takes into account such income.
An S corporation will not have an income inclusion under section
951A unless it made an election under Proposed Regulations
section 1.958-1(e)(2) to be treated as owning stock of a CFC
within the meaning of section 958(a).
Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then add the gross income
on lines 1 through 23 by country or territory and enter the total by
country in rows A, B, and C (and additional rows if more than
three countries). The sum of the amounts in rows A, B, C, etc.,
do not need to equal the amount on line 24 given that not every
gross income amount is required to be reported by country.
Note. Interest expense is always included on lines 39 to 43 and
not on other lines.
Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of foreign
taxes that are deductible, but not creditable.
Note. Foreign taxes that are creditable (even if a shareholder
chooses to deduct such taxes) are not reported as expenses in
Part II. Creditable taxes are reported in Part III, Section 3.
Section 2—Deductions
Lines 25 through 54. Deductions of the S corporation must be
allocated and apportioned according to certain rules. See, for
example, Regulations sections 1.861-8 through -20 and
Temporary Regulations sections 1.861-8T and -9T. See also
sections 1366 and 1373(a). For purposes of allocating and
apportioning expenses, in general, a shareholder adds the share
of the S corporation's deductions to its other deductions incurred
directly by the shareholder. See Regulations section 1.861-8(e)
(15). The shareholder reports such deductions on Form 1116,
Part I, lines 2 through 5. Section 2 also generally corresponds to
the deductions separately reported on Form 1120-S,
Schedule K.
Lines 49 and 50. Other deductions. Attach a statement to the
Schedules K-2 and K-3 describing the amount and type of other
deductions. The statement must conform to the format of Part II.
Schedule K-2, Part III, and
Schedule K-3, Part III (Other
Information for Preparation of Form
1116)
Section 1—R&E Expenses Apportionment
Factors
Line 28. Net long-term capital loss. Report net long-term
capital loss on line 28. Do not include losses reported on line 29.
This section requires the S corporation to report information that
a shareholder will use to allocate and apportion its R&E expense
for foreign tax credit limitation purposes.
Line 29. Collectibles loss. Report collectibles loss on line 29
and not on line 28.
Line 32. Research & experimental (R&E) expenses. In
general, R&E expenses are allocated and apportioned by the
shareholder and reported in column (f). See Regulations section
1.861-17(f). R&E expenses, as described in section 174, are
ordinarily definitely related to gross intangible income
An S corporation is not required to complete Section 1 of Part
III unless either (i) the S corporation incurs R&E expense, or (ii)
the shareholder is expected to license, sell, or transfer its
intangible property to the S corporation (as provided in
Regulations section 1.861-17(f)(3)).
reasonably connected with relevant broad product categories of
the taxpayer and are allocable to gross intangible income as a
class related to such product categories. The product categories
are determined by reference to the three-digit classification of
the Standard Industrial Classification Manual (SIC) code
Deductible R&E expenses, as described in section 174, are
ordinarily definitely related to gross intangible income
reasonably connected with relevant broad product categories of
the taxpayer and are allocable to gross intangible income as a
class related to such product categories. The product categories
are determined by reference to the three-digit classification of
the SIC code. In general, R&E expenses are apportioned based
on gross receipts.
R&E expenses are allocated and apportioned by the
shareholder; see Regulations section 1.861-17(f)(1). The
regulations require the S corporation to report to its shareholders
the gross receipts by SIC code according to source and
separate category of income. They also require the S
corporation to report the amount of R&E expense performed in
the United States and outside the United States to apply
exclusive apportionment; see Regulations section 1.861-17(f)
(2).
Line 38. Charitable contributions. Charitable contribution
deductions are apportioned solely to U.S. source gross income;
see Regulations section 1.861-8(e)(12). Therefore, this
deduction should be reported in column (a).
Lines 39 and 40. Interest expense specifically allocable un-
der Regulations sections 1.861-10 and -10T. Apart from
interest expense entered on line 39, enter on line 40 interest
expense that is directly allocable under Temporary Regulations
section 1.861-10T to income from specific S corporation
property. Such interest expense is treated as directly allocable to
12
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
reported on Schedule K-2. Include on line 1, assets without
directly identifiable yield referred to in Temporary Regulations
section 1.861-9T(g)(3)(iii).
Column (e). As of the date of these instructions, the only
separate category that could be included in column (e) is the
section 901(j) category of income. See the Instructions for Form
1116 for the potential countries to be listed with the section
901(j) category of income.
Lines 3 and 4. On Schedule K-2, report reductions in the S
corporation's asset values to reflect the S corporation's directly
allocable interest under Regulations section 1.861-10(e) and
Temporary Regulations section 1.861-10T, see also Temporary
Regulations section 1.861-9T(e)(1). On Schedule K-3, report the
shareholder's share of the reduction in the S corporation's assets
reported on Schedule K-2.
Line 1. Enter the gross receipts by SIC code for each grouping.
Such gross receipts include both the S corporation's gross
receipts and certain other parties' gross receipts; see
Regulations section 1.861-17(d)(3) and (4). Sales of parties
controlled by the S corporation should be included on line 1 if
such controlled parties can reasonably be expected to benefit
from the R&E expense connected with the product categories.
This includes sales that benefit from the shareholder's R&E
expenses if licensed through the S corporation. Sales of
uncontrolled parties are also taken into account if such sales
involve intangible property that was licensed or sold to the
uncontrolled party if the uncontrolled party can reasonably be
expected to benefit from the R&E expense.
Line 5. On Schedule K-2, report the average value of assets
excluded from the apportionment formula; see section 864(e)(3).
On Schedule K-3, report the shareholder's share of the excluded
assets reported on Schedule K-2. Include on line 5 assets
without directly identifiable yield referred to in Temporary
Regulations section 1.861-9T(g)(3)(iii).
Line 6. Shareholders must generally apportion interest expense
by reference to the shareholder's assets, including the
shareholder's pro rata share of S corporation assets. See
Regulations section 1.861-9(e)(3) and Temporary Regulations
section 1.861-9T(d). Interest expense must be apportioned
according to the interest expense classifications under sections
163 and 469. This includes reporting the assets according to
such classifications.
Line 2. Report the amount of R&E expense related to activity
performed in the United States and the amount of R&E expense
related to activity performed outside the United States by SIC
code. The total of the amounts on Schedule K-2, Part III, Section
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the
total of the amounts on Schedule K-3, Part III, Section 1, line 2,
must equal Schedule K-3, Part II, line 32.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
and 6d.
Note. Line 2 is not reported according to source or separate
category.
Example 10. Parts II and III. Asset method
Note. The SIC code for line 2B(i) does not need to be the same
apportionment of interest expense. A, a U.S. citizen, has a
10% interest in S corporation. S corporation is engaged in the
active conduct of a U.S. trade or business. S corporation’s
business generates only domestic source income. S corporation
has an investment portfolio consisting of several less-than-10%
stock investments. S corporation has a bank loan. The proceeds
of the bank loan were divided equally between the business and
the investment portfolio. A’s only assets attracting interest
expense are those owned by S corporation. A’s only business
assets and investment assets are its pro rata share of those
owned by S corporation. A’s only interest expense is that from A’s
pro rata share of the S corporation loan.
SIC code for line 2A(i).
Section 2—Interest Expense Apportionment
Factors
This section requires the S corporation to report information that
a shareholder will use to allocate and apportion its interest
expense for foreign tax credit limitation purposes.
Complete this Section 2 only if the S corporation or the
shareholders have interest expense or stewardship expense.
Stewardship expenses. In the case of the shareholder's
stewardship expenses incurred to oversee the S corporation, the
S corporation's value is determined and characterized under the
asset method in Regulations section 1.861-9. See Regulations
section 1.861-8(e)(4)(ii)(C). Therefore, the reporting later with
respect to Part III, Section 2, for interest expense apportionment
factors generally applies to the shareholder's stewardship
expense apportionment.
A’s share of the interest expense for the loan with respect to S
corporation’s business is $2,000. It is apportioned on the basis
of business assets. Because all business income is domestic
source, the business assets are domestic assets and reported
on Schedules K-2 and K-3, Part III, Section 2, line 6b, column
(a). A’s $2,000 share of the interest expense is reported on
Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S.
source gross income by the shareholder.
The interest expense for A’s share of the loan with respect to
S corporation’s investments is $2,000 and is reported in
Schedule K-3, Part II, line 42, column (f). The investment interest
must be apportioned on the basis of investment assets. Applying
the asset method, $80,000 of S corporation’s adjusted basis in
its investment portfolio stock generates domestic source income
and $120,000 of S corporation’s adjusted basis in the stock
generates foreign source passive income. S corporation reports
these amounts on Schedule K-2, Part III, Section 2, line 6c,
columns (a) and (c), respectively. A’s share of the adjusted basis
in S corporation’s stock is $8,000 with respect to the stock
generating domestic source income and $12,000 with respect to
the stock generating foreign source passive income. Such
amounts are reported on Schedule K-3, Part III, Section 2,
line 6c, columns (a) and (c), respectively. With respect to the
interest expense on the loan for S corporation’s investments,
$800 ($8,000/$20,000 x $2,000) is apportioned to domestic
source income and $1,200 ($12,000/$20,000 x $2,000) is
apportioned to foreign source passive income.
Interest expense is apportioned based on the average value
of assets; see Regulations section 1.861-9(g)(2)(i)(A). A
taxpayer can use either the tax book value or the alternative
book value of its assets; see Regulations section 1.861-9(i).
When reporting the basis in an asset that is stock in nonaffiliated
10%-owned corporations, adjust such amount for earnings and
profits (E&P); see Regulations section 1.861-12(c)(2)(i)(A).
Note. Attach to Form 1120-S, a second Part III, Section 2, if the
S corporation reports both the tax book value and the alternative
tax book value of its assets to the shareholders.
Column (b). The S corporation characterizes its pro rata share
of the S corporation assets that give rise to foreign branch
category income as assets in the foreign branch category. See
Regulations section 1.861-9(e)(10).
Line 1. On Schedule K-2, report the average of the
beginning-of-year and end-of-year bases in the S corporation's
assets; see Regulations section 1.861-9(g)(2)(i)(A). On
Schedule K-3, report the shareholder's share of the assets
13
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Codes for Types of Tax
Lines 7 and 8. The amounts reported on lines 7 and 8 are
subsets of the amounts reported on line 6 representing the value
of stock held by the S corporation in certain foreign corporations.
Code
WHTD
WHTP
WHTB
WHTR
WHTI
ECI
Type of Tax
With respect to an S corporation-owned specified 10%
foreign corporation that is not a CFC, the S corporation will report
on line 7, columns (a) through (e), the total value of the stock in
all such foreign corporations. The value of the stock is the S
corporation’s basis in the stock adjusted to take into account the
E&P of the foreign corporations as explained in Regulations
section 1.861-12(c)(2). The S corporation must attach a
statement to the Schedules K-2 and K-3 with the following
information for each foreign corporation for which adjusted basis
is reported on line 7.
Withholding tax on dividends
Withholding tax on distributions of PTEP
Withholding tax on branch remittances
Withholding tax on rents, royalties, and license fees
Withholding tax on interest
Taxes paid or accrued to foreign countries or territories on
certain effectively connected income
OTHS
OTHR
OTH
Other foreign taxes paid or accrued on sales income
Other foreign taxes paid or accrued on services income
Other foreign taxes paid or accrued
Name of foreign corporation.
•
EIN or reference ID number. Do not enter “FOREIGNUS” or
•
“APPLIED FOR.”
Percentage of voting and value of stock owned by the S
•
If there are multiple types of tax for the same country,
generate multiple alpha rows for the same country, one row for
each type of tax. For example, see below.
corporation in such foreign corporation.
Value of the stock in such corporation included in each of the
•
groupings in 6b through 6d (denoting separately each of those
groupings).
Description
(a) Type of tax
With respect to S corporation-owned CFCs, the S corporation
will report on line 8, column (f), the total value of its stock in all
such foreign corporations. The value of the stock is the S
corporation's basis in the stock adjusted to take into account the
E&P of the foreign corporations as explained in Regulations
section 1.861-12(c)(2). The S corporation must attach a
statement to the Schedules K-2 and K-3 with the following
information for each foreign corporation for which basis is
reported on line 8.
1
Direct (section 901 or 903) foreign taxes:
Paid
Accrued
A
B
AA
AA
WHTD
OTH
Column (b). Taxes assigned to section 951A category in-
come. Taxes assigned to section 951A category income are
taxes paid or accrued on distributions of PTEP assigned to the
reclassified section 951A PTEP and section 951A PTEP groups.
An S corporation might not be able to complete this column due
to lack of information regarding the treatment of the current year
distributions.
Name of foreign corporation.
•
EIN or reference ID number. Do not enter “FOREIGNUS” or
•
“APPLIED FOR.”
Percentage of voting and value of stock owned by the S
•
corporation in such foreign corporation.
Value of the stock in such corporation.
•
Section 3—Foreign Taxes
Note. An S corporation may have an income inclusion under
section 951A if it made an election under Proposed Regulations
section 1.958-1(e)(2) to be treated as owning stock of a CFC
within the meaning of section 958(a).
Do not complete this Section 3 if the S corporation does
not pay or accrue foreign taxes.
TIP
In Part III, Section 3, the S corporation assigns foreign taxes
paid or accrued (including on U.S. source income) to a separate
category and source. Include taxes paid or accrued to foreign
countries or to U.S. territories.
Column (f). Other category.
Foreign taxes paid or accrued to sanctioned countries.
No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries.
Attachment. As previously mentioned in the instructions for
Schedules K-2 and K-3, Part I, box 4, for each of the amounts
listed on lines 1 through 3, attach a statement to the Schedules
K-2 and K-3 reporting the following information.
Foreign taxes related to PTEP resourced by treaty. If the
S corporation pays or accrues foreign taxes on receipt of a
distribution of PTEP that is sourced from an annual PTEP
account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) and
resourced as foreign source income under a treaty, such taxes
are included in column (f).
The dates on which the taxes were paid or accrued.
The exchange rates used.
•
•
•
The amounts in both foreign currency and U.S. dollars. See
section 986(a).
On the line after category code, enter one of the following
codes.
Column (a). Enter the code for the type of tax.
Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
category income, and there is an election to apply the treaty,
enter code RBT PAS.
Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general
category income, and there is an election to apply the treaty,
enter code RBT GEN.
Code RBT 951A. If an applicable income tax treaty treats any
U.S. source section 951A category income as foreign source
section 951A category income, and there is an election to apply
the treaty, enter code RBT 951A.
14
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
PTEP for which a foreign tax credit may be partially or entirely
disallowed. However, it is important to track this amount as a tax
on a distribution.
Line 1. Enter in U.S. dollars the total foreign taxes (described in
section 901 or section 903) that were paid or accrued by the S
corporation (according to its method of accounting for such
taxes). Do not reduce the amount that you report on line 1 by the
reductions reported on line 2. Do not report redetermined taxes
on line 1. Report such taxes on line 3.
G. Other. Attach a statement to the Schedules K-2 and K-3
indicating the reason for the reduction.
There is no need to report the amounts on line 2 by country.
Line 3. Enter in U.S. dollars the change in foreign tax as a result
of a foreign tax redetermination. See section 905(c) and
Regulations sections 1.905-3 through -5. If the amount is less
than the original foreign tax, report the change as a negative
amount. If the amount is more than the original foreign tax, report
the change as a positive amount.
Note. Do not include on line 1 any foreign taxes not creditable
but deductible as reported on Part II, Section 2, line 45.
If the S corporation uses the cash method of accounting for
foreign taxes, check the “Paid” box and enter foreign taxes paid
during the tax year on line 1. Report each shareholder's share on
line 1 of Section 3 of Schedule K-3, Part III.
If the S corporation uses the accrual method of accounting for
foreign taxes, check the “Accrued” box and enter foreign taxes
accrued on line 1. Report each shareholder's share on line 1 of
Section 3 of Schedule K-3, Part III.
Note. Payment of additional foreign taxes that relate to an
earlier tax year by an S corporation that has the cash method of
accounting does not result in a foreign tax redetermination; see
Regulations section 1.905-3(a). Such amounts should be
reported on line 1 as foreign taxes paid by the S corporation in
the current year. Report the U.S. tax year to which the foreign tax
relates. This is the U.S. tax year that includes the close of the
foreign tax year to which the tax relates. Report the date on
which the tax was paid. If there is more than one date tax is paid,
enter one of the dates paid on the schedule itself and then attach
a statement to the Schedules K-2 and K-3, including all of the
information reported on the schedule with the other dates paid.
Note. Check only one box “Paid” or “Accrued” depending on the
method of accounting the S corporation uses to account for
foreign taxes.
Enter on a separate line, indicated by the letters A through F,
taxes paid or accrued to each country. Enter the two-letter code
“OC” for the country code.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to regulated investment companies and section 863(b).
These exceptions apply as well to reporting of taxes in this
section.
Example 11. Part III, Section 3. Multiple country
sources—Foreign taxes. The facts are the same as in
Example 8, earlier. USC has the cash method of accounting and
pays taxes of $1,000 and $3,000 to Countries AA and YY,
respectively. USC completes Part III, Section 3, line 1, as follows.
If there is more than one redetermination in a year with
respect to different countries, report such redeterminations on
separate lines. Enter the two-letter code from the list at IRS.gov/
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to regulated investment companies and section 863(b).
Do not enter “various” or “OC” for the country code.
Similarly, if there is more than one redetermination in a year
with respect to the same country, but the redeterminations are
related to different years, report such redeterminations on
separate lines.
In addition, attach a statement that includes the information in
Schedule C (Form 1116), Parts I and II, as applicable, with
respect to each foreign tax redetermination.
Contested taxes. In general, a contested foreign income tax
liability does not accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
contested foreign income tax liability is not a reasonable
approximation of the final foreign income tax liability and,
therefore, is not considered an amount of tax paid for purposes
of section 901 until the contest is resolved. Thus, an S
corporation generally does not take into account a contested
liability as a creditable foreign tax expenditure until the contest is
resolved and the liability has been paid; see Regulations section
1.905-1(f)(1). However, to the extent that an S corporation has
remitted a contested foreign income tax liability to a foreign
country, shareholders may elect to claim a provisional foreign tax
credit for the shareholder's pro rata share of such contested
foreign income tax liability. See Regulations section 1.905-1(f)
(2).
S corporations that are contesting a foreign income tax
liability with a foreign country but that have remitted all or a
portion of such contested liability should report information about
the contested tax on line 3, and check the “Contested tax” box.
In addition, S corporations should attach a statement and
include information necessary for shareholders to complete
Form 7204 and Schedule C (Form 1116), including a description
of the contest and a description of the contested foreign income
tax.
Example 11 Table
(e) General
category
income
(a) Type of
Description
tax
Foreign
1
Direct (section 901 or 903) foreign taxes:
Paid
Accrued
A
B
AA
YY
OTHR
OTHR
1,000
3,000
Line 2. Enter on line 2, as negative number, the sum of the
taxes in the following categories.
A. Taxes on foreign mineral income (section 901(e)).
B. Reserved.
C. Taxes attributable to boycott operations (section 908).
D. Reduction in taxes for failure to timely file (or furnish all of
the information required on) Forms 5471 and 8865 (section
6038(c)).
E. Foreign income taxes paid or accrued during the current
tax year with respect to splitter arrangements under section 909.
F. Foreign taxes on foreign corporate distributions. For
example, include taxes on distributions of PTEP assigned to the
following PTEP groups: reclassified section 965(a) PTEP,
reclassified section 965(b) PTEP, section 965(a), and section
965(b) PTEP, a portion of which is not creditable. The S
corporation may be unable to determine the amount of a
distribution that is attributable to non-previously taxed E&P or
15
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Attachment 3 (Schedule K-2)
(d) Functional
currency of
distributing foreign
corporation
(a) Name of
(b) EIN or reference
distributing foreign
ID number
(e) Amount of NII
PTEP in functional
currency
(f) Spot rate
(functional currency
to U.S. dollars)
(c) Date of
distribution
(g) Amount of NII
PTEP in U.S. dollars
corporation
S corporations must also file a statement each year for which
there are one or more contested liabilities outstanding or in
which a contested tax is resolved that includes information
necessary for shareholders to complete Schedule C (Form
1116), Part V.
and owns 50% of the foreign corporation's stock through a
partnership, then distributions by the foreign corporation to the S
corporation and partnership are to be reported on separate rows
in Part IV of the S corporation’s Schedule K-2 (Form 1120-S). If
the S corporation owns stock of a foreign corporation through a
partnership from which it receives a Part V of Schedule K-3
(Form 1065 or 8865), the S corporation must replicate each line
of Part V, Schedule K-3 (Form 1065 or 8865) in Part IV of its
Schedule K-2 (Form 1120-S). Rows for distributions with respect
to an S corporation’s direct ownership of foreign corporation
stock should be listed before rows for distributions with respect
to an S corporation's ownership of foreign corporation stock
through a pass-through entity.
The S corporation may have annual PTEP accounts with
respect to the foreign corporation, or the foreign corporation may
have E&P that, when distributed, is excludable from the S
corporation’s gross income under section 1293(c). Do not report
distributions to the extent that they are attributable to PTEP in
annual PTEP accounts of the S corporation or to E&P that is
excludable from the S corporation’s gross income under section
1293(c). Distributions by the foreign corporation to the S
corporation that are attributable to PTEP in annual PTEP
accounts of the S corporation should be properly reflected on the
Schedules J (Form 5471) for the foreign corporation. The S
corporation should provide this information to its shareholders,
as appropriate.
However, to the extent a distribution is attributable to PTEP in
an annual PTEP account of the S corporation with respect to a
foreign corporation, or attributable to E&P that is excludable from
the S corporation’s gross income under section 1293(c), that
corresponds to a tax year of the foreign corporation that ended
with or within a tax year of the S corporation (i) that began after
December 31, 2012, and (ii) for which an election under
Regulations section 1.1411-10(g) was not made by the S
corporation NII PTEP, append Attachment 3 to Schedule K-2 and
an Attachment 4 to each K-3 in the following format, adding
additional rows as necessary for each distribution by a foreign
corporation. For more information about net investment income
and net investment income tax relating to CFCs and QEFs, see
Regulations section 1.1411-10.
Schedule K-2, Part IV, and
Schedule K-3, Part IV (Distributions
From Foreign Corporations to S
Corporation)
Note. Shareholders will use the following information, in
combination with other information known to the shareholders,
including Schedule P (Form 5471), to exclude from gross income
distributions to the extent that they are attributable to PTEP in
their annual PTEP accounts and report foreign currency gain or
loss with respect to the PTEP on Form 1040.
Use Schedule K-2, Part IV, to report the distributions made by
foreign corporations to the S corporation.
Use Schedule K-3, Part IV, to report the shareholder's share
of the amounts reported in Schedule K-2, Part IV.
Exception. Schedule K-2, Part IV, is not required to be
completed with respect to distributions by a foreign corporation if
the S corporation knows that none of the distributions by the
foreign corporation are attributable to PTEP in annual PTEP
accounts of any direct or indirect shareholder. Nevertheless, the
S corporation may be required to append Attachment 3 to the
Schedule K-2 (discussed later).
Exception. Schedule K-3, Part IV, for a shareholder does not
need to be completed with respect to distributions by a foreign
corporation if the S corporation knows that none of the
distributions by the foreign corporation are attributable to PTEP
in annual PTEP accounts of the shareholder or any U.S. person
that is treated as indirectly owning stock of the foreign
corporation through the shareholder. Nevertheless, the S
corporation may be required to append Attachment 4 to the
Schedule K-3 for the shareholder (discussed later). If this
exception is applicable with respect to a foreign corporation, the
sum of the amounts reported in Schedules K-3, Part IV, with
respect to the foreign corporation may not equal the amounts
reported in Schedule K-2, Part IV, with respect to the foreign
corporation.
Note. If additional rows are required, attach statements to the
Schedules K-2 and K-3 that look like the current version of
Schedules K-2 and K-3, Part IV, respectively.
Column (b). Enter the EIN or reference ID number of the
distributing foreign corporation. Do not enter “FOREIGNUS” or
“APPLIED FOR.” For basic information about reference ID
numbers (including the requirements as to the characters
permitted), see the Instructions for Form 1118.
Rows A through O. Use rows A through O to report information
with respect to each distribution by a foreign corporation with
respect to its stock that the S corporation (directly or through
pass-through entities) owns (within the meaning of section 958)
other than solely by reason of applying section 318(a)(3)
(providing for downward attribution) as provided in section
958(b). Each row should relate the S corporation's direct
ownership of stock in the foreign corporation or direct ownership
of the ownership interests in a pass-through entity that (directly
or through other pass-through entities) owns (within the meaning
of section 958) stock in the foreign corporation other than solely
by reason of applying section 318(a)(3) (providing for downward
attribution) as provided in section 958(b). For example, if an S
corporation directly owns 50% of the foreign corporation's stock
Column (c). Enter the year, month, and day in which the
distribution was made using the format YYYYMMDD.
Column (d). Enter the applicable three-character alphabet
code for the foreign corporation’s functional currency using the
ISO 4217 standard. These codes are available at ISO.org/
Note. Columns (e) and (f) are reported in functional currency.
16
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Attachment 4 (Schedule K-3)
(d) Functional
currency of
distributing foreign
corporation
(a) Name of
(b) EIN or reference
distributing foreign
ID number
(e) Shareholder’s
share of NII PTEP in
functional currency
(f) Spot rate
(functional currency
to U.S. dollars)
(g) Shareholder’s
share of NII PTEP in
U.S. dollars
(c) Date of
distribution
corporation
Generally, a foreign corporation is a CFC if more than 50% of
either the total combined voting power of all classes of stock
entitled to vote or the total value of the stock of the corporation is
owned (within the meaning of section 958(a)) or is considered as
owned by applying the rules of section 958(b) by U.S.
Column (e). This represents the S corporation’s share of the
amount distributed in functional currency. See Schedule R (Form
5471), Distributions From a Foreign Corporation, column (c).
Column (f). This represents the S corporation’s share of the
amount of E&P distributed in functional currency. See
Schedule R (Form 5471), column (d). The total of the amounts
reported in column (f) with respect to a distributing foreign
corporation should equal the S corporation’s share of the total
reported on line 9 of all Schedules J (Form 5471), Accumulated
Earnings and Profits (E&P) of Controlled Foreign Corporation, on
a separate category of income basis as reported in Schedule J
(Form 5471) TOTAL filed with respect to the distributing foreign
corporation.
If a Schedule J (Form 5471) with code “TOTAL” entered on
line a (at the top of page 1 of Schedule J) is not filed with respect
to the distributing foreign corporation, then the total of the
amounts reported in column (f) with respect to a distributing
foreign corporation should equal the S corporation’s share of the
amount reported on line 9, column (f), of the Schedule J (Form
5471) filed with respect to the distributing foreign corporation.
shareholders. For this purpose, a U.S. shareholder is a U.S.
person (as defined in section 957(c)) who owns (within the
meaning of section 958(a)), or is considered as owning by
applying the rules of ownership of section 958(b), 10% or more
of the total combined voting power of all classes of stock entitled
to vote, or 10% or more of the total value of shares of all classes
of stock of such foreign corporation.
If the S corporation is treated as not owning stock of a foreign
corporation within the meaning of section 958(a) for a tax year of
the foreign corporation (because the S corporation has not made
an election under Proposed Regulations section 1.958-1(e)(2)
and, in the case of a tax year beginning before January 25, 2022,
the S corporation, pursuant to Regulations section 1.958-1(d)(4)
(i), applies Regulations sections 1.958-1(d)(1) through (3) to
such tax year), or the S corporation is not a U.S. shareholder of
the foreign corporation during such tax year, the information
regarding subpart F income inclusions and section 951(a)(1)(B)
inclusions that are reported in Schedule K-2, Part V, columns (e)
and (f) with respect to the foreign corporation for such tax year,
are not inclusions of the S corporation. Schedule K-3, Part V,
columns (e) and (f), report the information shareholders will need
to figure and report their subpart F income inclusions and
section 951(a)(1)(B) inclusions with respect to the CFC.
Column (g). Enter the exchange rate on the date of distribution
used to translate the amount of the distribution in functional
currency to U.S. dollars. See section 989(b)(1). Report the
exchange rate using the “divide-by convention” specified under
Reporting exchange rates on Form 5471 in the Instructions for
Form 5471.
Column (h). Enter the amount of the distribution in U.S. dollars.
Translate column (e) using the spot rate reported in column (g).
Note. If the S corporation is treated as owning stock of a foreign
corporation within the meaning of section 958(a) for a tax year of
a foreign corporation (because the S corporation elected to be
so treated under Proposed Regulations section 1.958-1(e)(2) or,
in the case of a tax year of the foreign corporation beginning
before January 25, 2022, the S corporation, pursuant to
Regulations section 1.958-1(d)(4)(i), does not apply Regulations
sections 1.958-1(d)(1) through (3)) to such tax year, and is a
U.S. shareholder of the foreign corporation during such tax year,
then any subpart F income inclusions and section 951(a)(1)(B)
inclusions with respect to the foreign corporation for such tax
year are inclusions of the S corporation, which are therefore not
reported in Schedules K-2 and K-3, columns (e) and (f), and are
instead reported on Schedules K and K-1, line 10, Other income
(loss).
Column (i). Enter the amount of E&P distributed in U.S. dollars.
Translate column (f) using the spot rate reported in column (g).
Column (j). If the distributing foreign corporation is a qualified
foreign corporation, determined without regard to section 1(h)
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).
Schedule K-2, Part V (Information on
Shareholders’ Section 951(a)(1) and
Section 951A Inclusions), and
Schedule K-3, Part V (Information on
Shareholder’s Section 951(a)(1) and
Section 951A Inclusions
Note. Shareholders will use the following information to
complete Form 8992 and Form 1040 with respect to income
inclusions under section 951(a) (subpart F income inclusions),
section 951(a)(1)(B) inclusions, and section 951A inclusions.
Note. If the S corporation elects to be treated as owning stock of
a foreign corporation within the meaning of section 958(a) under
Proposed Regulations section 1.958-1(e)(2), and the S
corporation is a U.S. shareholder of the foreign corporation
during a tax year of the foreign corporation, then the S
corporation determines its GILTI inclusion for its tax year in which
or with which such tax year of the foreign corporation ends,
which it reports on Form 1120-S, Schedule K, line 10, Other
income (loss). Schedule K-1, line 10, Other income (loss),
reports the shareholders’ share of the S corporation’s GILTI
inclusion. An S corporation that has made an election under
Proposed Regulations section 1.958-1(e)(2), and is a U.S.
shareholder of the foreign corporation during a tax year of the
foreign corporation, does not complete columns (g) through (n)
Schedules K-2 and K-3, Part V, must be completed with
respect to a CFC if the S corporation owns (within the meaning
of section 958) stock of the CFC, unless the S corporation owns
stock of the CFC solely by reason of applying section 318(a)(3)
(providing for downward attribution) as provided in section
958(b).
17
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
of Part V of Schedules K-2 and K-3 for such foreign corporation
with respect to such tax year.
anticipated to be figured by multiplying the percentage in column
(d) by the amount of subpart F income or GILTI item,
respectively. For example, in general, a shareholder’s share
through its ownership interest in the S corporation of tested
income in column (i) is anticipated to be figured by multiplying
the percentage in column (d) by the amount of tested income in
column (g).
Exception. Schedule K-2, Part V, does not need to be
completed with respect to a CFC if the S corporation knows that
it does not have a direct or indirect shareholder (through
pass-through entities only) that is a U.S. shareholder of the CFC
required to include in gross income a subpart F income inclusion
and/or section 951(a)(1)(B) inclusion with respect to the CFC, or
figure section 951A inclusions by taking into account GILTI items
(defined later) of the CFC.
Line a. Complete a separate Part V for each applicable
separate category of income. However, all GILTI items must be
reported in only one Part V. If GILTI items include passive
category income, report all GILTI items in the Part V completed
for passive category income; otherwise, report all GILTI items in
the Part V completed for general category income. Enter the
appropriate code on line a.
Exception. Schedule K-3, Part V, for a shareholder does not
need to be completed with respect to a CFC if the S corporation
knows that (i) the shareholder is not a U.S. shareholder of the
CFC required to include in gross income a subpart F income
inclusion and/or section 951(a)(1)(B) inclusion with respect to
the CFC, or figure section 951A inclusions by taking into account
GILTI items (defined later) of the CFC; and (ii) no U.S. person
that indirectly owns (through pass-through entities only) an
interest in the CFC through the shareholder is a U.S. shareholder
of the CFC required to include in gross income a subpart F
income inclusion and/or section 951(a)(1)(B) inclusion with
respect to the CFC, or figure section 951A inclusions by taking
into account GILTI items (defined later) of the CFC. If the S
corporation does not complete Part V of Schedule K-3 for a
shareholder with respect to a CFC, the sum of each
Note. The other reporting requirements of an S corporation with
respect to reporting income by separate category do not change
by reason of the S corporation reporting GILTI items that include
general category income in a Part V completed for passive
category income.
Codes for Categories of Income
Code
PAS
Category of Income
Passive Category Income
Section 901(j) Income
shareholder's share of the CFC's subpart F income, section
951(a)(1)(B) inclusion with respect to the CFC, and share of the
CFC's GILTI items (defined later) reported on all Schedules K-3
may not equal the aggregate share of subpart F income of the
CFC, the aggregate section 951(a)(1)(B) inclusion with respect
to the CFC (defined later), and the aggregate share of the CFC's
GILTI items (defined later), respectively, reported on the
Schedule K-2.
Use Schedule K-2, Part V, to report the information on the S
corporation’s share of the amounts its shareholders will need to
figure their subpart F income inclusions, section 951(a)(1)(B)
inclusions, and their GILTI inclusions, with respect to CFCs
owned (within the meaning of section 958) by the S corporation.
Use Schedule K-3, Part V, to report each shareholder’s share of
the amounts needed to determine its subpart F income
inclusions, section 951(a)(1)(B) inclusions, and GILTI inclusion,
with respect to CFCs owned (within the meaning of section 958)
by the S corporation.
If the S corporation must complete Schedules K-2 and K-3,
Part V, with respect to a CFC because an exception described
earlier does not apply, then the S corporation must complete
Schedules K-2 and K-3, Part V, by assuming that each
shareholder in the S corporation is a U.S. shareholder of the
CFC and is required to include in gross income its share of the
CFC's subpart F income, section 951(a)(1)(B) inclusion, and its
GILTI.
A shareholder's GILTI is figured based upon its share of the
following amounts for each CFC with respect to which it is a U.S.
shareholder: tested income, tested loss, QBAI, tested loss QBAI
amount, tested interest income, and tested interest expense
(collectively, GILTI items) (a CFC's subpart F income and GILTI
items, CFC items).
901j
GEN
General Category Income
Line b. If any portion of a CFC item is U.S. source, complete a
separate Part V for U.S. source CFC items, and check the box on
line b in such separate Part V.
Line 1. Use lines A through K to report information with respect
to each CFC owned (within the meaning of section 958) by the S
corporation, and for which Part V of Schedules K-2 and K-3 must
be completed. If the S corporation owns a CFC through a
partnership from which it receives a Schedule K-3 (Form 1065 or
8865), Part VI, the S corporation must replicate each line of Part
VI, Schedule K-3 (Form 1065 or 8865) that is related to the CFC
in its Schedule K-2 (Form 1120-S), Part V. For example, if an S
corporation directly owns 50% of the CFC's stock and owns 50%
of the CFC's stock through a partnership, the CFC should be
listed on two lines with one line related to the S corporation's
direct ownership and the other line related to the S corporation's
ownership through the partnership. Lines related to an S
corporation's direct ownership of CFCs should be listed before
lines related to an S corporation's non-direct ownership of CFCs.
If additional lines are required, attach a statement to the
Schedules K-2 and K-3 that looks like the current version of Part
V.
Column (a). Enter the name of each CFC for which Part V must
be completed.
Column (b). Enter the EIN or reference ID number of the CFC.
Do not enter “FOREIGNUS” or “APPLIED FOR.” For basic
information about reference ID numbers (including the
requirements as to the characters permitted), see the
Instructions for Form 1118.
A shareholder's share of a CFC's subpart F income, amounts
used to determine its section 956 amount with respect to a CFC,
and a CFC's GILTI items may not be limited to the shareholder's
share of such income, amounts, or items through its ownership
in the S corporation. However, for purposes of completing
Schedules K-2 and K-3, Part V, use only the shareholder's share
of a CFC's subpart F income, amounts used to determine its
section 956 amount with respect to a CFC, and a CFC's GILTI
items through the shareholder's ownership in the S corporation.
Column (c). Enter the end of the CFC’s tax year using the
format YYYYMMDD.
Column (d). Enter the shareholders' shares of CFC items
through the shareholders' ownership in the S corporation
(aggregate share). See Regulations sections 1.951-1(b),
1.951-1(e), and 1.951A-1(d)(1) for rules on determining the
shareholders' shares.
A shareholder’s share through its ownership in the S
corporation of subpart F income and GILTI items is generally
18
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Note. An S corporation that has made an election to be treated
as owning stock of a CFC within the meaning of section 958(a)
under Proposed Regulations section 1.958-1(e)(2) (or, in the
case of a tax year of a CFC beginning before January 25, 2022,
does not, pursuant to Regulations section 1.958-1(d)(4)(i), apply
Regulations sections 1.958-1(d)(1) through (3) to such tax year),
and is a U.S. shareholder of a CFC listed in column (a) during a
tax year of the CFC, does not report amounts in columns (e) or
(f) with respect to the CFC for such tax year.
Schedule K-2, Part VI, and
Schedule K-3, Part VI (Information
Regarding Passive Foreign
Investment Companies (PFICs))
Note. Shareholders will use the following information to
complete Form 8621 and/or determine income inclusions with
respect to the PFICs reported in Schedules K-2 and K-3, Part VI.
Column (e). Enter the aggregate share of the amount of the
CFC's subpart F income, if any. Note that an amount determined
under section 956(a) is not considered subpart F income. For
guidance on figuring a CFC's subpart F income and the
shareholders' shares of a CFC's subpart F income, see
Worksheet A in the Instructions for Form 5471.
Except as otherwise provided, Schedules K-2 and K-3, Part
VI, must be filed by every S corporation that owns PFIC stock,
directly or indirectly. However, the following exceptions apply.
An S corporation that has elected to treat a PFIC as a
•
pedigreed qualified electing fund (QEF) or made a
Column (f). Enter the amount determined under section 956
with respect to the shareholders that relate to the shareholders'
ownership in the S corporation, as described in these
instructions for column (f) (aggregate section 951(a)(1)(B)
inclusion). In determining the section 956 amount, use only the
shareholders' shares through their ownership in the S
corporation of:
mark-to-market (MTM) election under section 1296 with respect
to a PFIC applicable to the S corporation’s tax year (other than if
the S corporation is making an MTM election under section 1296
with respect to PFIC stock in the current tax year if the current
tax year is not the first year of the S corporation’s holding period
in that stock (non-initial section 1296 MTM election)) is not
required to complete Schedules K-2 and K-3, Part VI, with
information regarding that PFIC if the S corporation files Form
8621 for that PFIC. The term “pedigreed QEF” is defined in
Regulations section 1.1291-1(b)(2)(ii).
The average of the amounts of U.S. property held (directly or
•
indirectly) by the CFC as of the close of each quarter of the
CFC’s tax year, and
The applicable earnings of the CFC.
•
An S corporation that owns stock of a foreign corporation that
•
For guidance on figuring the shareholders' share of a CFC's
is treated as a qualifying insurance corporation (QIC) (as defined
in section 1297(f)(1)) and which is not treated as a PFIC by
reason of section 1298(b)(1), or an S corporation that satisfies
the deemed election requirements of Regulations section
1.1297-4(d)(5)(iv) with respect to a foreign corporation eligible to
be treated as a QIC (and that is not treated as a PFIC by reason
of section 1298(b)(1)), is not required to complete Schedules
K-2 and K-3, Part VI, with respect to that foreign corporation.
earnings invested in U.S. property, see Worksheet B in the
Instructions for Form 5471.
Note. An S corporation that has made an election to be treated
as owning stock of a CFC within the meaning of section 958(a)
under Proposed Regulations section 1.958-1(e)(2), and is a U.S.
shareholder of the CFC during a tax year of the CFC, does not
complete columns (g) through (n) of Part V of Schedules K-2 and
K-3 with respect to the CFC for such tax year.
An S corporation that knows that all of its direct and indirect
•
shareholders that are U.S. persons are (i) not subject to the PFIC
rules with respect to the corporation under section 1297(d)
because they are subject to the subpart F rules with respect to
the corporation; or (ii) tax-exempt entities that are not subject to
the PFIC rules with respect to the corporation under Regulations
section 1.1291-1(e) is not required to complete Schedules K-2
and K-3, Part VI, with respect to the corporation.
Column (g). Enter the CFC's tested income, if any, from line 6
of Schedule I-1 (Form 5471), Information for Global Intangible
Low-Taxed Income, for each CFC.
Column (h). Enter the CFC's tested loss, if any, from line 6 of
Schedule I-1 (Form 5471) for each CFC. The loss amounts
should be shown as negative numbers.
An S corporation that marks to market stock of a PFIC as
•
described in Regulations section 1.1291-1(c)(4) does not need
to report information about the PFIC in Schedules K-2 and K-3,
Part VI. The S corporation should report its MTM gain or loss on
Schedule K (Form 1120-S), and report the shareholders’ shares
of those amounts in Schedule K-1 (Form 1120-S), Part III. Note,
however, there may be instances in which the S corporation will
need to provide its shareholders with additional information to
meet their tax obligations with respect to a PFIC the stock of
which the S corporation has marked to market as described in
Regulations section 1.1291-1(c)(4), such as when the section
1291 rules apply because the stock was not marked in the first
year of the S corporation’s holding period. In such instances, the
S corporation may use Part VI to provide the needed information.
Column (i). Enter the aggregate share of the tested income
listed in column (g) for each CFC with tested income.
Column (j). Enter the aggregate share of the tested loss listed
in column (h) for each CFC with tested loss. The loss amounts
should be shown as negative numbers.
Column (k). If the CFC has a tested loss in column (h), enter
zero. If the CFC has tested income in column (g), enter the
aggregate share of QBAI. A CFC's QBAI is reported on
Schedule I-1 (Form 5471), line 8.
Column (l). If the CFC has tested income in column (g), enter
zero. If the CFC has a tested loss in column (h), enter as a
negative number the aggregate share of the CFC's tested loss
QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A
CFC's tested loss QBAI amount is reported on Schedule I-1
(Form 5471), line 9c, which must be translated to U.S. dollars.
An S corporation that has elected to be treated as an entity for
•
purposes of applying section 951A as provided in Notice
2020-69, 2020-39 I.R.B. 604, is not required to complete
Schedules K-2 and K-3, Part VI, with respect to any PFIC that
also constitutes a CFC (PFIC/CFC) with respect to which the S
corporation is a U.S. shareholder.
Column (m). Enter the aggregate share of the CFC's tested
interest income. A CFC's tested interest income is reported on
Schedule I-1 (Form 5471), line 10c.
Use Schedule K-2, Part VI, to report certain information with
respect to any PFIC owned, directly or indirectly, by the S
corporation for which reporting is required, including PFICs with
respect to which no QEF or section 1296 MTM election has
been made and unpedigreed QEFs (section 1291 funds), and
PFICs with respect to which pedigreed QEF, section 1296 MTM,
Column (n). Enter the aggregate share of the CFC's tested
interest expense. A CFC's tested interest expense is reported on
Schedule I-1 (Form 5471), line 9d.
19
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
or other elections have been, or may be, made and for which the
S corporation is not filing a Form 8621.
Note. If the S corporation acquired shares in a PFIC on multiple
dates during the tax year, append a completed Attachment 5 to
Schedule K-2, Part VI, and its corresponding Schedules K-3,
Part VI, providing those dates.
S corporations must also use Schedule K-2, Part VI, to report
information for any PFIC with respect to which the S corporation
is making a non-initial section 1296 MTM election, and for any
foreign corporation eligible to be treated as a QIC that is treated
as a PFIC by reason of section 1298(b)(1), regardless of whether
it files Form 8621 for that PFIC. See section 1296(j)(1)(A) and
Regulations section 1.1296-1(i) for more information related to
non-initial section 1296 MTM elections.
Attachment 5
Additional Information for Part VI, Section 1
General Information
(a) Name of PFIC
Annual Information
(b) EIN or
(g) Dates PFIC shares
acquired during tax year
(if applicable)
reference ID
number
Use Schedule K-3, Part VI, to report the shareholder’s share,
through its ownership in the S corporation, of the amounts
reported on Schedule K-2, Part VI.
Complete only one line in both Sections 1 and 2 for each
PFIC for which reporting in Schedules K-2 and K-3, Part VI, is
required. Each line completed for a PFIC in Section 1 should
correspond to the same line on Section 2. If there is no
information to report with respect to a PFIC in Section 2,
columns (c) through (o), only complete the name and EIN of the
PFIC in Section 2, columns (a) and (b), and leave columns (c)
through (o) blank for that PFIC. For additional information on
determining indirect ownership of PFICs, see Regulations
section 1.1291-1(b)(8).
Column (h). Enter the total number of all classes of shares of
the PFIC the S corporation owned at the end of its tax year.
Column (i). Enter the total value of all shares in the PFIC held
by the S corporation at the end of the tax year. If the PFIC shares
are not publicly traded, the S corporation may rely upon periodic
account statements provided at least annually to determine the
value of a PFIC unless the S corporation has actual knowledge
or reason to know based on readily accessible information that
the statements do not reflect a reasonable estimate of the PFIC's
value and the information provides a more reasonable estimate
of the PFIC's value.
The S corporation may have additional required information
with respect to a PFIC for certain columns (for example,
scenarios where the S corporation may have multiple different
events with respect to the PFIC in the same tax year, such as
multiple dates of acquisitions of, or distributions with respect to,
the PFIC stock). In that case, complete Schedules K-2 and K-3,
Part VI, with the first of those entries for a PFIC and attach a
statement including the remaining entries for the PFIC to
Schedule K-2, Part VI, and its corresponding Schedules K-3,
Part VI, with Attachments 5 and/or 6 completed.
Note. A shareholder may need additional information not
required to be reported in this Schedule K-2, Part VI (or the
shareholder’s Schedule K-3, Part VI), from the S corporation with
respect to the value of the PFIC shares as of a particular date to
aid the shareholder in making certain elections under
If the S corporation has additional PFICs for which to report
information that does not fit in single Schedules K-2 and K-3,
Part VI, it can attach additional Parts VI of Schedules K-2 and
K-3, as needed.
Regulations section 1.1291-10, 1.1297-3, or 1.1298-3.
Column (j). If the S corporation has made either of the following
elections with respect to the PFIC, indicate which election was
made using the following codes. If the S corporation has not
made an election with respect to the PFIC, leave this column
blank with respect to that PFIC.
Section 1—General Information
Columns (a) through (c). Enter the name, U.S. EIN or
reference ID number, and address of each PFIC held directly or
indirectly by the S corporation during its tax year. Do not enter
“FOREIGNUS” or “APPLIED FOR. ”
S Corporation Election Codes
For basic information about reference ID numbers (including
the requirements as to the characters permitted), see the
Instructions for Form 8621.
Code
QEF
S Corporation Election Type
Qualified Electing Fund Election
Section 1296 Mark-to-Market Election
Columns (d) and (e). Enter the beginning and end of the
MTM
PFIC’s tax year using the format YYYYMMDD.
Reminder. If the S corporation has made a pedigreed QEF
election or section 1296 MTM election (other than a non-initial
section 1296 MTM election) with respect to a PFIC, and the S
corporation files Form 8621 for that PFIC, it is not required to
report information regarding that PFIC in Schedule K-2 or K-3,
Part VI. If the S corporation has marked stock in a PFIC to
market as described in Regulations section 1.1291-1(c)(4), it is
not required to report information regarding that PFIC in
Schedule K-2 or K-3, Part VI.
Column (f). Enter each class of shares in the PFIC owned by
the S corporation using the following codes.
Codes for Classes of PFIC Shares
Code
COM
PRE
OTH
VAR
Class of PFIC Shares
Common or Ordinary Shares
Preferred Shares
Other Equity Interest
Multiple Classes of Shares or Equity Interests
Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations section 1.1297-4 for
additional information on QICs.
Column (g). If the S corporation acquired any PFIC shares
during the tax year, provide the date(s) of acquisition of those
shares using the format YYYYMMDD. If the S corporation
acquired no shares in a particular PFIC during its tax year, leave
this column blank with respect to that PFIC.
Column (l). Check the box if the PFIC has indicated that its
shares are “marketable stock” as defined in section 1296(e) and
Regulations section 1.1296-2.
20
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
amounts. See Regulations section 1.1295-1(g) for additional
information on annual PFIC statements. The S corporation must
complete columns (c) and (d) only for PFICs with respect to
which it has made a pedigreed QEF election but for which it
does not file Form 8621, and for any PFIC it has elected to treat
as an unpedigreed QEF.
Column (m). Check the box if the PFIC is a PFIC/CFC.
Note. If the PFIC is a PFIC/CFC, a shareholder may need
certain additional information with respect to the PFIC/CFC’s
E&P not required to be reported in this Schedule K-2, Part VI (or
the shareholder’s Schedule K-3, Part VI), from the S corporation
to aid the shareholder in making certain elections under
Regulations sections 1.1291-9, 1.1297-3, or 1.1298-3.
Reminder. If the S corporation has made a pedigreed QEF
election with respect to a PFIC, and if the S corporation files
Form 8621 for that PFIC, the S corporation is not required to
report information regarding that PFIC in Schedule K-2, Part VI,
or Schedule K-3, Part VI. The S corporation should report its
inclusion of its share of the QEF’s ordinary earnings and net
capital gain on Schedule K, and report the shareholders’ shares
of those amounts in Schedule K-1, Part III.
Reminder. An S corporation that knows that all of its direct and
indirect shareholders that are U.S. persons are not subject to the
PFIC rules with respect to a PFIC/CFC under section 1297(d)
because they are subject to the subpart F rules with respect to
the PFIC/CFC is not required to complete Schedules K-2 and
K-3, Part VI, with respect to the PFIC/CFC. Additionally, an S
corporation that has elected to be treated as an entity for
purposes of applying section 951A as provided in Notice
2020-69 is not required to complete Schedules K-2 and K-3, Part
VI, for any PFIC that is a PFIC/CFC with respect to which the S
corporation is a U.S. shareholder.
Section 1296 Mark-to-Market Information
Columns (e) and (f). Enter the fair market value (FMV) of the
PFIC stock at the beginning and end of the S corporation’s tax
year in columns (e) and (f), respectively. If any shares of the
PFIC were acquired during the tax year for which the Form
1120-S is being filed, the FMV in column (e) should reflect the
FMV of those shares as of the date of acquisition. The S
corporation must complete columns (e) and (f) only for PFICs
with respect to which it has made a section 1296 MTM election
but for which it does not file Form 8621 and for any PFIC with
respect to which it is making a non-initial section 1296 MTM
election.
Column (n). Complete column (n) in the following manner.
IF...
THEN...
this is the first year of the S corporation’s holding
check the box.
•
period in stock of the foreign corporation, and
the S corporation has determined (directly or
otherwise) that the foreign corporation is a PFIC under
the income test or asset test of section 1297(a),
•
the foreign corporation was a PFIC in a prior tax year check the box.
Reminder. If the S corporation has made an MTM election
under section 1296 with respect to a PFIC (other than a
•
of the S corporation’s holding period, and
the S corporation has not determined (directly or
•
non-initial section 1296 MTM election), and if the S corporation
files Form 8621 for that PFIC, the S corporation is not required to
report information regarding that PFIC in Schedule K-2, Part VI,
or Schedule K-3, Part VI. The S corporation should report its
section 1296(a) MTM gain or loss on Schedule K, and report the
shareholders’ shares of those amounts in Schedule K-1, Part III.
otherwise) the foreign corporation is a former PFIC
within the meaning of Regulations section 1.1291-9(j)(2)
(iv),
the foreign corporation was a PFIC in a prior tax year do not check the
•
of the S corporation’s holding period, and
the S corporation has determined (directly or
box.
•
otherwise) the foreign corporation is a former PFIC
within the meaning of Regulations section 1.1291-9(j)(2)
(iv),
If the S corporation has marked stock in a PFIC to market as
described in Regulations section 1.1291-1(c)(4), it is not
required to report information regarding that PFIC in
Schedule K-2 or K-3, Part VI, though it may use Part VI to
provide the shareholder with additional information to meet its
tax obligations with respect to the PFIC in certain instances,
such as when the section 1291 rules apply because the stock
was not marked in the first year of the S corporation's holding
period.
Note. If the foreign corporation is a former PFIC within the
meaning of Regulations section 1.1291-9(j)(2)(iv), a shareholder
may need additional information not required to be reported in
this Schedule K-2, Part VI (or the shareholder’s Schedule K-3,
Part VI), from the S corporation with respect to the PFIC to aid
the shareholder in making certain elections under Regulations
section 1.1298-3.
Note. If the S corporation has made an MTM election under
section 1296 with respect to a PFIC but does not file Form 8621
for that PFIC, a shareholder may need additional information not
required to be reported in this Schedule K-2, Part VI (or the
shareholder’s Schedule K-3, Part VI), regarding its share of the S
corporation’s adjusted tax basis in the S corporation’s MTM PFIC
stock in order to complete Form 8621.
Section 2—Additional Information on PFIC or
Qualified Electing Fund (QEF)
General Information
Columns (a) and (b). Enter the name and U.S. EIN (or
reference ID number) of each PFIC held directly or indirectly by
the S corporation during its tax year. Do not enter “FOREIGNUS”
or “APPLIED FOR.”
Section 1291 and Other Information
Note. Generally, the information in columns (g) through (o) is to
assist shareholders of section 1291 funds in satisfying any
information reporting obligations and in figuring income
inclusions with respect to section 1291 funds. However, this
information may be relevant to PFICs with respect to which a
QEF election (pedigreed or unpedigreed), section 1296 MTM
election (including a non-initial section 1296 MTM election), or
other election has been made by the S corporation, shareholder,
or other indirect PFIC shareholder. Accordingly, the S
QEF Information
Columns (c) and (d). Enter the S corporation’s share of the
total ordinary earnings and net capital gain (as defined in
Regulations section 1.1293-1(a)(2)) of the PFIC for the S
corporation’s tax year in which or with which the tax year of the
PFIC ends in columns (c) and (d), respectively. The PFIC should
provide the S corporation with a statement that provides
information to assist the S corporation in determining these
corporation must complete columns (g) through (o) with respect
to each PFIC for which reporting in Schedule K-2, Part VI, and
21
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Schedule K-3, Part VI, is required. However, note the instructions
for column (k) regarding reporting distributions from PFICs with
respect to which the S corporation has made a pedigreed QEF
election or section 1296 MTM election (other than a non-initial
section 1296 MTM election) and for which the S corporation
does not file Form 8621.
instructions for Form 8621, Part V, line 16d, for additional
information on creditable foreign taxes attributable to PFIC
distributions, including apportioning creditable foreign taxes to
the portion of a distribution that constitutes an excess distribution
and certain rules related to creditable foreign taxes on a
disposition of PFIC stock.
Reminder. If the S corporation has additional required
information with respect to a PFIC for any of columns (g) through
(j) or (l) through (m) (for example, multiple distributions with
respect to the PFIC stock), it must complete the column with the
first of those entries and attach a statement including the
remaining entries to Schedule K-2, Part VI, and its
corresponding Schedules K-3, Part VI, with the information
contained in Attachment 6.
Column (k). Enter the total amount of distributions the S
corporation received from the PFIC in the 3 preceding tax years,
or, if shorter, the total amount of distributions the S corporation
received during its holding period of the PFIC stock. However, do
not enter any amount in this column with respect to a PFIC for
which the S corporation has made a pedigreed QEF election or
section 1296 MTM election (other than a non-initial section 1296
MTM election) and for which the S corporation does not file Form
8621.
Column (g). Enter the date(s) on which the S corporation
initially acquired each block of stock in the PFIC using the format
YYYYMMDD.
Column (l). Enter the date(s) on which the S corporation
disposed of any block of stock in the PFIC during the S
corporation’s tax year, if any, using the format YYYYMMDD.
Column (h). Enter the amount of each distribution of cash
and/or the FMV of any other property distributed to the S
corporation by the PFIC during the tax year, if any.
Column (m). If the S corporation disposed of any block of stock
in the PFIC during the S corporation’s tax year, enter the amount
realized by the S corporation on each disposition.
Note. Deemed distributions by QEFs do not need to be
reported on this Schedule K-2 (or the shareholder’s
Schedule K-3). However, shareholders that have made, or intend
to make, an election under section 1294, and that are deemed to
have received a distribution from the QEF, may need this
information to complete any computations under section 1294
(including for Form 8621, if required). See section 1294(f) and
Temporary Regulations section 1.1294-1T for additional
information.
Column (n). If the S corporation disposed of any block of stock
in the PFIC during the S corporation’s tax year, enter the S
corporation’s tax basis in the shares of the PFIC on the date of
disposition.
Schedule K-3. Enter the shareholder’s share, through its
ownership in the S corporation, of the S corporation’s tax basis in
the PFIC shares.
Column (o). Enter the S corporation’s gain or loss on the
disposition of PFIC shares. This equals column (m) minus
column (n).
Column (i). Enter the date(s) of distribution of the amounts
entered in column (h) using the format YYYYMMDD.
Column (j). Enter the total creditable foreign taxes attributable
to a distribution from the PFIC. See section 1291(g) and the
Attachment 6
Additional Information for Part VI, Section 2
General Information
Section 1291 and Other Information
(a) Name of
PFIC
(b) EIN or
reference ID
number
(g) Dates
(h) Amount of
(i) Dates of
distribution
(j) Total
creditable
foreign taxes
attributable to
distribution by
PFIC
(l) Dates PFIC (m) Amount
(n) Tax basis
of PFIC
(o) Gain or
(loss) on
disposition of
PFIC shares
PFIC shares cash and FMV
shares
disposed of
during tax
year (if
realized on
disposition of
PFIC shares
were acquired
of property
distributed by
PFIC during
the current tax
year (if
shares on
date of
disposition
applicable)
applicable)
22
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
(2) with respect to the PTEP groups. The PTEP groups are not
reported in this Part VII.
Schedule K-2, Part VII (S
Corporation’s Interest in Foreign
Corporation Income (Section 960)),
and Schedule K-3, Part VII
Lines 1 through 4. The S corporation’s share of the CFC’s net
income in each of the subpart F income groups, tested income
group, and residual income group by unit is reported on lines 1
through 4.
The CFC’s net income and taxes in each of these groups are
figured on Schedule Q (Form 5471), and then included in
columns (iii) and (iv), respectively. See Schedule Q in the
Instructions for Form 5471, for the meaning of unit.
Do not include on line 1 (including lines 1a through 1j and any
subset lines (1), (2), etc., under line 1) any amounts excluded
from subpart F income under the high-tax exception in section
954(b)(4) (subpart F high-tax exception); these amounts are
reported on line 4 (including any subset lines (1), (2), etc., under
line 4).
(Shareholder’s Share of S
Corporation's Interest in Foreign
Corporation Income (Section 960))
Note. Shareholders will use the following information to figure a
deemed paid foreign tax credit on Form 1118.
Reporting currency. Report all amounts in Part VII in functional
currency.
The S corporation must complete a separate Schedule K-2,
Part VII, for each CFC with respect to which it has a direct or
indirect interest, unless the S corporation does not have a
shareholder that is eligible to make a section 962 election to
claim a deemed paid foreign tax credit with respect to such CFC.
An indirect interest means that the CFC is owned by the S
corporation through one or more partnerships.
Schedule K-3, Part VII, must be completed and provided to
shareholders who may be eligible to make a section 962 election
to claim a deemed paid foreign tax credit.
An S corporation that does not have or receive sufficient
information or notice regarding a shareholder must presume the
shareholder is eligible to claim the indirect credit and must
complete the Schedules K-2 and K-3, Part VII, accordingly.
Exception. Part VII is not required to be completed with
respect to dormant foreign corporations (as defined in section 3
In general, if a section 962 election is in effect, a U.S.
shareholder of a CFC is deemed to pay all or a portion of the
foreign income taxes paid or accrued by the CFC that are
properly attributable to subpart F income or tested income of the
CFC that the U.S. shareholder includes in its gross income. See
section 960(a) and (d).
To figure the foreign taxes deemed paid by the U.S.
shareholder, the income, deductions, and taxes of the CFC must
be assigned to separate categories of income and then included
in income groups within those separate categories. See
Regulations section 1.960-1(c)(1). The applicable separate
categories of income are general category income, passive
category income, and section 901(j) income. The income groups
include the subpart F income groups, the tested income group,
and the residual income group. Each single item of foreign base
company income as defined in Regulations section 1.954-1(c)(1)
(iii) is a separate subpart F income group. See Regulations
section 1.960-1(d)(2)(ii)(B).
Also do not include on line 3 (or lines (1), (2), etc., under
line 3) any amounts excluded under the GILTI high-tax exclusion
in Regulations section 1.951A-2(c) (7) (“GILTI high-tax
exclusion”); these amounts are reported on line 4 (and on lines
(1), (2), etc., under line 4).
The PTEP groups are not reported in Part VII. Do not report
by unit with respect to the following subpart F income groups: (i)
international boycott income; (ii) bribes, kickbacks, and other
payments; and (iii) section 901(j) income. Also do not report by
unit with respect to the recaptured subpart F income group.
Columns (i) through (iv). In Schedule K-2, Part VII, the S
corporation reports in column (ii) its share of the CFC's net
income by income groups and by units. In column (iii), the S
corporation reports the CFC’s total net income by income groups
and units as reported in column (xvi) of Schedule Q (Form
5471). In column (iv), the S corporation reports the CFC’s current
year foreign taxes for which credit is allowed by income groups
and units as reported in column (xii) of Schedule Q (Form 5471).
In column (i), consistent with the reporting requirement on Form
1118, enter the two-letter code (from the list at IRS.gov/
CountryCodes) of each foreign country and U.S. territory within
which income is sourced and/or to which taxes were paid or
accrued. Enter “US” for income sourced in the United States. Do
not enter “various” or “OC” for the country code. Do not enter a
country in column (i) of line 5. See the instructions for line D for
further information.
In Schedule K-3, Part VII, the S corporation reports each
shareholder's share of the net income in the income group by
unit and country.
Line A. On line A, enter the EIN or reference ID number of the
CFC as listed on Form 5471. Do not enter “FOREIGNUS” or
“APPLIED FOR.”
Line B. The S corporation must file separate Schedules K-2 and
K-3, Part VII, to report the net income or loss of the CFC in each
separate category. Use the applicable code from the table below.
Line 1f allows the S corporation to report foreign personal
holding company income under section 954(c)(1)(F) (income
from notional principal contracts); (G) (payments in lieu of
dividends); and (H) (personal service contracts). An S
Category of Income Codes
Code
PAS
Category of Income
corporation must report a separate line 1f for income in each of
sections 954(c)(1)(F), (G) and (H). Income within one of these
income groups may need to be further subdivided on separate
lines to the extent it is attributable to more than one country,
source of income, passive grouping, etc. See the instructions for
Schedule Q (Form 5471) in the Instructions for Form 5471.
Passive Category Income
Section 901(j) Income
General Category Income
901j
GEN
Line C. With respect to passive category income, separate
Schedules K-2 and K-3, Part VII, must be completed for each
applicable grouping under Regulations section 1.904-4(c). This
includes the groups in Regulations section 1.904-4(c)(3)
reported on the Schedule Q (Form 5471).
The tested income group consists of tested income within a
section 904 category; see Regulations section 1.960-1(d)(2)(ii)
(C). The residual income group consists of any income not in the
other income groups or in a PTEP group; see Regulations
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)
23
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
The S corporation should use the following codes to report
each of these groupings for each unit.
Example 12. Part VII. Subpart F income group reporting
by unit. In Year 1, USC, an S corporation, wholly owns foreign
corporation CFC with reference ID number 1234. The CFC owns
a foreign disregarded entity organized in Country X. CFC has
two separate units, the foreign disregarded entity and the CFC
itself.
Passive Grouping Codes
Code
Passive Group
i
All passive income received during the tax year that is subject to a
withholding tax of 15% or greater must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(i).
ii
All passive income received during the tax year that is subject to a
withholding tax of less than 15% (but greater than zero) must be
treated as one item of income. See Regulations section 1.904-4(c)
(3)(ii).
iii
iv
All passive income received during the tax year that is subject to no
withholding tax or other foreign tax must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(iii).
All passive income received during the tax year that is subject to no
withholding tax but is subject to foreign tax other than a withholding
tax must be treated as one item of income. See Regulations
section 1.904-4(c)(3)(iv).
Example 12. Foreign Source Income
For the Year 1 tax year, the two units have the following foreign source income.
Tax
Country Code
Net Income
Country X Foreign Disregarded Entity (FDE) Passive Interest
Income
20% withholding tax
XX
100u
CFC Passive Rental Income
10% withholding tax
No tax
YY
ZZ
50u
CFC General Category Tested Income
300u
Example 12. USC’s 1st Schedule K-2, Part VII
USC completes Schedule K-2, Part VII, as follows.
A
B
C
Enter EIN or reference ID number of controlled foreign corporation
Separate category (enter code)
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PAS
i
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If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c)
(i) Country code
(ii) S corporation’s share of
foreign corporation’s net
income
(iii) Foreign corporation’s
total net income
(functional currency)
(iv) Foreign corporation’s
current year foreign taxes for
which credit allowed (U.S.
dollars)
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).
(functional currency)
1
Subpart F income groups
a
Dividends, interest, rents, royalties, and
annuities (total)
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(1) Unit: Country X FDE
XX
100u
100u
$20
24
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Example 12. USC’s 2nd Schedule K-2, Part VII
USC completes another Schedule K-2, Part VII, as follows.
A
B
C
Enter EIN or reference ID number of controlled foreign corporation
Separate category (enter code)
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PAS
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If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c)
(i) Country code
(ii) S corporation’s share of (iii) Foreign corporation’s
(iv) Foreign corporation’s
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).
foreign corporation’s net
income
total net income
current year foreign taxes
for which credit allowed
(U.S. dollars)
(functional currency)
(functional currency)
1
Subpart F income groups
Dividends, interest, rents, royalties, and
a
annuities (total)
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(1) Unit:
CFC
YY
50u
50u
$5
Example 12. USC’s 3rd Schedule K-2, Part VII
USC completes a third Schedule K-2, Part VII, as follows.
A
B
Enter EIN or reference ID number of controlled foreign corporation
Separate category (enter code) .
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1234
GEN
(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)
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(i) Country code
(ii) S corporation’s share of
foreign corporation’s net
income
(iii) Foreign corporation’s
total net income
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).
(functional currency)
(functional currency)
3
Tested income group (total)
(1) Unit: CFC
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ZZ
300u
300u
$0
USC also completes Schedule K-3, Part VII, with each
CFC with reference ID number 1234. USC has two U.S. citizen
shareholders. CFC has only one unit, the CFC itself, and no
other separate units. CFC has general category foreign source
foreign base company sales income (FBCSI) sourced in Country
A of 100u and general category foreign source FBCSI sourced in
Country B of 50u and general category foreign source FBCSI
sourced in Country C of 30u. The country code for Country A is
“AA,” the country code for Country B is “BB,” and the country
code for Country C is “CC.”
shareholder’s share of the S corporation’s net income in each
income group.
Line D. If net income in an income group is sourced from more
than one country, check the box on line D, and attach a
statement to Schedules K-2 and K-3 to indicate that you have
expanded Part VII to report these additional countries on both
Form 1120-S and Schedule K-3 (for shareholder’s share).
Example 13. Part VII. More than two source countries. In
Year 1, USC, an S corporation, wholly owns foreign corporation
Example 13 Table
USC completes Schedule K-2, Part VII, as follows.
A
B
D
Enter EIN or reference ID number of controlled foreign corporation
Separate category (enter code) .
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GEN
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Check the box and attach a statement if there is more than one source country for a line
(i) Country code
(ii) S corporation’s share of foreign
corporation’s net income
(functional currency)
Enter amounts in functional currency of the foreign corporation (unless
otherwise noted).
1
Subpart F income groups
Foreign base company sales income (total)
(1) Unit: CFC
g
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180u
100u
50u
AA
BB
(2) Unit: CFC
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Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Example 13. Attachment (Expansion)
USC attaches to Schedule K-2 the following schedule to expand 1g to include another line under 1g.
A
B
D
Enter EIN or reference ID number of controlled foreign corporation
Separate category (enter code) .
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1234
GEN
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Check the box and attach a statement if there is more than one source country for a line
(i) Country code
(ii) S corporation’s share of foreign
Enter amounts in functional currency of the foreign corporation (unless otherwise noted).
corporation’s net income
(functional currency)
1
Subpart F income groups
g Foreign base company sales income (total)
(3) Unit: CFC
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180u
30u
CC
USC also completes Schedule K-3, Part VII, with each
Line F. If the foreign corporation has foreign oil and gas
extraction income (FOGEI) or foreign oil-related income (FORI),
the S corporation should check the box and complete a separate
Part VII indicating the amount of FOGEI and FORI in each
grouping. The S corporation should check box 2 in Part I and
complete Schedule I (Form 1118). See the instructions for Part I,
box 2.
shareholder's share of the S corporation's net income in the
subpart F income group. USC attaches to Schedule K-3 the
same schedule it attaches to Schedule K-2, with each
shareholder's share of the subpart F income groups by country.
In Schedule K-3, Part VII, USC also includes the CFC’s total net
income and the CFC’s current year foreign taxes for which credit
is allowed in each income group.
Line G. Enter the functional currency of the foreign corporation
Line E. The S corporation should check the box and complete a
separate Part VII for U.S. source income in each separate
category.
as reported on Form 5471, line 1h.
26
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)
Index
C
R
H
R&E expenses apportionment
factors 12
How to complete Schedules K-2 and
K-3 3
S
I
Identifying information, S
S corporation’s interest in foreign
corporation 4
corporation 23
Identifying information,
Section 1291 and other
shareholder 4
information 21
Currency 3
Interest expense apportionment
D
factors 13
Deductions 12
Interest expense specifically
allocable under Regulations
Distributions from foreign
Section 951(a)(1) and Section 951A
Inclusions 17
L
E
EIN 4
Exception to filing Schedules K-2 and
K-3 2
N
F
FOGEI 26
T
Table 1. Information on personal
O
Foreign taxes deductible but not
Taxes assigned to section 951A
category 14
Foreign taxes paid or accrued to
Foreign taxes related to PTEP
U
P
FORI 26
W
Q
G
Gains on sale of certain personal
property 4
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