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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

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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.  
General Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 1  
Purpose of Schedules K-2 and K-3 . . . . . . . . . . . 1  
Who Must File . . . . . . . . . . . . . . . . . . . . . . . . . . 1  
When and Where To File . . . . . . . . . . . . . . . . . . . 3  
How To Complete Schedules K-2 and K-3 . . . . . . 3  
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 4  
Schedule K-2 Identifying Information . . . . . . . . . . 4  
Schedule K-3 Identifying Information . . . . . . . . . . 4  
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  
International Information . . . . . . . . . . . . . . . . . 4  
Part II. Foreign Tax Credit Limitation . . . . . . . . . . 10  
Part III. Other Information for Preparation of  
Form 1116 . . . . . . . . . . . . . . . . . . . . . . . . . . 12  
Who Must File  
Part IV. Distributions From Foreign  
Corporations to S Corporation . . . . . . . . . . . . 16  
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  
951(a)(1) and Section 951A Inclusions . . . . . . 17  
Part VI. Information Regarding Passive  
Foreign Investment Companies (PFICs) . . . . . 19  
Part VII. S Corporation's Interest in Foreign  
Corporation Income (Section 960) . . . . . . . . . 23  
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27  
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  
published, go to IRS.gov/Form1120S.  
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  
K-3 applies for 2023. See Domestic Filing Exception, later.  
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  
shareholder. See Example 3. The S corporation must complete  
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  
of the information requested by the shareholder. See Example 2.  
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.  
1167 is available at IRS.gov/Pub1167. The procedures relevant  
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  
Schedules K-2 and K-3. See Form 1116 Exemption, later.  
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  
submitted electronically to substituteforms@irs.gov; or requests  
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  
two-letter code from the list at IRS.gov/CountryCodes. Do not  
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  
were paid or accrued from the list at IRS.gov/CountryCodes. Do  
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  
were paid or accrued from the list at IRS.gov/CountryCodes. Do  
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)  
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  
a Form 1116 (Form 1116 exemption). Also see Foreign Tax  
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  
the shareholder. See Domestic Filing Exception, earlier.  
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  
category by the S corporation. See Shareholder determination,  
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  
accounts of the S corporation. See the instructions for line 19 for  
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  
are reported on lines 41 through 43. See Example 10, later.  
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  
available at OSHA.gov/data/sic-manual.  
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  
from the list at IRS.gov/CountryCodes. Do not enter “various” or  
“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 “TOTALentered 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  
of Rev. Proc. 92-70). See also Domestic Filing Exception, earlier.  
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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1234  
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  
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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1234  
PAS  
ii  
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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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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  
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  
25  
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
General filing instructions 9  
Gross income 10  
R
Capital gains and losses 11  
Category of income codes 23  
Charitable contributions 12  
Codes for categories of income 18  
Codes for classes of PFIC shares 20  
Codes for types of tax 14  
Collectibles (28%) gain 11  
Collectibles loss 12  
R&E expenses 12  
H
R&E expenses apportionment  
factors 12  
High-taxed income 5  
Rental income 11  
How to complete Schedules K-2 and  
K-3 3  
S
I
S corporation determination 9  
S corporation election codes 20  
Identifying information 4  
Computer-generated schedules K-2 3  
Contested taxes 15  
Identifying information, S  
S corporation’s interest in foreign  
corporation 4  
corporation 23  
Identifying information,  
Section 1291 and other  
Country codes 10  
shareholder 4  
information 21  
Currency 3  
Income resourced by treaty 10  
Section 1291 information 21  
Section 1296 MTM information 21  
Section 267A disallowed deduction 6  
Section 901(j) income 9  
Interest expense apportionment  
D
factors 13  
Deductions 12  
Interest expense specifically  
allocable under Regulations  
section 1.861-10 and -10T 12  
Distributions from foreign  
Section 951(a) inclusions 11  
corporations to S corporation 16  
Section 951(a)(1) and Section 951A  
Dividends, ordinary and qualified 11  
Domestic filing exception 2  
Downstream loan 7  
Interest expense, other 12  
International transactions 7  
Inclusions 17  
Section 951A category income 10  
Section 951A(a) inclusions 12  
Section 986(c) gain and loss 11  
Section 987 gain and loss 11  
Section 988 gain and loss 11  
Shareholder determination 10  
Splitter arrangements 5  
L
E
EIN 4  
Loan, downstream 7  
Loan, upstream 7  
Exception to filing Schedules K-2 and  
K-3 2  
N
Stewardship expenses 13  
Name of S corporation 4  
Net long-term capital gain 11  
Net long-term capital loss 12  
Net section 1231 gain 11  
F
FOGEI 26  
T
Foreign branch category income 9  
Foreign oil and gas taxes 4  
Foreign tax translation 5  
Foreign taxes 14  
Table 1. Information on personal  
property sold 4  
Table 2. Downstream loans 7  
Table 3. Upstream loans 7  
O
Other deductions 12  
Other forms 7  
Foreign taxes deductible but not  
Taxes assigned to section 951A  
creditable 12, 15  
category 14  
Other income 12  
Foreign taxes paid or accrued to  
Total gross income 12  
Other international transactions 7  
sanctioned countries 14  
Foreign taxes related to PTEP  
U
resourced by treaty 14  
P
Unrecaptured section 1250 gain 11  
Upstream loan 7  
FORI 26  
Part applicability 4  
Form 1116 exemption exception 8  
Form 5471 information 7  
Form 8621 information 19  
Form 8858 information 7  
Parts of Sch K-2, in general 3  
Passive grouping codes 24  
PFIC, QEF general information 20  
W
When to file 3  
Where to file 3  
Who must file 1  
Q
G
QEF information 21  
Gains on sale of certain personal  
property 4  
27