Form 1065 Instructions for Schedule K-3
Partner's Instructions for Schedule K-3 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.„International (For Partner's Use Only)
Rev. 2023
Related Forms
- Form 1065 Schedule K-3 - Partner's Share of Income, Deductions, Credits, etc. International
Department of the Treasury
Internal Revenue Service
2023
Partner’s Instructions for
Schedule K-3 (Form 1065)
Partner’s Share of Income, Deductions, Credits, etc.—International (For Partner’s
Use Only)
Contents
Page
Part VIII. Part VIII includes two new columns: (iii) the foreign
corporation's total net income, and (iv) the foreign corporation's
current year foreign taxes for which credit allowed. Part VIII also
requests the functional currency of the foreign corporation.
These additions will allow the preparer to include all information
necessary for the section 960 computation on Part VIII without
attaching Schedule Q (Form 5471).
Part I. Partner’s Share of Partnership’s Other
Part XIII. New lines have been added to Part XIII to provide
additional information a nonresident alien, foreign trust, or
foreign estate needs to complete Schedule P (Form 1040-NR) to
report information and calculate gain or loss on the transfer of an
interest in a partnership that directly or indirectly is engaged in
the conduct of a trade or business within the United States.
Part III. Other Information for Preparation of
Part IV. Information on Partner’s Section 250
Deduction With Respect to Foreign
General Instructions
Part V. Distributions From Foreign
The Partner’s Instructions for Schedule K-1 (Form 1065)
generally apply to Schedule K-3, including Inconsistent
Treatment of Items and Errors. These instructions provide
additional information specific to Schedule K-3 for tax years
beginning in 2023.
Part VI. Information on Partner’s Section
Part VII. Information Regarding Passive
Part VIII. Partner’s Interest in Foreign
Purpose of Schedule K-3
Schedule K-3 (Form 1065) reports items of international tax
relevance from the operation of a partnership. You must include
this information on your tax or information returns, if applicable.
See separate parts for specific instructions. You only need to use
the schedules that are applicable to you. For example, in
general, if the partner receiving Schedule K-3 is a domestic
corporation, the partnership would not have completed and filed
Part X, Foreign Partner's Character and Source of Income and
Deductions, because that part is inapplicable to domestic
corporation partners. If the partner receiving Schedule K-3 is
itself a partnership, it'll use information from Schedule K-3 to
complete Schedules K-3 to report to its partners.
Part IX. Partner’s Information for Base Erosion
Part X. Foreign Partner’s Character and
Part XIII. Foreign Partner’s Distributive Share
of Deemed Sale Items on Transfer of
Section references are to the Internal Revenue Code unless
otherwise noted.
The proper treatment of certain items by the partner is
dependent on information that the partnership may not have, and
thus the partnership may have reported certain information on
Schedule K-3 based on assumptions that are incorrect. In such
cases, the partner must treat the items according to the partner’s
actual facts, and if appropriate file a Form 8082, Notice of
Inconsistent Treatment or Administrative Adjustment Request
(AAR), to identify and explain the inconsistency.
Future Developments
For the latest information about developments related to Form
1065 and its instructions, such as legislation enacted after they
What’s New
Domestic partnerships with no or limited foreign activity. A
partnership with no foreign source income, no assets generating
foreign source income, and no foreign taxes paid or accrued may
be reporting information to partners on Schedules K-3. For
example, if you claim a credit for foreign taxes paid and/or
accrued separately from your partnership interest, you may need
certain information from the partnership to complete Form 1116
or Form 1118. Also, if you're a domestic corporation, a domestic
partnership may be required to complete Part IX when the
partnership makes certain deductible payments to foreign
parties related to you. The information reported in Part IX will
Part I, box 7, reserved. Box 7 that previously required
attachment of Form 8858 has been reserved. Instead, box 13
now requires, in certain instances, information that a partner
(whether direct or indirect) needs to complete Form 8858 with
respect to a foreign branch or foreign disregarded entity owned
by the partnership.
Part II. Amounts may now be entered in lines 41 through 43,
columns (a) through (e), with respect to interest expense.
Dec 21, 2023
Cat. No. 74716D
assist you as a domestic corporation in determining the amount
of base erosion payments made through the partnership, and in
determining if you're subject to the base erosion and anti-abuse
tax (BEAT). See also Part IV concerning foreign-derived
intangible income (FDII) for when a domestic partnership with
solely domestic activity may be reporting information to you, and
Part XI for when a domestic or foreign publicly traded partnership
(PTP) as defined in section 7704(b) with no foreign activity may
be reporting information to you.
Example 1—Part IX required to determine base erosion
payments. Foreign corporation wholly owns DC, a domestic
corporation, and FC, a foreign corporation. DC satisfies the
gross receipts test; see Regulations section 1.59A-2(d). In Year
1, DC owns a 50% interest in domestic partnership USP. An
unrelated domestic corporation owns the remaining 50% interest
in USP. DC's investment in USP doesn't qualify for the small
partner exception; see Regulations section 1.59A-7(d)(2). In
Year 1, USP pays FC $100 for services. The services aren't
eligible for the services cost method exception; see Regulations
section 1.59A-3(b)(3)(i). DC's distributive share of the $100
payment to FC is $50. For purposes of determining whether a
payment or accrual by a partnership is a base erosion payment,
any amount paid or accrued by USP is treated as paid or
accrued by each partner based on the partner's distributive
share of the item of deduction with respect to that amount; see
Regulations section 1.59A-7(d)(2). Therefore, DC is treated as
having paid $50 to FC. DC must complete Form 8991, Tax on
Base Erosion Payments of Taxpayers With Substantial Gross
Receipts, to compute its base erosion minimum tax amount (if
any); therefore, DC receives Part IX of Schedule K-3 (Form
1065) from USP.
Section 250 Deduction for Foreign-Derived Intangible Income
(FDII) and Global Intangible Low-Taxed Income (GILTI).
Part V. Used, in combination with other information known to
you, such as from Schedule P (Form 5471), Previously Taxed
Earnings and Profits of U.S. Shareholders of Certain Foreign
Corporations, to determine your share of distributions by foreign
corporations to the partnership that are attributable to previously
taxed earnings and profits (PTEP) in your annual PTEP accounts
with respect to the foreign corporations (which are excludable
from your gross income) or non-previously taxed earnings and
profits (E&P), and the amount of foreign currency gain or loss on
the PTEP that you're required to recognize under section 986(c).
Use the information to figure and report the dividends and
foreign currency gain or loss on Form 1040 and Form 1120. Also
use the information to claim and figure a foreign tax credit on
Form 1116 or 1118.
Part VI. Used to determine your income inclusions under
sections 951(a) and 951A if you're a U.S. shareholder of any of
the listed CFCs. Partners will use the information to complete
Form 8992, U.S. Shareholder Calculation of Global Intangible
Low-Taxed Income, and Forms 1040 and 1120 with respect to
subpart F income inclusions, section 951(a)(1)(B) inclusions,
and section 951A inclusions.
Part VII. Used to complete Form 8621, Return by a
Shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund, and to provide information required to
determine your inclusion with respect to the PFIC.
Part VIII. Used to determine your deemed paid taxes on
inclusions under section 951A, 951(a)(1), or 1293(f). Domestic
corporate partners and partners making a section 962 election
will use the information to figure a deemed paid foreign tax credit
on Form 1118.
Part IX. Used to figure the BEAT. Corporate partners will use
the information to complete Form 8991.
How To Use Schedule K-3
Reporting currency. All amounts are reported in U.S. dollars
Part X. Used to provide information to a foreign partner (or a
pass-through entity partner with a foreign owner) to determine its
tax liability or reporting requirements with respect to income
effectively connected with a U.S. trade or business (ECI) or with
respect to fixed, determinable, annual, or periodical (FDAP)
income. Partners will use the information to figure and report any
U.S. tax liability on Form 1040-NR, U.S. Nonresident Alien
Income Tax Return; Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation; or other applicable forms.
except where otherwise specified.
References to other 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 partners
such as Form 1041, U.S. Income Tax Return for Estates and
Trusts. Similarly, references to Form 1120, U.S. Corporation
Income Tax Return, are intended, if applicable, to apply to other
forms in the 1120 series. References to forms which have been
replaced are intended, if applicable, to include the replacement
forms.
Part XI. Certain partners that have entered into section
871(m) transactions referencing units in the partnership will use
any information reported in this part to determine their U.S.
withholding tax and reporting obligations with respect to those
transactions under section 871(m) and related rules, including
for purposes of determining the amounts to report on Form 1042,
Annual Withholding Tax Return for U.S. Source Income of
Foreign Persons; and Form 1042-S, Foreign Person's U.S.
Source Income Subject to Withholding.
Uses of the parts of Schedule K-3, in general. The following
are brief descriptions of each part of Schedule K-3. Detailed
information is provided later in the Specific Instructions.
Part I. Used to determine any international tax items not
reported elsewhere on Schedule K-3 (Form 1065).
Part II. Used to determine your distributive share of
Part XII. Reserved for future use.
partnership income and loss by source and separate category of
income for purposes of the foreign tax credit limitation. Partners
will use the information to claim and figure a foreign tax credit on
Form 1116 or 1118.
Part XIII. Use this information as follows.
If you're a nonresident alien individual, foreign trust, or foreign
•
estate, complete Schedule P (Form 1040-NR), Foreign Partner’s
Interests in Certain Partnerships Transferred During Tax Year.
Part III. Used to determine the allocation and apportionment
of research and experimental (R&E) expense, interest expense,
and FDII deduction for purposes of the foreign tax credit
limitation. Also use this part to determine your distributive share
of the partnership's creditable foreign taxes paid or accrued, and
to determine income adjustments under section 743(b) by
source and separate category. Partners will use the information
to figure and claim a foreign tax credit on Form 1116 or 1118.
Part IV. Used to determine your deduction with respect to
FDII. Partners will use the information to claim and figure a
section 250 deduction with respect to FDII on Form 8993,
If you're a foreign corporation, complete Schedule P (Form
•
1120-F), List of Foreign Partner Interests in Partnerships, Parts
IV and V.
If this is an installment sale, see Form 6252, Installment Sale
•
Income.
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Instructions for Sch. K-3 (Form 1065) (2023)
to know an entity that took into account related income from the
arrangement is a covered person with respect to one or more
partners. For example, you're a payor of a foreign tax if you take
into account the foreign taxes paid or accrued by the partnership
under section 702(a)(6). If the partnership wholly owns a reverse
hybrid (as defined in Regulations section 1.909-2(b)(1)(iv)) and
you own 10% or more (determined by vote or value) of the
interest in the partnership, the reverse hybrid is a covered person
with respect to you. You can’t credit the foreign taxes paid or
accrued by the partnership with respect to the reverse hybrid
until you or the partnership takes into account the related income
of the reverse hybrid. Until then, the taxes are suspended. The
partnership reported your share of the potentially suspended
taxes as a result of the application of section 909 on Part III,
Section 4, line 2E. If you're a corporation, complete Form 1118,
Schedule G, line E, for taxes suspended under section 909. If
you're an individual, estate, or trust, include on Form 1116, Part
III, line 12, taxes suspended under section 909. If you're required
to complete Form 5471 for a CFC, include in Schedule E (Form
5471), Schedule E-1, line 3b, column (d), taxes suspended
under section 909.
Specific Instructions
Schedule K-3 Identifying Information
Item E—Part applicability. The partnership checked the “Yes”
box to indicate the applicable parts of Schedule K-3. The
partnership checked the “No” box to indicate the inapplicable
parts of Schedule K-3.
Part I. Partner’s Share of
Partnership’s Other Current Year
International Information
This part reports your information for international tax items not
reported elsewhere on Schedule K-3.
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. If the partnership sells
nondepreciable personal property (other than inventory and
certain intangible property), you, the partner, are treated as the
seller. Therefore, you’ll need to determine the source of the gain
reported on Part II, line 1, column (f). In general, if you're a U.S.
citizen or resident alien individual, the gain is U.S. source.
However, 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 if an income tax of at least 10% is
imposed by and paid to a foreign country regarding such sale;
see section 865(g)(2). See also sections 865(e)(1) and 865(h)
for other sourcing provisions for which the information provided
in box 1 may be helpful.
If the partnership checked box 1 in Part I, use the information
attached to Schedule K-3 to determine if a foreign country
imposed a tax of at least 10% or more on the gain from each
sale. If so, and you have a tax home in a foreign country, such
gain is foreign source income and reported on Form 1116. For
more information, see the instructions for Part II, column (f), later.
If the partnership checked box 3, and the statement indicates
that the partnership took into account the related income from
the splitter arrangement, the taxes are partially or fully
unsuspended depending on the amount of related income taken
into account. Even though the taxes are unsuspended, in certain
cases you might not be eligible to claim a credit for those taxes,
for example, when the related income is taken into account as
part of a dividend for which you're eligible for a section 245A
deduction. To the extent you're eligible to claim a credit for
unsuspended taxes, these amounts may be claimed on Form
1118 or 1116, as applicable. If you're required to complete Form
5471, for a CFC, report the unsuspended taxes on Schedule E,
(Form 5471), Schedule E-1, line 3a, column (d).
In some cases, you may take into account related income
directly that allows you to partially or fully unsuspend taxes, for
example, by way of a subpart F or GILTI inclusion with respect to
related income.
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 partnership had such taxes, it checked box 2 and attached a
partially completed Schedule I (Form 1118), Reduction of
Foreign Oil and Gas Taxes, to Schedule K-3. If you're a
There might be a splitter arrangement with respect to the
partner even if the partnership didn't identify one, given
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CAUTION
that the partnership didn't have the information available
to the partner. Therefore, you must identify such arrangement
even if box 3 isn't checked.
corporation, use the partially completed Schedule I to complete
your Schedule I (Form 1118). If you're an individual, estate, or
trust, see Form 1116, Part III, line 12, and the associated
instructions for the applicable reduction for individuals.
Box 4. Foreign tax translation. If the partnership checked
box 4, it'll attach a statement described in the instructions for
Part III, Section 4.
Box 5. High-taxed income. If the partnership checked box 5,
you must determine if the passive income reported to you by the
partnership is treated as income in another separate category.
Income received or accrued by a U.S. person that would
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 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 a
partnership into account pursuant to section 702(a)(6).
otherwise be passive income isn't treated as passive income if
the income is determined to be high-taxed income; see section
904(d)(2)(B)(iii)(II). You must group your distributive shares of
passive income from a partnership according to the rules in
Regulations section 1.904-4(c)(3). However, the portion, if any,
of the distributive share of income attributable to income earned
by a domestic partnership through a foreign qualified business
unit (QBU) is separately grouped under the rules of Regulations
section 1.904-4(c)(4); see Regulations section 1.904-4(c)(5)(ii).
The partnership attached Worksheets 1 and/or 2, from the
Partnership Instructions for Schedules K-2 and K-3 (Form 1065).
If the partnership checked box 3 in Part I, it attached a
statement that separately identifies any arrangement, along with
your share of the taxes paid or accrued in connection with the
arrangement in which the partnership participates that would
qualify as a splitter arrangement under section 909. The box
should be checked only if the partnership knows or has reason
Use Schedule K-3 and your taxes on your other passive
income (that is, passive income that isn't attributable to your
distributive share of the partnership’s income as reported on
Schedule K-3) to determine if you need to assign passive
income and the associated taxes to another separate category
of income. You must allocate and apportion your expenses to
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Instructions for Sch. K-3 (Form 1065) (2023)
this passive income to determine if the income is treated as
income in another separate category. This includes both your
distributive share of partnership expenses and expense incurred
by you directly. If you're a corporation, see the Instructions for
Form 1118 for how to report your income and taxes reclassified
under the high-taxed income rule. If you're an individual, estate,
or trust, see the Instructions for Form 1116 for how to report your
income and taxes reclassified under the high-taxed income rule.
example, your share of the income or DCL attributable to the
partnership’s foreign branch or interest in a hybrid entity).
Box 12. Form 8865 information. If the partnership transferred
property to a foreign partnership that would subject one or more
of its domestic partners to reporting under section 6038B and
Regulations section 1.6038B-2(a)(2) but didn't file Schedule O
(Form 8865), containing all the information required under
Regulations section 1.6038B-2, with respect to the transfer, the
partnership must provide the necessary information for each
partner to fulfill its reporting requirements under Regulations
section 1.6038B-2. The partnership should attach the relevant
information to Schedule K-3, as applicable to the partner.
Box 6. Section 267A disallowed deductions. If the
partnership checked box 6 on Part I and attached a statement
titled "Section 267A Disallowed Deduction," prepare your tax
return by taking into account that you aren't allowed a deduction
for any of the amounts listed in the statement. Thus, for example,
don't claim as a deduction any amount reported on
Box 13. Other international items. If the partnership has
transactions, income, deductions, payments, or anything else
that implicates the international tax provisions of the Code and
such items aren't otherwise reported on this part or other parts of
Schedule K-3, the partnership reported that information on a
statement and checked box 13.
If you're a CFC partner (or in the case of a pass-through entity
partner, your partner is a CFC), the partnership attached
information to Schedule K-3 so that the U.S. shareholder may
complete the Form 5471. If you're a controlled foreign
partnership (CFP) partner (or in the case of a pass-through entity
partner, your partner is a CFP), the partnership attached
information to Schedule K-3 so that the U.S. partner in the CFP
may complete Form 8865.
Schedule K-3, Part II, Section 2, lines 41 through 43, or Part X,
Section 2, line 9, to the extent listed in the statement as an
amount for which a deduction is disallowed under section 267A.
In addition, you may be required to report the amount of your
disallowed deductions under section 267A. See, for example,
Form 1120, Schedule K, Question 21, and Form 1120-F, U.S.
Income Tax Return of a Foreign Corporation, Additional
Information, item EE.
Box 6 and the accompanying statement describe only
interest or royalty paid or accrued by the partnership for
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CAUTION
which the partnership knows, or has reason to know, that
you're disallowed a deduction under section 267A. In certain
cases, the partnership may not know, or have reason to know,
that you're disallowed a deduction for interest or royalty paid or
accrued by the partnership. See the instructions for Form 1065,
Schedule B, line 22, for additional information.
Parts II and III
Schedule K-3, Parts II and III, report information you use to figure
the foreign tax credit. In general, a U.S. individual, U.S. citizen or
U.S. resident individual beneficiary of certain domestic estates
and trusts, or domestic corporation may claim a credit for taxes
paid or accrued, and in some cases deemed paid, to foreign
countries or U.S. territories. In general, foreign corporations and
nonresident alien individuals may claim a credit for taxes paid or
accrued to foreign countries or U.S. territories with respect to
ECI. The amount of foreign tax credit in a tax year is generally
limited to the lesser of the foreign taxes paid or accrued or the
U.S. tax on foreign source income. The limitation is figured by
separate categories of foreign source income, including foreign
branch category, passive category, and general category. See
the instructions for Forms 1116 and 1118, as well as Pub. 514,
Foreign Tax Credit for Individuals, for a summary of the rules for
determining the sources and separate categories of income.
Note that the information on Parts II and III may need to be
included on the Schedule K-3 you file if you're a partnership
receiving Schedule K-3 as a partner in the partnership. For
example, another domestic partnership or a foreign partnership
will need to report the share of foreign source income and taxes
on the Schedule K-3 (Form 1065 or 8865), Parts II and III.
Similarly, if you're a CFC partner in the partnership, the U.S.
shareholder of the CFC will need to report the information
reported on your Schedule K-3, Parts II and III, on Form 5471, in
particular, Schedule E (Form 5471).
For your share of any interest or royalty paid or accrued by the
partnership, you must apply section 267A and determine
whether a deduction is disallowed, regardless of whether box 6
is checked or whether the amount is listed on the accompanying
statement.
Boxes 8 and 9. Form 5471 and other forms. If applicable, the
partnership will attach the relevant portions of Form 5471; Form
5713, International Boycott Report; and other relevant
international tax forms. If the partnership has filed Form 8990,
Limitation on Business Interest Expense Under Section 163(j),
the partnership will also provide on Schedule K-1 the information
needed to complete Form 8990, Schedule A, for foreign partners
which are required to report their distributive share of excess
business interest expense, excess taxable income, and excess
business interest income, if any, that is attributable to ECI.
Box 9 will be checked if the partnership attached Form 8858,
Form 8621, or both to its Form 1065. If you need information
from these forms, request it from the partnership.
Box 10. Partner loan transactions. If this box is checked, the
partnership identified upstream or downstream partnership loan
transactions. See Regulations sections 1.861-9(e)(8) and (9) for
purposes of determining special rules regarding interest
expense allocation and apportionment if you have such loan
transactions with the partnership.
Partnership with U.S. partners and limited or no foreign ac-
tivity. In many instances, a partnership with no foreign partners,
no foreign source income, no assets generating foreign source
income, and no foreign taxes paid or accrued may have reported
information on Schedule K-3. For example, if you claim the
foreign tax credit, you generally need certain information from
the partnership on Schedule K-3, Parts II and III, to complete
Form 1116 or 1118. 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 you need to
compute the foreign tax credit limitation, which determines the
amount of foreign tax credit available to you.
There might be a partner loan transaction even if the
partnership didn't identify one, given that the partnership
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CAUTION
didn't have the information available to the partner.
Box 11. Dual consolidated loss. If the partnership checked
box 11 and you're a domestic corporation (other than a regulated
investment company (RIC), a real estate investment trust (REIT),
or an S corporation), the dual consolidated loss (DCL) rules
pursuant to Regulations sections 1.1503(d)-1 through
1.1503(d)-8 may apply to your share of certain partnership items.
In order to comply with the DCL rules, take into account the
information provided in the attachment to this schedule (for
Exceptions. You may not have received Schedule K-3 if the
partnership was eligible for an exception. See Domestic Filing
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Instructions for Sch. K-3 (Form 1065) (2023)
Exception in the Partnership Instructions for Schedules K-2 and
K-3 (Form 1065). Also, if you (or, if you're a pass-through entity,
your direct or indirect partner) are eligible to claim a foreign tax
credit, you aren't required to receive Schedule K-3, Parts II and
III, if you or your partners aren't required to complete Form 1116.
This could be the case, for example, because you (or, if you're a
pass-through entity, your direct or indirect partners) qualify for an
exception to filing the Form 1116. See section 904(j) and Form
1116 exemption exception in the Partnership Instructions for
Schedules K-2 and K-3 (Form 1065). However, see reasons
below for requesting the Schedule K-3 when you're required to
file Form 1116.
Example 2—domestic filing exception met; issuance of
Schedule K-3 not required. A married couple, U.S. citizens,
each own a 50% interest in USP, a domestic partnership. USP
invests in a RIC. USP receives a Form 1099 from the RIC
reporting $100 of creditable foreign taxes paid or accrued on
passive category foreign source income. USP doesn't have any
foreign activity aside from that of the RIC. USP notifies the
couple on an attachment to the Schedule K-1 that they won’t
receive Schedule K-3 unless they request it. The married couple
doesn’t request Schedule K-3 from USP for tax year 2023.
Because USP qualified for the domestic filing exception, USP
didn't complete Schedule K-3 for the couple.
partnership. In general, a partner apportions interest expense to
reduce U.S. source gross income or foreign source gross income
based on the tax book value of its assets, including its
distributive share of the partnership's interest expense and
assets; see section 864(e)(2) and Regulations section
1.861-9(e). Taking into account the assets of a domestic
partnership generating solely U.S. source income would result in
more expense allocated to U.S. source gross income and less
expense allocated to reduce foreign source gross income.
Additional foreign source income increases the partner's foreign
tax credit limitation, and the ability of the partner to claim foreign
tax credits. The regulations provide exceptions to asset method
apportionment for certain less-than-10% limited partners, and
the instructions take this into account such that the partnership
isn't required to provide these partners with certain portions of
Schedule K-3. Schedule K-1 doesn't separately state the
distributive share of the partnership's total interest expense, or
the tax book value of the assets, whereas the Schedule K-3
contains this information. See Regulations section 1.861-9(e).
See the instructions for Part II, lines 39 through 40 and lines 41
through 43, and Part III, Section 2, for further guidance.
Example 3—Parts II and III required for partnership with
no foreign activity. U.S. citizens A and B own equal interests in
USP, a domestic partnership. USP 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 USP doesn't
have interest expense. None of A’s interest expense is directly
allocable. A doesn't have an overall domestic loss in tax year
2023.
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 doesn't apply to USP with
respect to A. USP provided Parts II and III of Schedule K-3 to A.
A’s share of the tax book value of USP’s assets is $50,000, which
is reported on Schedule K-3, Part III, Section 2, column (a). Not
including its distributive share of the assets of USP, the tax book
value of A’s assets is $50,000. Of A’s assets, $10,000 generate
passive category foreign source income and $40,000 generate
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 USP’s assets are
Reasons to request Schedule K-3 from domestic partner-
ships with limited or no foreign activity. 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 partnership completed the
Schedule K-3, Parts II and III, because the partnership’s gross
income, gross receipts, expenses, assets, and foreign taxes paid
may affect the foreign tax credit available to the partner. The
source of certain gross income is determined by the partner. In
addition, some expenses of the partnership are allocated and
apportioned by the partner. Because the foreign tax credit
limitation is computed by the partner, it’s not possible for the
partner to assume that all income of the partnership is U.S.
source and all expenses of the partnership reduce U.S. source
income. Also, the allocation and apportionment of certain partner
expenses take into account distributive shares of assets and
income of the partnership that aren't otherwise reported on the
Schedule K-1. For example, for sourcing purposes, personal
property sold by the partnership is treated as sold by the
partners; see section 865(i)(5). 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
partner is a pass-through entity, the partnership might not know
the ultimate residence of the first non-pass-through partner. The
distributive share of the partnership's gain on the sale of
personal property isn't separately stated on Schedule K-1, but is
reported on Schedule K-3, Part II.
As another example, the partner's R&E expense (which
includes the distributive share of the partnership's R&E expense)
is allocated and apportioned by the partner; see Regulations
section 1.861-17(f). R&E expense is allocated and apportioned
based on the gross receipts by Standard Industrial Classification
(SIC) code. The distributive share of the R&E expense by SIC
code isn't separately stated on Schedule K-1, but is reported on
Schedule K-3, Part II. The partner needs Schedule K-3, Part III,
Section 1, for the partner's share of the partnership's gross
receipts by SIC code for purposes of allocating and apportioning
R&E expense.
In some cases, the partner will be able to use the information
reported on Parts II and III to increase the foreign tax credit
limitation, and the amount of available foreign tax credit to the
partner. For example, Schedule K-3, Part III, Section 2, provides
the partner with the tax book value of the assets of the
characterized in the same category under sections 163 and 469
for purposes of 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.
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 distributive share of USP’s assets, the amount of A’s
interest expense that would reduce foreign source gross income
is $1,000 ($5,000 x $10,000/$50,000). Therefore, A’s 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% (0.25) x $7,000)
of the $2,000 of foreign taxes. See section 904.
Taking into account the distributive share of USP’s assets, the
amount of A’s interest expense that reduces passive category
foreign source gross 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% (0.25) 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 partnership assets.
B doesn't request a Schedule K-3 from USP for tax year
2023. Under the domestic filing exception, USP didn't complete
Schedule K-3 for B.
5
Instructions for Sch. K-3 (Form 1065) (2023)
Example 4—Part II, not Part III, required for partnership
with no foreign activity. The facts are the same as in
Example 3, except that A has $5,000 of expenses described in
Regulations section 1.861-8(e)(9), and A and USP have no other
expenses. Further, A’s share of USP’s gross income is $50,000.
Not including its distributive share of the income of USP, A’s
gross income is $50,000. Of A’s gross income, $5,000 is foreign
source gross income and $45,000 is U.S. source gross income.
USP doesn't have any gross income the source of which is
determined by the partner.
A’s expenses must be ratably apportioned based on A’s gross
income (including its distributive share of the income of USP);
see Regulations section 1.861-8(c)(3). Therefore, USP provided
Schedule K-3, Part II, to A. Before taking into account the
distributive share of USP’s gross income, the amount of A’s
expenses described in Regulations section 1.861-8(e)(9) that
reduce foreign source gross 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% (0.25) x $4,500) of the $2,000 of foreign
taxes. See section 904.
Taking into account the distributive share of USP’s gross
income, the amount of A’s expenses described in Regulations
section 1.861-8(e)(9) that reduce foreign source gross 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% (0.25) x $4,750) of the
$2,000 of foreign taxes—an additional foreign tax credit amount
of $62.50 after taking into account A’s distributive share of the
gross income of USP.
section 904(d)(2)(B)(iii)(II) and Regulations section 1.904-4(c)
for an exception to passive category if income is subject to a
high rate of foreign tax.
Column (f). Sourced by partner. You must determine the
source and separate category of the income reported in this
column. The income in this column will generally be with respect
to sale of personal property other than inventory, depreciable
property, and certain intangible property sourced under section
865. This column might also include foreign currency gain on a
section 988 transaction. If you're a U.S. citizen or resident, sales
and gains reported in this column will generally be U.S. source
income and not reported on Form 1116 or 1118 unless you elect
to re-source such income under an applicable income tax treaty.
There are certain exceptions, for example, a U.S. citizen or
resident with a tax home (as defined in section 911(d)(3)) in
another country is treated as a nonresident if an income tax of at
least 10% is imposed by and paid to a foreign country regarding
such sale. See the instructions for box 1 of Part I, earlier. Also,
the source of foreign currency gain or loss on section 988
transactions may be determined by reference to the residence of
the QBU on whose books the asset, liability, or item of income or
expense is properly reflected. See the Instructions for Form 1118
and Pub. 514 for additional details.
Section 1—Gross Income (Lines 1 Through 24)
Form 1118, Schedule A, requires a corporation to separately
report certain types of gross income by source and separate
category. Schedule K-3, Part II, lines 1 through 23, generally
follow the separately reported types of gross income on
Schedule A. Individuals must follow the same sourcing rules, but
Form 1116 only requires reporting of total gross income from
foreign sources by separate category. Therefore, those required
to file Form 1116 would report line 24, taking into account
section 904(b)(2) and PTEP adjustments, by country on their
Form 1116, Part I, line 1a. Because all gross income is reported
on one line on the Form 1116, there is no need to specify other
reporting lines for gross income below.
Because A and USP don't have R&E expense or interest
expense, and because USP didn't pay or accrue any foreign
taxes, USP didn't provide Schedule K-3, Part III, to A.
Note. A partner may need the distributive share of the
partnership’s gross income for purposes of allocating and
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9) and should request this
information from the partnership if it's needed and if it has not
been provided.
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 is sourced. On lines 1 through 24, report for
each gross income item, on a separate line (A, B, or C), the
foreign country or U.S. territory within which the gross income is
sourced. If a type of income is sourced from more than three
countries, a statement is attached to expand Schedule K-3, Part
II, for that type of income to report the additional countries.
Part II. Foreign Tax Credit Limitation
Column (a). U.S. source. Don't report amounts in this column
on Form 1116 or 1118 unless you elect to re-source such
income under an applicable U.S. income tax treaty. See sections
904(d)(6) and 865(h). See the instructions for Forms 1116 and
1118 for income re-sourced by treaty reported as a separate
category of income.
Note. For Part II, column (f), if the partnership entered the code
XX, it was because it couldn’t determine the country or U.S.
territory with respect to which the gross income is sourced
because the source is determined by your residence, or for
pass-through entities, the residence of the first non-pass-through
partner.
The partnership entered for column (f) the foreign country to
which the partnership paid tax of at least 10% of the gain. See
sections 865(e) and 865(g).
Each gross income item (for example, sales vs. interest
income) may have different countries listed on A, B, C, etc.,
given that the partnership might not have sales income and
interest income, for example, from the same country. Line 24
should sum each country’s total income reported on 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
by foreign country or U.S. territory with respect to RICs and
section 863(b). See the instructions for Forms 1116 and 1118 for
these exceptions that apply.
Columns (b) through (e). Foreign source. Add the amounts
reported in these columns to your other income in these
separate categories and report the total amounts on the
applicable Form 1116, Part I, or Form 1118, Schedule A.
Exception. If you're a limited partner, you hold less than 10%
of the value of the partnership, and you didn't hold your interest
in the ordinary course of the partner’s active trade or business,
then any amounts reported on Schedule K-3, Part II, Section 1,
and Part III, Section 1, columns (b), (d), and (e); Part III, Section
3, columns (c) and (d); and Part III, Section 5, columns (b), (c),
(e), and (f), should generally be reported as passive category
income. Deductions reported on Part II, Section 2, columns (b),
(d), and (e), should generally be reported as reducing passive
category income. Similarly, any foreign taxes paid or accrued on
foreign source income in Part III, Section 4, columns (b), (c), (e),
and (f), should generally be assigned to passive category
income; see Regulations section 1.904-4(n)(1)(ii). If you're a
limited partner that owns less than 10% of a capital and profits
interest in the partnership, Part III, Section 2, was not completed
by the partnership; see Regulations section 1.861-9(e)(4). See
6
Instructions for Sch. K-3 (Form 1065) (2023)
Note. Schedule K-3 reports gross income by country or U.S.
territory because such information is requested on Forms 1116
and 1118. Income and taxes are reported by country on the
Forms 1116 and 1118 so that the IRS may, for example, initially
evaluate whether taxpayers are claiming credits for compulsory
payments to foreign governments.
Line 28. Net long-term capital loss. Line 28 doesn't include
losses reported on line 29.
Lines 16 and 46. Section 986(c) gain and loss. This line
reports the partnership’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
partnership’s annual PTEP accounts. You’ll need to determine
your foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from annual PTEP accounts
that you have with respect to a foreign corporation, using
Schedule K-3, Part V.
The amount of foreign currency gain and loss that you report
on Form 1118 and other forms, for example, Form 1040 or 1120,
will include your share of the partnership’s foreign currency gain
or loss under section 986(c) and your own foreign currency gain
or loss under section 986(c). If you file Form 1118, complete the
following.
Line 1. Sales. If you file Form 1118, add the amount reported
on this line to your other sales and report the total on the Form
(f). Sourced by partner, earlier, for more information.
Line 2. Gross income from performance of services. If you
file Form 1118, add the amount reported on this line to your other
gross income from performance of services and report the total
on the Form 1118, Schedule A, column 8, by separate category.
Lines 3, 4, and 10. Rental income, royalties, and license
fees. If you file Form 1118, add the amount reported on this line
to your other rental income, royalties, and license fees and report
the total on the Form 1118, Schedule A, column 6, by separate
category.
1. Add the amount from Schedule K-3, Part II, line 16, to
your other section 986(c) gain.
2. Report the total in Form 1118, Schedule A, column 9, by
separate category.
Line 5. Guaranteed payments. If you file Form 1118, add the
amount reported on this line to your other guaranteed payments
and report the total on the Form 1118, Schedule A, column 11,
by separate category.
3. Identify the type of gain as section 986(c) gain in Form
1118, Schedule A, column 10.
4. Add the amount from Schedule K-3, Part II, line 46, to
your other section 986(c) losses.
Line 6. Interest income. If you file Form 1118, add the amount
reported on this line to your other interest income and report the
total on the Form 1118, Schedule A, column 5, by separate
category.
5. Enter the total, as applicable, by separate category, on:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
Lines 7 and 8. Ordinary dividends and qualified dividends.
Some of the amounts reported on these lines may be attributable
to PTEP in annual PTEP accounts that you have with respect to
a foreign corporation and are therefore excludable from your
gross income. If you file Form 1116, don't include the amount
attributable to PTEP in your annual accounts on Part I, line 1a. If
you file Form 1118, add the amount reported on this line, less the
amount attributable to PTEP in your annual PTEP accounts, to
your other dividends and report the total in Form 1118,
If you entered an amount in Form 1118, Schedule A, column
13(h), enter the type of loss as section 986(c) loss in Form 1118,
Schedule A, column 13(i).
Lines 17 and 47. Section 987 gain and loss. If you file Form
1118, complete the following.
1. Add the amount from Schedule K-3, Part II, line 17, to
Schedule A, column 4, by separate category.
your other section 987 gain.
See the Instructions for Form 1116 for additional information
with respect to rules regarding capital gain rate differentials (as
defined in section 904(b)(3)(D)) for qualified dividends.
2. Enter the total in Form 1118, Schedule A, column 9, by
separate category.
3. Identify the type of gain as section 987 gain in Form 1118,
Lines 11 through 15 and 27 through 30. Capital gains and
losses. 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. These rules
apply to individuals and may require adjustments to the amounts
on lines 11 through 15, which in turn affect the total amount on
line 24. See the Instructions for Form 1116 for additional
information. If you file Form 1116, report Schedule K-3, Part II,
lines 27 through 30, on Form 1116, Part I, line 5, by separate
category. If you file Form 1118, add the amounts reported on
Schedule K-3, Part II, lines 11 through 15, to other gross income
you report on the Form 1118, Schedule A, column 11, by
separate category. Add the amounts reported on Schedule K-3,
Part II, lines 27 through 30, to other amounts you report on Form
1118, Schedule A, column 13(j); Form 1118, Schedule H, Part II,
column (e); or Form 1118, Schedule H, Part III, column (e), as
applicable, by separate category.
Schedule A, column 10.
4. Add the amount from Schedule K-3, Part II, line 47, to
your other section 987 loss.
5. Enter the total, as applicable, by separate category, on:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
If you entered an amount in Form 1118, Schedule A, column
13(h), enter the type of loss as section 987 loss in Form 1118,
Schedule A, column 13(i).
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 of the
foreign currency gain or loss is determined by reference to the
residence of the taxpayer, the foreign currency gain and loss will
be reported in column (f). For example, if you're a U.S. resident,
such gain or loss is U.S. source and wouldn’t be reported on
Form 1116 or 1118. If you file Form 1118, complete the
following.
Line 12. Net long-term capital gain. Line 12 doesn't include
gains reported on lines 13, 14, and 15.
Line 14. Unrecaptured section 1250 gain. If gain is both
unrecaptured section 1250 gain and net section 1231 gain, the
gain was reported on line 14 and not on line 15, but the
partnership included an attachment indicating the amount of
unrecaptured section 1250 gain that is also net section 1231
gain.
1. Add the amount from Schedule K-3, Part II, line 18, to
your other section 988 gain.
7
Instructions for Sch. K-3 (Form 1065) (2023)
2. Enter the total in Form 1118, Schedule A, column 9, by
separate category.
Lines 31, 37, 44, and 45. Other deductions. If you file Form
1118, add the amounts reported on these lines to your other
deductions and report the total in Form 1118, Schedule A,
column 13(j); Form 1118, Schedule H, Part II, column (e); or
Form 1118, Schedule H, Part III, column (e), as applicable, by
separate category.
3. Identify the type of gain as section 988 gain in Form 1118,
Schedule A, column 10. See the instructions for column (f).
4. Add the amount from Schedule K-3, Part II, line 48, to
your other section 988 loss.
Line 32. Research & experimental (R&E) expenses. Add the
R&E expenses reported in column (f) to your other R&E
expenses. After determining the portion of such expenses that
are allocable to U.S. source income or foreign source income
because they are performed predominantly in a particular
geographic area, report the remaining R&E expense on Form
1118, Schedule H, Part I. See Regulations section 1.861-17(f).
5. Enter the total, as applicable, by separate category, on:
• Form 1118, Schedule A, column 13(h);
• Form 1118, Schedule H, Part II, column (e); or
• Form 1118, Schedule H, Part III, column (e).
If you entered an amount in Form 1118, Schedule A, column
13(h), enter the type of loss as section 988 loss in Form 1118,
Schedule A, column 13(i).
Lines 33 and 35. Allocable rental, royalty, and licensing ex-
penses (depreciation, depletion, and amortization). If you
file Form 1118, add the amounts reported on these lines to your
other allocable rental, royalty, and licensing expenses
Line 19. Section 951(a) inclusions. If you file Form 1118, add
the amount reported on this line to your other section 951(a)
inclusions and report the total in Form 1118, Schedule A, column
3(a), by separate category.
(depreciation, depletion, and amortization) and report the total in
Form 1118, Schedule A, column 13(d), by separate category.
Line 20. Other income. If you file Form 1118, add the amount
reported on this line to your other income and report the total in
Form 1118, Schedule A, column 11, by separate category.
Lines 34 and 36. Allocable rental, royalty, and licensing ex-
penses (other than depreciation, depletion, and amortiza-
tion). If you file Form 1118, add the amounts reported on these
lines to your other allocable rental, royalty, and licensing
expenses (other than depreciation, depletion, and amortization)
and report the total in Form 1118, Schedule A, column 13(e), as
applicable, by separate category.
Line 24. Total gross income. If you file Form 1116, add the
amounts from lines A, B, and C (and additional lines, if
applicable) to your other foreign source gross income from those
countries, and enter the totals on Form 1116, Part I, line 1a,
taking into account any section 904(b) adjustments for capital
gains, as described earlier, for Schedule K-3, Part II, lines 11
through 15, and lines 27 through 30; or PTEP adjustments, as
described earlier, for Schedule K-3, Part II, lines 7 and 8, and
lines 16 and 46.
If box 6 of Part I is checked, royalty expenses may
include amounts for which you aren't allowed a
!
CAUTION
deduction under section 267A. See the statement with
respect to box 6 of Part I attached to Schedule K-3.
If you file Form 1118, add the amounts from lines A, B, and C
(and additional lines, if applicable) to your other foreign source
gross income from those countries, and enter the totals in Form
1118, Schedule A, column 11, taking into account any PTEP
adjustments, as described earlier, for Schedule K-3, Part II, lines
7 and 8, and lines 16 and 46.
Line 38. Charitable contributions. Charitable contribution
deductions shouldn’t be reported on Form 1116 or 1118
because such deductions are allocable to U.S. source income.
Lines 39 and 40. Interest expense specifically allocable un-
der Regulations sections 1.861-10 and -10T. If you file Form
1118, add the amounts reported on these lines to your other
interest expense specifically allocable under Regulations
sections 1.861-10 and -10T and report the total in Form 1118,
Schedule H, Part II, lines 1b and c, column (b).
Section 2—Deductions (Lines 25 Through 54)
Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
type of deduction may be allocated and apportioned according
to a different methodology; see Regulations sections 1.861-8
through -20. For purposes of allocating and apportioning
expenses, in general, a partner adds the distributive share of the
partnership's deductions with other deductions incurred directly
by the partner or through other pass-through entities including
partnerships, S corporations, and trusts (see Regulations
section 1.904-5(a)(4)(iv) for a definition of pass-through entity);
see Regulations section 1.861-8(e)(15). Schedule K-3, Part II,
lines 25 through 53, generally follow the separately reported
types of deductions and losses on Form 1118, Schedule A.
Individuals must generally follow the same expense allocation
and apportionment rules, but Form 1116 only requires separate
reporting of certain deductions. See Form 1116, Part I, lines 2
through 5.
Lines 41 through 43. Other interest expense. If you file Form
1118, add the sum of the interest expense included on these
lines to your other interest expense and report the total in Form
1118, Schedule H, Part II, line 2, column (b). If you file Form
1116, allocate and apportion the sum of the interest expense
included on these lines and report the allocated and apportioned
amounts on the applicable separate category Form 1116, Part I,
line 4b. Interest expense incurred by certain individuals, estates,
and trusts is allocated and apportioned 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
Regulations section 1.861-10T. See Regulations section
1.861-9(e)(3) and Temporary Regulations sections 1.861-9T(d)
(1) and (3).
Exception. If you're a limited partner, and your ownership,
together with ownership by persons that bear a relationship to
the partner described in section 267(b) or section 707, of the
capital and profits interest of the partnership is less than 10%,
your distributive share of the partnership’s interest expense
reduces passive category foreign source gross income. See
Regulations sections 1.861-9(e)(4)(i) and 1.904-4(n)(1)(ii) for
further guidance. If you file Form 1118, report interest expense
from such limited partners on the passive category Form 1118,
Schedule A, column 13(j), unless the high-taxed income
exception of section 904(d)(2)(B)(iii)(II) is applicable. If you file
Line 25. Expenses allocable to sales income. If you file Form
1118, add the amount reported on this line to your other
expenses allocable to sales income and report the total in Form
1118, Schedule A, column 13(f), by separate category.
Line 26. Expenses allocable to gross income from perform-
ances of services. If you file Form 1118, add the amount
reported on this line to your other expenses allocable to gross
income from performance of services and report the total in
Form 1118, Schedule A, column 13(g), by separate category.
8
Instructions for Sch. K-3 (Form 1065) (2023)
Form 1116, report such interest expense on the passive
category Form 1116, Part I, line 4b, unless the high-taxed
income exception of section 904(d)(2)(B)(iii)(II) is applicable.
However, if your partnership interest is held in the ordinary
course of your active trade or business, your share of the
partnership's interest expense is apportioned in accordance with
your share of gross foreign source income in each separate
category and gross U.S. source income from the partnership.
Report the interest expense on the appropriate Form 1118 or
1116, as applicable.
Exception. See Regulations sections 1.861-9(e)(8) and (9)
for special rules concerning downstream and upstream
partnership loans that require a matching of related interest
income to interest expense allocations.
Instructions for Form 1118 to determine the exclusive
apportionment of the R&E expenses.
Section 2—Interest Expense Apportionment
Factors
This section includes the information that you need to allocate
and apportion your interest expense for foreign tax credit
limitation purposes. This part is relevant for all partners with
interest expense (including the share of the partnership's interest
expense) except certain limited partners with less than a 10%
partnership interest; see Regulations section 1.861-9(e)(4)(i).
Individual, estate, and trust partners will use this Section 2 to
determine the interest expense reported on Form 1116, Part I,
line 4b. See the Instructions for Form 1116. Because the interest
expense is reported on one line on the Form 1116, and the face
of Form 1116 doesn't require further detail with respect to the
allocation and apportionment of interest expense, the
If box 6 of Part I is checked, interest expense may
include amounts for which you aren't allowed a
!
CAUTION
deduction under section 267A. See the statement with
instructions below don't refer to Form 1116.
respect to box 6 of Part I attached to Schedule K-3.
Exception. See Regulations section 1.861-9T(d)(1) for an
exception to the apportionment of interest expense when an
individual’s foreign source income (including income excluded
under section 911) doesn't exceed $5,000. Such interest
expense may be allocated entirely to U.S. source income.
Corporate partners will use this Section 2 to determine the
interest expense reported on Form 1118, Schedule H, Part II.
The particular line reporting on Form 1118 is specified below.
Stewardship expenses. In the case of the partner’s
stewardship expenses incurred to oversee the partnership, the
partnership's value is determined and characterized under the
asset method in Regulations section 1.861-9 (taking into
account any adjustments under sections 734(b) and 743(b)); see
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the
instructions with respect to Part III, Section 2, generally apply to
the partner’s stewardship expenses.
Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of foreign
taxes not creditable but deductible.
Note. Foreign taxes that are creditable (even if a partner
chooses to deduct such taxes) aren't reported as expenses on
Part II. Don't claim a foreign tax credit on Form 1116 or 1118 for
amounts reported on line 45. However, you may claim a
deduction for such taxes on the applicable form, including Forms
1040 and 1120.
Line 3. Report the inside basis of the partnership assets
reported on line 3 in Form 1118, Schedule H, Part II, line 1b,
column (a).
Line 4. Report the inside basis of the partnership assets
reported on line 4 in Form 1118, Schedule H, Part II, line 1c,
column (a).
Creditable foreign taxes are reported on Part III, Section 4.
Line 49. Other allocable deductions. If you file Form 1118,
add the amounts reported on this line to your other allocable
deductions and enter the total in Form 1118, Schedule A,
column 13(j), by separate category.
Line 5. Report the inside basis of the partnership assets
reported on line 5 in Form 1118, Schedule H, Part II, line 1d,
column (a).
Line 50. Other apportioned share of deductions. If you file
Form 1118, add the amounts reported on this line to your other
apportioned share of deductions and report the total in Form
1118, Schedule H, Part II, column (e); or Form 1118,
Line 6. Report the amounts on line 6 in Form 1118, Schedule H,
Part II, lines 2 and 3, column (a), as applicable.
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 if you're a partner that is an individual, estate, or trust, or
if you're a pass-through entity partner that may have an
individual, estate, or trust as a partner.
Example 5—Parts II and III: asset method apportionment
of interest expense. A, a U.S. citizen, owns a 10% interest in
USP, domestic partnership. USP is engaged in the active
conduct of a U.S. trade or business. USP’s business generates
only domestic source income. USP separately has an
investment portfolio consisting of several less-than-10% stock
investments. USP has a bank loan. The proceeds of the bank
loan were divided equally between the business and the
investment portfolio. A’s only business assets and investment
assets are its distributive share of those owned by USP. A’s only
interest expense is that from its distributive share of the USP
loan.
Schedule H, Part III, column (e), by separate category.
Part III. Other Information for
Preparation of Form 1116 or 1118
Section 1—R&E Expenses Apportionment
Factors
This section reports the information that you need to allocate and
apportion your R&E expense for foreign tax credit limitation
purposes. R&E expenses are allocated and apportioned by the
partner; see Regulations section 1.861-17(f)(1). Individual,
estate, and trust partners will use this Section 1 to determine the
R&E expense reported on Form 1116, Part I. See the
Instructions for Form 1116. Corporate partners will use this
Section 1 to determine the R&E expense reported on Form
1118, Schedule H, Part I.
A’s share of the interest expense for USP’s business is
$2,000. It's apportioned on the basis of business assets.
Because all business income is domestic source, the business
assets are deemed domestic assets and reported in
Line 1. Add the amounts reported on line 1 by SIC code to your
other gross receipts and report on Form 1118, Schedule H, Part
I.
Schedule 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's apportioned to U.S. source gross
Line 2. Add the amounts reported on line 2 to the partner's
other 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. See the
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Instructions for Sch. K-3 (Form 1065) (2023)
income by the partner and doesn’t need to be reported on Form
1116.
Section 4—Foreign Taxes
Section 4 reports your share of the foreign taxes paid or accrued
by the partnership by separate category and source.
The interest expense for A’s share of USP’s investments is
$2,000 and is reported on Schedule K-3, Part II, line 42, column
(f). The investment interest must be apportioned on the basis of
investment assets. A’s distributive share of the adjusted basis in
USP’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. $800 (($8,000/$20,000) x $2,000) is
apportioned to domestic source income and $1,200
Line 1. Report the taxes on line 1 in the applicable portions of
Form 1116, Part II, and Form 1118, Schedule B, Part I, for the
applicable separate category of income. To complete those
parts, refer to the statement attached to Schedule K-3, referred
to earlier in the instructions with respect to box 4 of Part I with the
following information.
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
(($12,000/$20,000) x $2,000) is apportioned to foreign source
passive income. The amount apportioned to foreign source
passive income is reported on the passive category Form 1116,
line 4b.
section 986(a).
The partner takes its distributive share of the partnership’s
foreign taxes into account in the partner’s tax year with or within
which the partnership’s tax year ends regardless of whether the
partner or partnership takes foreign taxes into account on the
cash or accrual basis.
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 partnership in certain foreign corporations. In
determining its foreign tax credit limitation, a corporate partner
should disregard interest expense that is properly allocable to
stock of a 10%-owned foreign corporation that has been
characterized as a section 245A asset. See section 904(b)(4)
and Regulations section 1.904(b)-3(a)(1)(ii).
Line 2. Report the total reduction of taxes for each separate
category of income from line 2 on Form 1116, Part III, line 12;
and Form 1118, Schedule B, Part II, line 3.
Line 3. Report the redetermined foreign taxes from line 3 on
Schedule L (Form 1118), Foreign Tax Redeterminations, and
Schedule C (Form 1116), Foreign Tax Redetermination, as
applicable. In addition, the partner should file an amended
return, if required, to report the foreign tax redetermination and
change in U.S. tax liability. See the instructions for Form 1116 or
1118 and Regulations sections 1.905-3 through -5 for additional
information.
The amount of properly allocable deductions is determined by
treating the section 245A subgroup for each separate category
as a statutory grouping for purposes of allocating and
apportioning interest deductions on the basis of assets. Assets
in a section 245A subgroup only include stock of a specified
10%-owned foreign corporation that has been characterized as a
section 245A asset. The stock is characterized as a section
245A asset to the extent it generates income that would
generate a dividends received deduction under section 245A if
distributed. This doesn't include income that is included as
GILTI, subpart F income, or a section 956 inclusion or income
described in section 245(a)(5) (which gives rise to a dividends
received deduction under section 245 instead of section 245A).
Note. If you're an accrual method taxpayer, generally you may
not claim a credit for additional taxes reported on line 3 by the
partnership unless those taxes have been paid. See section
905(c)(2) and Regulations section 1.905-3(a).
Use the information in the attachment provided by the
partnership to complete Schedule L (Form 1118), and/or
Schedule C (Form 1116), as applicable.
If the partnership checked the “Contested tax” box and
reported information about a contested foreign income tax on
line 3, the partnership has remitted a contested foreign income
tax liability to a foreign country, and you as the partner may elect
to claim a provisional foreign tax credit for your distributive share
of such contested foreign income tax liability; see Regulations
section 1.905-1(f)(2). To make the election to claim the
provisional foreign tax credit, file Form 7204, Consent To Extend
the Time To Assess Tax Related To Contested Foreign Income
Taxes—Provisional Foreign Tax Credit Agreement. See the
instructions for Form 1116 or 1118, and the Instructions for Form
7204, for additional information.
In the case of a specified 10%-owned foreign corporation that
isn't a CFC, if you're eligible for the section 245A deduction for
distributions received from that corporation, all of the value of its
stock is generally in a section 245A subgroup because the stock
generally generates dividends eligible for the section 245A
deduction (and can't generate an inclusion under section 951(a)
(1) or 951A(a)). See Regulations section 1.904(b)-3(c)(2).
The amount reported on line 7 is the value of stock of the
partnership-owned specified 10%-owned foreign corporation
that isn't a CFC. Use the information provided in the attachment
to line 7 to determine if such amount should be reported on Form
1118, Schedule H, Part II, lines 3a through 3f, as (a) section
245A dividend, or (b) Other.
If the specified 10%-owned foreign corporation is a CFC, you
must subdivide a portion of the value of stock in each separate
category and in the residual grouping for U.S. source income
between a section 245A and non-section 245A subgroup under
the rules described in Regulations section 1.861-13(a)(5).
The amount reported on line 8 is the value of the stock in
partnership-owned CFCs. Use the information provided in the
attachment to line 8 to determine if such amount should be
reported on Form 1118, Schedule H, Part II, lines 3a through 3f,
as (a) section 245A dividend, or (b) Other.
Section 5—Other Tax Information
Section 5 reports the section 743(b) income adjustments
allocated to you by source, separate category, and class of gross
income. The section 743(b) income adjustments should be
included as relevant in other parts of the Schedule K-3. For
example, the section 743(b) income adjustments should be
reflected as part of the total depreciation reported on Part II,
Section 2. Therefore, you don't need to adjust other reported
amounts for the section 743(b) income adjustments.
No credit is allowed for taxes paid or accrued to a country
described in section 901(j). However, a deduction is generally
allowed with respect to a tax described in section 901(j).
Section 3—Foreign-Derived Intangible Income
(FDII) Deduction Apportionment Factors
Section 3 reports the information necessary for you to assign the
FDII deduction to a source and separate category such that it
may be reported on Form 1118, Schedule A; or Form 1116, Part
I.
10
Instructions for Sch. K-3 (Form 1065) (2023)
QBAI used to determine its DTIR on Form 8993, Part I, line 7b.
However, for certain items determined by the partner that affect
the amount of a partner’s adjusted bases included in its share of
partnership specified tangible property, the partner must use and
the partnership must provide information that separately
distinguishes between the amount of the adjusted bases in a
partnership's tangible property that the domestic corporation
would include in its adjusted bases in the partnership specified
tangible property and the amount of the adjusted bases in the
partnership's tangible property that the domestic corporation
would not include in its adjusted bases in the partnership
specified tangible property, see Regulations section
1.250(b)-2(g).
Part IV. Information on Partner’s
Section 250 Deduction With Respect
to Foreign Derived Intangible Income
(FDII)
A domestic corporate partner should use this Part to calculate
the partner's FDII on Form 8993.
Section 1—Information To Determine Deduction
Eligible Income (DEI) and Qualified Business
Asset Investment (QBAI) on Form 8993
Lines 1 through 7. A partner must include the amount reported
to it on line 1 in calculating the gross income on Form 8993,
line 1. The partner must also include any amounts that it
identifies from Schedule K-3, lines 3 through 7, that aren't
attributable to its DEI on Form 8993, Part I, lines 2a through 2f.
Use information on Schedule K-3, Part IV, Section 2, lines 2(a)
through (c), and in Section 3 to determine the expenses properly
allocable to DEI on Form 8993, Part I, line 5.
Example 6—partner’s reporting of DEI and QBAI. DC is a
domestic corporation that owns a 50% interest in a domestic
partnership, USP. USP manufactures and sells Product A and
provides services solely to U.S. persons. The services give rise
to domestic oil and gas extraction income (DOGEI) for purposes
of section 250(b)(3)(A)(i)(V). USP has $200 in gross receipts
from sales of Product A, $100 in cost of goods sold, and $50 in
properly allocated and apportioned deductions (none of which
are interest or R&E expenses). USP reports these amounts on
Schedule K-2, Part IV, Section 1, lines 2a through 2c,
Section 2—Information To Determine
Foreign-Derived Deduction Eligible Income
(FDDEI) on Form 8993
Line 9. Gross receipts. A partner must include the amounts
reported to it on Schedule K-3, Part IV, Section 2, line 9, on Form
8993, Part II, line 9b. However, the partner must only include the
portion of the amounts on Schedule K-3, Part IV, Section 2,
line 9, columns (a) through (c), that are attributable to its gross
DEI on Form 8993, Part I, line 4.
Line 10. COGS. A partner must include the amounts reported
to it on Schedule K-3, Part IV, Section 2, line 10, on Form 8993,
Part II, line 10b. However, the partner must only include the
portion of the amount on Schedule K-3, Part IV, Section 2,
line 10, that is attributable to its gross DEI on Form 8993, Part I,
line 4.
Line 11. Allocable deductions. A partner must include the
amounts reported to it on Schedule K-3, Part IV, Section 2,
line 11, on Form 8993, Part II, line 13.
respectively, and 50% of these amounts on the same section
and lines of the Schedule K-3 that USP issues to DC, because
this information is necessary for DC to compute its DEI. The net
amount increases DC’s DEI, which increases its deemed
intangible income (DII) and in turn increases its section 250
deduction for FDII. DC uses these amounts to calculate its gross
DEI on Form 8993, Part I, line 4.
USP has $100 in gross receipts from services, $50 in cost of
services, and $25 in properly allocated and apportioned
deductions (none of which are interest or R&E expenses).
Because the performance of these services results in DOGEI, it
doesn't give rise to DEI, but rather 50% of the net amount ($25)
is reported on Schedule K-3 Part IV, Section 1, line 6, so that DC
can treat this amount as an exclusion from its DEI. DC’s DEI is
determined without this amount by subtracting the amount from
DEI on Form 8993, Part I, line 2e.
USP owns two properties, Asset C which has an adjusted
basis of $1,000, and Asset D which has an adjusted basis of
$1,200. Asset C is used in the production of Product A and Asset
D is used in providing the DOGEI services. Because sales of
Product A give rise to DEI, 50% or $500 of the partnership’s
adjusted basis in Asset C ($1,000) is reported to DC on
Schedule K-3, Part IV, Section 1, line 8. This increases DC’s
QBAI, and thereby increases DC’s deemed tangible income
return (DTIR). The increase to DTIR decreases DC’s DII which in
turn decreases its section 250 deduction for FDII. DC uses the
amount to determine its DTIR from partnerships on Form 8993,
Part I, line 7b.
Line 12. Other apportioned deductions. A partner must
include the amounts reported to it on Schedule K-3, Part IV,
Section 2, line 12, on Form 8993, Part II, line 17. However, the
partner must only include the portion of the amount on
Schedule K-3, Part IV, Section 2, line 12, that is attributable to its
gross DEI on Form 8993, Part I, line 4.
Section 3—Other Information for Preparation of
Form 8993
Interest Expense and Interest Expense
Apportionment Factors
This section reports the information that you need to allocate and
apportion your interest expenses for FDII purposes.
Lines 13A and 13B. Interest expense specifically allocable
under Regulations sections 1.861-10(e) and -10T. Include these
amounts on Form 8993, Part I, line 5, and/or Part II, line 14.
Line 13C. Other interest expense. Add the interest expense
to your other interest expense.
Exception. Certain corporate partners with a less-than-10%
interest in a partnership shall directly allocate their distributive
shares of the partnership’s interest expense to its distributive
share of partnership gross income; see Regulations section
1.861-9(e)(4). After apportionment, if necessary, include the
appropriate amount of interest expense on Form 8993, Part I,
line 5, and/or Part II, line 14.
Note. Some of the amounts reported on these lines related to
distributions by foreign corporations may be attributable to PTEP
in annual PTEP accounts that a partner has with respect to a
foreign corporation and are therefore excludable from the
partner’s gross income. See sections 959(a) and 959(d).
Line 14. Interest expense apportionment factors. Corporate
partners will use this section to determine the interest expense
reported on Form 8993, Part I, line 5, and Part II, line 14.
Line 8. Partnership QBAI. A partner must include the amount
reported to it on Schedule K-3, Part IV, line 8, in calculating the
11
Instructions for Sch. K-3 (Form 1065) (2023)
If the partnership received a distribution that is attributable to
PTEP in an annual PTEP account of the partnership, or
attributable to E&P that are excludable from the partnership’s
gross income under section 1293(c), that is treated as a dividend
for purposes of section 1411 (that is, for purposes of the net
investment income tax (NIIT)) and, therefore, may be net
investment income (NII) (such PTEP, NII PTEP), it'll attach a
statement to Schedule K-3 regarding your share of the
partnership’s NII PTEP. If you're an individual who is a U.S.
citizen or resident, or a domestic trust or estate, use the U.S.
dollar amounts of NII PTEP reported on the statement, and
follow the Instructions for Form 8960 to figure and report your
NII. Corporate partners aren't subject to the NIIT; see
R&E Expenses and R&E Expenses Apportionment
Factors
This section reports the information that you need to allocate and
apportion your R&E expense for FDII purposes. R&E expenses
are allocated and apportioned by the partner. See Regulations
section 1.861-17(f)(1).
Line 15. Gross receipts by SIC code. Add the amounts to the
partner's other gross receipts by SIC code.
Line 16. R&E expenses by SIC code. Add the amounts to the
partner's other R&E expenses by SIC code.
Regulations sections 1.1411-1 through -10 for details. Note that
your share of a distribution received by the partnership that is
attributable to PTEP in your annual PTEP accounts, or
attributable to E&P that are excludable from your gross income
under section 1293(c), may also be treated as a dividend for
purposes of section 1411 and, therefore, may be NII PTEP.
Part V. Distributions From Foreign
Corporations to Partnership
Use Part V to determine your share of distributions by foreign
corporations to the partnership (with your share being reported
in this Part V) that are attributable to PTEP in your annual PTEP
accounts with respect to the foreign corporations (which are
excludable from your gross income) or non-previously taxed
E&P, and the amount of foreign currency gain or loss on the
PTEP that you're required to recognize under section 986(c).
The amount of foreign currency gain or loss on the PTEP that
you're required to recognize under section 986(c) is equal to the
excess of the U.S. dollar amount of the PTEP over your U.S.
dollar basis in the PTEP. If the distributed PTEP was maintained
in a functional currency other than the U.S. dollar, the U.S. dollar
amount of the distributed PTEP is determined by translating the
distributed PTEP into U.S. dollars using the spot rate on the date
that the PTEP was distributed; see section 989(b)(1). Your U.S.
dollar basis in the distributed PTEP is generally equal to the U.S.
dollar amount of E&P that you previously included in gross
income; see sections 989(b)(1) and (3).
Note. Columns (e) and (f) are reported in the foreign
corporation’s functional currency.
Part VI. Information on Partner’s
Section 951(a)(1) and Section 951A
Inclusions
Use Part VI to include in gross income the appropriate amount of
subpart F income inclusion and/or section 951(a)(1)(B)
inclusion, and to complete Form 8992.
If the partnership is a domestic partnership that is treated as
owning stock of a foreign corporation for a tax year of the foreign
corporation within the meaning of section 958(a) because
Regulations section 1.958-1(d)(1) doesn't apply to such tax year
and the domestic partnership doesn't, 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 the partnership is a U.S.
shareholder of the foreign corporation, 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 partnership, of which you generally include in gross
income a distributive share. In such a case, your share of the
partnership’s subpart F income inclusions and section 951(a)(1)
(B) inclusions is reported on Schedule K-1 (Form 1065), line 11,
and aren't reported in Schedule K-3, Part VI, columns (e) and (f).
For each CFC listed in column (a) of which you're a U.S.
shareholder, include the amounts of subpart F income and
section 951(a)(1)(B) inclusion reported on Part VI in determining
the amount you report on Form 1120, Schedule C, line 16; or
Schedule 1 (Form 1040), line 8.
Note that, for corporate partners, in determining the amount
you report on Form 1120, Schedule C, line 16, the section 951(a)
(1)(B) inclusion amounts reported on Part VI may be reduced
under Regulations section 1.956-1(a)(2).
Also use Part V, in combination with other information known
to you, to claim and figure a foreign tax credit on Form 1116 or
1118, and, if eligible, to claim and figure a dividends received
deduction under section 245A on Form 1120 with respect to
distributions that are attributable to non-previously taxed E&P.
Include the U.S. dollar amount of E&P distributions from
qualified foreign corporations in determining the amount of
qualified dividends you report on Form 1040, line 3a, or the
amount of dividends reported on Form 1120. A foreign
corporation identified as a qualified foreign corporation in column
(j) that is a PFIC (as defined in section 1297) as to you for the tax
year of the foreign corporation in which the distribution was
made, or the preceding tax year, isn't a qualified foreign
corporation, regardless of whether it's indicated as such in
column (j). See section 1(h)(11)(C)(iii)(I) and Notice 2004-70,
2004-44 I.R.B. 724.
Include the U.S. dollar amount of E&P distributions from a
nonqualified foreign corporation in determining the amount of
ordinary dividends you report on Form 1040, line 3b; or Form
1120.
For each CFC listed in column (a) of which you're a U.S.
shareholder, report the tested income and tested loss for each
CFC in Schedule A (Form 8992), columns (c) and (d),
respectively, and include your share of each CFC's items
described in Schedule K-3, Part VI, columns (i) through (n), in
determining the amount to report in Schedule A (Form 8992),
columns (e) through (j), respectively.
However, don't include the U.S. dollar amount of E&P
distributions from a foreign corporation to the extent the
distributions are attributable to PTEP in annual PTEP accounts
that you have with respect to the foreign corporation, or
attributable to E&P that are excludable from your gross income
under section 1293(c), in determining the amount of dividends
that you report on Form 1040, line 3a or 3b; or Form 1120. See
Notice 2019-01, 2019-02 I.R.B. 275.
Part VII. Information Regarding
Passive Foreign Investment
Companies (PFICs)
Include the amount of foreign currency gain or loss that you're
required to recognize under section 986(c) in determining the
amount to report on Form 1120; or Schedule 1 (Form 1040),
line 8.
U.S. persons may be required to complete and file Form 8621
and/or include amounts in income with respect to PFICs owned
12
Instructions for Sch. K-3 (Form 1065) (2023)
through a partnership. This includes PFICs with respect to which
no qualified electing fund (QEF) or section 1296 MTM election
has been made and unpedigreed QEFs (section 1291 funds), as
well as PFICs with respect to which a pedigreed QEF, section
1296 MTM, or other election has been, or may be, made. For
information regarding the requirement to file Form 8621, as well
as certain filing exceptions, see Regulations section 1.1298-1
and the Form 8621 instructions.
Use the information provided in this Schedule K-3, Part VII,
(including any supplemental attachments (Table 4 or 5, from the
Partnership Instructions for Schedules K-2 and K-3, if
applicable)), as instructed below, to complete Form 8621 with
respect to each PFIC for which you have a filing obligation.
Additionally, for any PFIC that you own through your interest in
the partnership, use the information provided in this
respect to a PFIC for which the partnership doesn't file Form
8621, if the partnership owns stock of an unpedigreed QEF, or if
the partnership is making a section 1296 MTM election with
respect to stock in a PFIC in the current tax year if the current tax
year isn't the first year of the partnership’s holding period in the
stock (non-initial section 1296 MTM election), it's required to
complete Schedule K-3, Part VII, with that PFIC’s information,
and you may be required to file Form 8621 with respect to that
PFIC. See Regulations section 1.1298-1(b)(2) and the Form
8621 instructions for additional information.
Additionally, if the partnership marks to market stock of a
PFIC as described in Regulations section 1.1291-1(c)(4), the
partnership generally doesn't need to report information about
the PFIC on Schedules K-2 and K-3, Part VII. In such a case, the
partnership should report its MTM gain or loss on Schedule K
and report your share of those amounts on Schedule K-1, Part
III. Note, however, in such a case there may be instances in
which you will need additional information from the partnership
to meet your tax obligations with respect to a PFIC for which the
partnership has marked to market the stock as described in
Regulations section 1.1291-1(c)(4), such as when section 1291
rules apply to you because the stock was not marked by the
partnership in the first year of its holding period. In such
instances, the partnership should provide you with the needed
information and may use Schedule K-3, Part VII, to do so.
Schedule K-3, Part VII, (including any supplemental attachments
(Table 4 or 5, from the Partnership Instructions for Schedules K-2
and K-3, if applicable)) to determine your income inclusion with
respect to the PFIC (if any) and complete your U.S. federal
income tax return.
If a PFIC reported on this Schedule K-3 also constitutes a
CFC within the meaning of section 957 (PFIC/CFC) and you're a
U.S. shareholder (within the meaning of section 951(b)) with
respect to that PFIC/CFC, the information on this schedule with
respect to that PFIC/CFC may not be relevant to you. The box in
Section 1, column (m), will be checked if the PFIC also
constitutes a CFC. See section 1297(d) for additional
information.
Columns (k) through (n). Use the information provided in
these columns to make certain elections with respect to a PFIC
on Form 8621, Part II. If you don't intend to make any election
with respect to a PFIC reported on this Schedule K-3, Part VII,
you may generally ignore these boxes for that PFIC.
Section 1—General Information
Columns (a) through (e). If you're required to complete Form
8621 with respect to a PFIC reported on this schedule, use this
information to complete the Form 8621 background information.
Note. If you're making an election under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3 with respect to a PFIC/CFC, or
a PFIC that is a former PFIC within the meaning of Regulations
section 1.1291-9(j)(2)(iv), you may need additional information
from the partnership that isn't reported on this Schedule K-3,
Part VII, including information regarding the PFIC’s E&P.
Columns (f) through (i). If you're required to complete Form
8621 with respect to a PFIC reported on this schedule, enter this
information on Form 8621, Part I, lines 1 through 4.
Section 2—Additional Information on PFIC or
Qualified Electing Fund (QEF)
Note. If you're making an election under Regulations section
1.1291-10, 1.1297-3, or 1.1298-3 with respect to a PFIC
reported on this Schedule K-3, Part VII, you may need additional
information from the partnership regarding the value of the PFIC
shares reported in column (i) that isn't reported here.
Note. The partnership will complete Section 2 with respect to
each PFIC reported on Section 1, and each line completed for a
PFIC on Section 1 corresponds to the same line on Section 2. If
the PFIC has no current year activity, or has no other information
for the partnership to report in columns (c) through (o), the
partnership will only include the name and employer
identification number (EIN) of the PFIC in columns (a) and (b)
and will leave columns (c) through (o) blank with respect to that
PFIC.
Column (j). If the partnership is a domestic partnership, this
column will indicate to you (using the codes below) whether the
partnership has made an election with respect to the PFIC which
binds the partners. If the partnership is a foreign partnership, no
code will be entered in this column; however, if certain
information with respect to the PFIC is provided, you may be
able to make certain elections with respect to the PFIC on Form
8621.
QEF Information
Partnership Election Codes for Column (j)
Columns (c) and (d). This information is to assist you in
determining your income inclusions from certain PFICs with
respect to which a QEF election has been, or may be, made.
Codes
QEF
MTM
Election Type
Qualified Electing Fund Election
Section 1296 Mark-to-Market Election
For any PFIC reported on Schedule K-3, Part VII, enter the
amounts from columns (c) and (d) on Form 8621, Part III, lines
6a and 7a, respectively, and include these amounts in gross
income on your U.S. federal income tax return unless you're
making an election under section 1294 with respect to the QEF
for the current tax year. If you're making a section 1294 election
with respect to the QEF for the current tax year, use the rest of
Form 8621, Part III, lines 8 and 9, to determine the amount of
deferred tax with respect to the QEF for the current tax year.
Note. In general, if the partnership is a domestic partnership
and has made a pedigreed QEF or section 1296 MTM election
with respect to a PFIC, the partnership isn't required to complete
Schedule K-3, Part VII, with respect to that PFIC if the
partnership files Form 8621 for that PFIC. In that case, you may
not be required to file Form 8621 with respect to that PFIC and
income inclusions with respect to the PFIC, if any, will be figured
by the partnership and reported to you on Schedule K-1, Part III.
However, if the partnership is a domestic partnership that has
made a pedigreed QEF or section 1296 MTM election with
Note. If your interest in the partnership constitutes an applicable
partnership interest within the meaning of section 1061(c) or the
13
Instructions for Sch. K-3 (Form 1065) (2023)
regulations thereunder, you may need additional information not
reported on this Schedule K-3 from the QEF with respect to its
computation of its net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) to perform certain computations under
section 1061 or the regulations thereunder. The partnership may
aid you in obtaining the information from the QEF, though the
QEF isn't required to provide it. See section 1061 and
Regulations sections 1.1061-4 and 1.1061-6 for more
information.
Section 1291 and Other Information
Generally, this information is to assist you in satisfying any
information reporting obligations for, and in figuring income
inclusions with respect to, section 1291 funds. However, except
as otherwise provided, this information may be relevant to PFICs
with respect to which a pedigreed QEF election, section 1296
MTM election (including a non-initial section 1296 MTM
election), or other election has been made by you or the
partnership.
Section 1296 Mark-to-Market Information
Column (g). This information is provided to help you assess
your holding period in the PFIC stock through your ownership in
the partnership. Unless also provided in Section 1, column (g),
with respect to an acquisition of stock in the PFIC during the
partnership's tax year, these dates don't need to be entered on
Form 8621 or on your U.S. federal income tax return.
Columns (e) and (f). This information is to assist you in
determining your gain or loss from certain PFICs with respect to
which an MTM election under section 1296 has been, or may be,
made (MTM PFIC), including PFICs with respect to which the
partnership is making a non-initial section 1296 MTM election.
For any PFIC reported on Schedule K-3, Part VII, enter the
amount from Schedule K-3, Part VII, Section 2, column (f), on
Form 8621, Part IV, line 10a. You may use the information in
Schedule K-3, Part VII, Section 2, column (e), to assist you in
determining your adjusted tax basis in the MTM PFIC in which
you're a shareholder through your ownership in the partnership.
Your adjusted tax basis in the MTM PFIC stock may be equal to
the fair market value (FMV) of the stock at the beginning of the
prior tax year reported in column (e). However, your adjusted tax
basis may not be equal to the FMV of the MTM PFIC stock
depending on the amounts of prior year income inclusions and
the amounts for which you were allowed a deduction with
respect to the MTM PFIC; see sections 1296(a)(2) and 1296(d)
for additional information. Once you have determined your
adjusted tax basis in the MTM PFIC stock, enter that amount on
Form 8621, Part IV, line 10b, and use the rest of Form 8621, Part
IV, lines 10c through 12, to determine your MTM gain or loss to
include on your U.S. federal income tax return.
Note. The dates entered in this column (g) will be the dates on
which the partnership acquired the PFIC stock. If you acquired
your partnership interest after the date listed with respect to a
PFIC, you may have a different holding period with respect to the
PFIC stock.
Column (h). Your share of the amount of cash and FMV of
property distributed by the PFIC during the tax year may be
reported on different parts of Form 8621, or not reported at all on
Form 8621.
Where on Form 8621 To Report Distributions From
PFICs
IF you're a shareholder of a...
THEN...
section 1291 fund, PFIC with respect enter this amount on Form 8621, Part
to which a domestic partnership is
making a non-initial section 1296
MTM election, or a PFIC that now
may be treated as a QIC, and for
which you're required to file Form
8621
V, line 15a.
If you're required to file Form 8621 for an MTM PFIC owned
by a domestic partnership (because, for example, the
partnership doesn't file Form 8621 for that MTM PFIC), enter the
amount from Schedule K-3, Part VII, Section 2, column (f), on
Form 8621, Part IV, line 10a. You may need additional
QEF for which you aren't making a
section 1294 election for the current
tax year
you don't need to enter this on Form
8621.
information from the partnership regarding your share of its
adjusted tax basis in the MTM PFIC stock to complete the rest of
Form 8621, Part IV. Your share of the partnership’s adjusted tax
basis in the MTM PFIC stock may be equal to your share of the
FMV of the stock at the beginning of the prior tax year reported
in column (e). However, your share of the partnership’s adjusted
tax basis in the MTM PFIC stock may not be equal to the FMV of
the stock at the beginning of the prior tax year, depending on the
amounts of the partnership’s prior year income inclusions and
the amounts for which the partnership was allowed a deduction
with respect to the MTM PFIC. Once you determine your share
of the partnership’s adjusted tax basis in the MTM PFIC shares,
enter this amount on Form 8621, Part IV, line 10b, and use the
rest of Form 8621, Part IV, lines 10c through 12, to determine
your MTM gain or loss to include on your U.S. federal income tax
return.
QEF for which you're making a
section 1294 election for the current
tax year
enter this amount on Form 8621, Part
III, line 8b.
MTM PFIC (other than a PFIC with
respect to which the partnership is
making a non-initial section 1296
MTM election)
you don't need to enter this on Form
8621.
Note. Deemed distributions by QEFs aren't reported on
Schedule K-3, Part VII. If you make, or have made, an election
under section 1294 and are deemed to have received a
distribution from the QEF, this information is required to complete
Form 8621, Parts III and VI. See section 1294(f) and Regulations
section 1.1294-1T for additional information.
Additionally, if the partnership is making a non-initial section
1296 MTM election with respect to a PFIC, you should use the
information for that PFIC from Schedule K-3, Part VII, Section 2,
columns (g) through (o), and the corresponding instructions
described below to determine whether you have received an
excess distribution with respect to the PFIC stock, or whether
your distributive share of the partnership’s section 1296(a) gain
for the tax year (if any) is treated as an excess distribution. This
will help you determine any corresponding additions to tax and
interest charges under section 1291. For special rules related to
RICs that are shareholders of PFICs with respect to which a
non-initial section 1296 MTM election has been made, see
Regulations section 1.1296-1(i)(3).
Note. If you have made a section 1294 election with respect to a
QEF owned by the partnership, a distribution of earnings by the
QEF will terminate the section 1294 election to the extent the
election is attributable to the earnings distributed. In such a case,
enter the amount of the distribution on Form 8621, Part VI,
line 22. See Regulations section 1.1294-1T(e) and the Form
8621, Part VI, instructions for additional information.
Column (i). This information is to help you assess any
information related to the date of a distribution from a PFIC. You
don't need to enter these dates on Form 8621 or on your U.S.
federal income tax return.
14
Instructions for Sch. K-3 (Form 1065) (2023)
and 13b, respectively. Complete the rest of Form 8621, Part IV,
lines 13 and 14, to determine your MTM gain or loss to include
on your U.S. federal income tax return. Your basis in the MTM
PFIC shares as reported by the partnership should reflect
adjustments made by the partnership with respect to the MTM
PFIC, as well as any other partner-specific adjustments such as
section 743(b) adjustments; you may also need to make
corresponding adjustments to your basis in your partnership
interest. See section 1296(b)(2) for additional information on
adjustments to basis in MTM PFIC shares held by foreign
partnerships with respect to section 1296 income inclusions and
deductions.
For each QEF in which you're a shareholder through your
ownership in the partnership with respect to which you have
previously made a section 1294 election, and for which you're
required to file Form 8621, if amounts are reported in
Schedule K-3, Part VII, Section 2, columns (m) through (o), with
respect to the QEF, the disposition may have partially or
completely terminated your election, and you may need to
complete Form 8621, Part VI, lines 22 through 24. See
Regulations section 1.1294-1T and the Form 8621 instructions
for additional information.
Column (j). This information is to help you assess any available
foreign tax credit attributable to an excess distribution from a
section 1291 fund or PFIC with respect to which the partnership
is making a non-initial section 1296 MTM election in which you're
a shareholder through your ownership in the partnership. If
you're required to file Form 8621 with respect to one of these
types of PFICs owned by the partnership, use this amount to
determine your foreign tax credit to include on Form 8621, Part V,
line 16d. See section 1291(g) for additional information on
creditable foreign taxes.
Note. Your share of foreign taxes in column (j) includes only
foreign taxes within the meaning of section 1291(g) and doesn't
include taxes attributable to QEF inclusions under section 1293.
If you're a corporate shareholder of a QEF that meets the
ownership requirements of section 1293(f)(3), use Part VIII to
determine your deemed paid foreign tax credit under section
960, including with respect to inclusions under section 1293(f).
Column (k). This information is to help you assess your excess
distribution and resulting other income, additional tax, and
interest charge with respect to each section 1291 fund in which
you're a shareholder through your ownership in the partnership
or for a PFIC with respect to which the partnership is making a
non-initial section 1296 MTM election. If you're required to file
Form 8621 with respect to one of these types of PFICs owned by
the partnership, use this amount to determine the amount to
include on Form 8621, Part V, line 15b, and use the rest of Form
8621, Part V, lines 15 and 16, to determine the amount of any
excess distribution and resulting other income, additional tax,
and interest charge to include on your U.S. federal income tax
return with respect to the section 1291 fund.
Note. If you have made a QEF election with respect to a PFIC
which you own indirectly through the partnership, you may be
required to adjust your share of the tax basis in the PFIC shares
as reported by the partnership, and thus your gain or loss
reported in column (o), by cumulative QEF inclusions and
distributions made by the QEF; your basis in your partnership
interest may need to be similarly adjusted. See section 1293(d)
for more information on basis adjustments with respect to QEFs.
Part VIII. Partner’s Interest in Foreign
Corporation Income (Section 960)
Note. The information in column (k) is only relevant with respect
to section 1291 funds and PFICs with respect to which the
partnership is making a non-initial section 1296 MTM election
and isn't relevant for any PFIC with respect to which a pedigreed
QEF election or other section 1296 MTM election has been, or
may be, made.
Note. Amounts on this part are reported in foreign currency.
In general, for purposes of the foreign tax credit, a domestic
corporate 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 gross
income; see sections 960(a) and (d). See also section 1293(f)
with respect to QEF inclusions from a PFIC. The domestic
corporate U.S. shareholder may claim a credit for such foreign
taxes, subject to certain limitations. Individuals, estates, and
trusts may also claim a foreign tax credit for foreign income taxes
deemed paid with respect to a CFC. However, they must make
an election under section 962.
Column (l). This information is provided to help you assess the
treatment to you on any disposition by the partnership of stock in
a PFIC in combination with column (g). These dates don't need
to be entered on Form 8621.
Note. Your holding period of the PFIC stock may have begun on
a different date than the partnership's holding period.
Columns (m) through (o). This information is to assist you in
figuring any gain or loss on the partnership's disposition of PFIC
stock.
To calculate the foreign taxes deemed paid by a partner that
is a corporate U.S. shareholder of a CFC held by a partnership,
the income, deductions, and taxes of the CFC must be assigned
to separate categories of income and then to income groups in
those separate categories; see Regulations section 1.960-1(c)
(1). This is completed on Schedule Q (Form 5471), CFC Income
by CFC Income Groups. The income groups include the subpart
F income group, 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). 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)
(3) with respect to the PTEP groups. The PTEP groups aren't
reported on this Schedule K-3, Part VIII.
For each section 1291 fund in which you're a shareholder
through your ownership in the partnership or for any PFIC with
respect to which the partnership is making a non-initial section
1296 MTM election for which you're required to file Form 8621,
enter the amount from Schedule K-3, Part VII, Section 2, column
(o), on Form 8621, Part V, line 15f, and use the rest of Form
8621, Part V, line 16, to determine the amount of any resulting
other income, additional tax, and interest charge to include on
your U.S. federal income tax return with respect to the PFIC. Your
adjusted tax basis in the PFIC shares as reported by the
partnership should reflect any adjustments in the partnership’s
shares in the PFIC that are specific to you; you may also need to
make corresponding adjustments to your basis in your
partnership interest.
For each MTM PFIC (including a PFIC with respect to which a
domestic partnership is making a non-initial section 1296 MTM
election) in which you're a shareholder through your ownership in
the partnership, and with respect to which you're required to file
Form 8621, enter the amounts from Schedule K-3, Part VII,
Section 2, columns (m) and (n), on Form 8621, Part IV, lines 13a
A partner claiming a deemed paid credit with respect to an
inclusion under section 951 will use Schedule K-3, Part VIII, to
complete Form 1118, Schedule C; see section 960(a). The
15
Instructions for Sch. K-3 (Form 1065) (2023)
partner will use column (ii) (the share of net income in each
subpart F income group of the CFC) to report in Form 1118,
Schedule C, column 8(a). The partner will use column (iii) (the
total net income in the subpart F income groups of the CFC) to
report in Form 1118, Schedule C, column 6. The partner will use
column (iv) (the total current year taxes by subpart F income
groups of the CFC) to report in Form 1118, Schedule C, column
7. The partner must also complete Form 1118, Schedule C,
column 5, with information from Schedule K-3, Part VIII.
960(d). The partner will use column (ii) (the partner's share of the
foreign corporation's net income by tested income group) to
report in Form 1118, Schedule D, column 5. The partner will use
column (iii) (the foreign corporation's total net income by tested
income group) to report in Form 1118, Schedule D, column 6.
The partner will use column (iv) (the foreign corporation's current
year tested foreign taxes for which credit is allowed by tested
income groups) to report in Form 1118, Schedule D, column 8.
Example 7—use Schedule K-3 to claim deemed paid
credit. In Year 1, USP, a domestic partnership, has two
domestic corporate partners with equal interests in the
partnership. USP wholly owns CFC. CFC earns passive category
interest income of 100u sourced from Country X and pays a
withholding tax of $20 to a foreign country. The code for Country
X is X. USP reports the following to each of its partners on
Schedule K-3, Part VIII.
Note. The amount entered in Form 1118, Schedule C, column
8(a), won't equal the share of the net income in the subpart F
income group if there is a qualified deficit. See Regulations
section 1.960-2(b)(3)(ii).
Similarly, a partner claiming a deemed paid credit with
respect to an inclusion under section 951A will report
Schedule K-3, Part VIII, on Form 1118, Schedule D; see section
Example 7—USP’s Schedule K-3, Part VIII, for Partners
A
C
EIN or reference ID number of CFC
.
.
.
.
.
.
.
1234
B
Separate category
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
PAS
(i)
If PAS was entered on line B, applicable grouping under Regulations section 1.904-4(c)
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(i) Country code
(ii) Partner’s share of
(iii) Foreign
(iv) Foreign
foreign corporation’s net
income (functional
currency)
corporation’s total net
income (functional
currency)
corporation’s current
year foreign taxes for
which credit allowed
(U.S. dollars)
1
Subpart F income groups
a Dividends, interest, rents, royalties, and annuities
(total)
(1) Unit: CFC
X
50u
100u
$20
On Form 1118, Schedule C, with respect to the passive
category, each domestic corporate partner reports with respect
to the information received on Schedule K-3 as shown in
Example—Domestic Corporate Partner’s Form 1118, Schedule C
5. Subpart F Income Group
6. Total Net
Income in
7. Total Eligible
Current Year
Taxes in Subpart
F Income Group
(U.S. dollars)
8. Section 951(a)(1)
Inclusion Attributable to
Subpart F Income Group
9. Divide
Column
8(a) by
10. Tax
Deemed Paid
(multiply
column 7 by
column 9)
1a. Name of
Foreign
Corporation
Subpart F
Income Group
(functional
currency)
Column 6
(a) Reg. sec.
(b) Reg. sec.
(c) Unit
(a)
(b) U.S.
Dollars
1.960-1(d)(2)(ii) 1.904-4(c)(3)(i)–
Functional
Currency
(B)(2)
(iv)
CFC
DIRRA
i
CFC
100u
$20
50u
0.500
$10
section 1.59A-7(d)(2) for further information regarding the
application of the exception for small partners.
Part IX. Partner’s Information for Base
Erosion and Anti-Abuse Tax (Section
59A)
Section 1—Applicable Taxpayer
Lines 1 Through 4
If you're a corporate partner of a partnership, use this part from
the partnership to determine your BEAT liability, if any. The BEAT
is generally levied on certain large corporations that have
deductions and certain other similar items paid or accrued to
foreign related parties that are 3% of their total deductions or
higher (2% in the case of certain banks or registered securities
dealers), a determination referred to as the "base erosion
percentage test." Corporate partners that are applicable
taxpayers under Regulations section 1.59A-2 may be subject to
the BEAT. See Regulations section 1.59A-7 for further
The amounts shown on lines 1 through 4 reflect the partner's
distributive share of gross receipts from the partnership's
business or rental activities. The partner should use the
information from lines 2 through 4 to complete Form 8991, Part I,
line 1b.
Line 1. Gross receipts for section 59A(e). This is the
partner's distributive share of gross receipts for the tax year as
described in Regulations section 1.448-1T(f)(2)(iv).
information regarding the application of section 59A to
Line 5. Amounts included in the denominator of the base
erosion percentage pursuant to Regulations section
1.59A-2(e)(3)(i)(B). This is the partner's distributive share of
the partnership's deductions to be included in the denominator
of the partner's base erosion percentage. For a description of
deductions that aren't included in the denominator, see
Regulations section 1.59A-2(e)(3)(ii).
partnerships, and the Instructions for Form 8991 to determine
whether a corporate partner is an applicable taxpayer subject to
the BEAT. Certain small partners aren't required to include the
partner's amount of base erosion tax benefits resulting from a
base erosion payment made by a partnership. See Regulations
16
Instructions for Sch. K-3 (Form 1065) (2023)
Section 2—Base Erosion Payments and Base
Erosion Tax Benefits
Lines 6 Through 9
Line 9. Rents, royalties, and license fees. Include the
amounts from columns (b) and (c) of line 9 on Form 8991,
Schedule A, line 4.
Line 10a. Compensation/consideration paid for services
NOT excepted by section 59A(d)(5). Include the amounts
from columns (b) and (c) on Form 8991, Schedule A, line 5a.
The partner should use the information from lines 8 through 16 to
complete Form 8991, Schedule A, lines 3 through 11.
Line 8. Purchase or creations of property rights for intangi-
bles (patents, trademarks, etc.). This is the partner's
distributive share of amounts paid or accrued to a foreign person
that is a related party of the partner in connection with the
acquisition or creation of intangible property rights (patents,
copyrights, trademarks, trade secrets, etc.) that is subject to the
allowance for depreciation (or amortization in lieu of
Line 10b. Compensation/consideration paid for services
excepted by section 59A(d)(5).
Column (a). Include the amount from line 10b on Form 8991,
Schedule A, line 5b.
Line 11. Interest expense. If you're a foreign corporate partner,
the partnership has completed Worksheet A for your distributive
share of items. Use the information to help complete your Form
8991.
depreciation). Include the amounts from columns (b) and (c) on
Form 8991, Schedule A, line 3.
Worksheet A
Foreign Partner’s Distributive Share of Interest Paid by the Partnership
(a)
(b)
(c)
Total Interest Paid or Accrued in Interest Paid or Accrued to
Interest Expense Paid or Accrued
to Foreign Related Parties of the
Foreign Partner That Is Allowed
as a Deduction in the Current
Year
the Current Year
Foreign Related Parties of the
Foreign Partner in the Current
Year
(1) Foreign partner’s distributive share of interest
expense on liabilities described in Regulations
section 1.882-5(a)(1)(ii)(A) or (B)
(2) Foreign partner’s distributive share of interest
paid on U.S.-booked liabilities under Regulations
section 1.882–5(d)(2)(vii)
(3) Foreign partner’s distributive share of interest
paid on all other liabilities of the partnership
Totals. Combine lines (1) through line (3)
Column (a). This is the partner's distributive share of all
interest paid or accrued by the partnership for the tax year
(excluding interest paid or accrued in a prior year treated as paid
or accrued in the current year under section 163(j) or similar
provisions).
Column (b). This is the partner's distributive share of all
interest expense paid or accrued by the partnership for the tax
year (excluding interest paid or accrued in a prior year treated as
paid or accrued in the current year under section 163(j) or similar
provisions) that is paid or accrued to a foreign person that is a
related party of the partner.
Column (c). This is the partner's base erosion tax benefit
attributable to interest expense paid or accrued by the
partnership that is allowed as a deduction in the current tax year.
See Regulations section 1.59A-3(b)(4) for more information on
how a foreign corporation with a U.S. trade or business or
permanent establishment determines the amount of interest that
is a base erosion tax benefit.
section 59A(c)(2)(A)(iii). Include the amounts from columns
(b) and (c) of line 13 on Form 8991, Schedule A, line 8.
Line 14a. Nonqualified derivative payments. The amounts
on this line are reported on Form 8991, Schedule A, line 9.
Column (a). This is the partner's distributive share of all
amounts paid or accrued by the partnership attributable to
derivative contracts as defined in section 59A(h)(4).
Column (b). This is the partner's distributive share of
amounts paid or accrued by the partnership to a foreign person
that is a related party of the partner attributable to derivative
contracts that aren't eligible for the qualified derivative payments
exception under Regulations section 1.59A-6 (nonqualified
derivative payments).
Column (c). This is the partner's base erosion tax benefit
attributable to nonqualified derivative payments paid or accrued
by the partnership to a foreign person that is a related party of
the partner.
Line 14b. Qualified derivative payments excepted by sec-
tion 59A(h). This is the partner's distributive share of qualified
derivative payments excepted by section 59A(h). Generally, a
qualified derivative payment is any payment made by the
taxpayer pursuant to a derivative contract, provided that the
taxpayer recognizes gain or loss on the derivative contract as if it
were sold for its FMV on the last business day of the tax year;
treats the gain or loss as ordinary; and treats the character of all
other items of income, deduction, gain, or loss with respect to a
payment pursuant to the derivative as ordinary. A payment isn't a
qualified derivative payment if the payment would be treated as a
base erosion payment if it were not made pursuant to a
For domestic corporate partners, include the total amount
from line 11 on Form 8991, Schedule A, line 6, columns (a-1),
(a-2), (b-1), and (b-2).
For foreign corporate partners, the amounts in columns (b)
and (c) are used to determine the amounts to be included on
Form 8991, Schedule A, line 6, columns (a-1), (a-2), (b-1), and
(b-2).
Line 12. Payments for the purchase of tangible personal
property. Include the amounts from columns (b) and (c) of
line 12 on Form 8991, Schedule A, line 7.
Line 13. Premiums and/or other consideration paid or ac-
crued for reinsurance as covered by section 59A(d)(3) and
derivative (such as interest, royalty, or services income). With
respect to a contract with both derivative and nonderivative
17
Instructions for Sch. K-3 (Form 1065) (2023)
components, a payment isn't a qualified derivative payment if it's
properly allocable to the nonderivative component.
The amount from line 14b is included on Form 8991,
Schedule A, line 9b. The partner meets the reporting
requirements of Regulations sections 1.59A-6(b)(2) and
1.6038A-2(b)(7)(ix) by entering the amount from line 14b on
Form 8991, Schedule A, line 9b.
sourcing rules for particular items of income, see Pub. 514 and
section 865. Once you have determined the source of the
income in column (b), use the statement the partnership
attached to the Schedule K-3 to report the income. If you
determine the income is U.S. source, the statement attached to
the Schedule K-3 will advise reporting the income as either ECI,
FDAP, or other. If you determine the income is foreign source, the
statement will advise whether the income should be reported as
ECI.
Line 15. Payments reducing gross receipts made to surro-
gate foreign corporation. The amounts from columns (b) and
(c) of line 15 are included on Form 8991, Schedule A, line 10.
Columns (c) and (d). Effectively connected income (non-
resident aliens).
Line 16. Other payments—specify. The amounts from
columns (b) and (c) of line 16 are included on Form 8991,
Schedule A, line 11.
Lines 1 through 5. Report ECI on Schedule E (Form 1040),
Supplemental Income and Loss, lines 1 through 5, and attach it
to your tax return. See Income (Loss) under Part III in the
Partner's Instructions for Schedule K-1 (Form 1065) for more
information on how to complete Schedule E.
Line 17, column (c). Base erosion tax benefits related to
payments included on lines 6 through 16, on which tax is
imposed by section 871 or 881, with respect to which tax has
been withheld under section 1441 or 1442 at 30% (0.30)
statutory withholding tax rate.
Line 6. Interest income. Report amounts of ECI from line 6 on
Form 1040-NR, line 2b.
Line 7. Dividends. Report amounts of ECI from line 7 on Form
Line 18, column (c). Portion of base erosion tax benefits
included on lines 6 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been withheld
under section 1441 or 1442 at reduced withholding rate pursuant
to income tax treaty. The amount on line 18(c) is included on
Form 8991, Schedule A, line14.
For more information regarding this computation, see the
Instructions for Worksheet for Schedule A, Line 14, Columns
(a-2) and (b-2) in the Instructions for Form 8991.
1040-NR, line 3a or 3b.
Line 8. Dividend equivalent. If you're a pass-through entity
and you provide a Schedule K-3 to your partners, see the
instructions for Part X, line 8, in the Partnership Instructions for
Schedules K-2 and K-3 (Form 1065).
Line 9. Royalties and license fees. Report amounts of ECI
from line 8 on Schedule E (Form 1040), line 4.
Lines 10 through 14. Report amounts of ECI from lines 10
through 14 on Schedule D (Form 1040) or Form 4797, Sales of
Business Property, attached to your tax return. Such amounts
include, for example, gains from the disposition of a U.S. real
property interest. See Income (Loss) under Part III in the
Partner's Instructions for Schedule K-1 (Form 1065), and the
instructions for Form 1040-NR, line 7, for more information on
how to report this income.
Line 19, column (c). Total base erosion tax benefits. The
partner should use the information from Section 1, lines 1
through 5, and Section 2, line 19, column (c), to assist in the
partner's determination of whether the partner is an applicable
taxpayer and to complete the applicable lines on Form 8991 and
Schedule A.
Part X. Foreign Partner’s Character
and Source of Income and
Deductions
Line 11. Net long-term capital gain. Line 11 doesn't include
gains reported on lines 12, 13, and 14.
Line 14. Net section 1231 gain. Line 14 doesn't include net
section 1231 gain that is also unrecaptured section 1250 gain.
Such gain is reported on line 13.
Use this part if you're a foreign person that earns ECI from U.S.
and/or foreign sources and/or U.S. source FDAP income to
determine if you have a U.S. tax obligation for the applicable tax
year. You may be required to figure your U.S. income tax liability
and file U.S. income tax returns and forms (for example, Form
1120-F, Form 1040-NR, and other applicable forms).
Foreign corporations. Foreign corporations should report ECI
on Schedule P (Form 1120-F), List of Foreign Partner Interests in
Partnerships, in accordance with the instructions.
Note. Don't report foreign source income listed in column (d) as
ECI if you determine it's subpart F income as defined under
section 952(a).
Section 1—Gross Income
The partnership uses Part X to report your distributive share of
income that is subject to tax in the United States. Keep it for your
records. You must report items of income from your Part X on
your tax return and accompanying schedules. Each line in this
section of the schedule corresponds to a line on the existing
Form 1065, Schedule K, lines 1 through 11. For a more detailed
description of the types of income listed on each line, see
Income (Loss) under Part III in the Partner's Instructions for
Schedule K-1 (Form 1065).
Don't report income listed in column (d) as ECI if it's
dividends, interest, or royalties paid by a foreign
!
CAUTION
corporation in which you own or are considered to own
(within the meaning of section 958) more than 50% of the total
combined voting power of all classes of stock entitled to vote.
Column (e). U.S. source Non-ECI (FDAP).
Nonresident aliens. Generally, amounts of U.S. source
non-ECI from column (e) are entered on your Schedule NEC
(Form 1040-NR).
Foreign corporations. Generally, amounts of U.S. source
non-ECI from column (e) are reported on your Form 1120-F,
Section I.
Column (a). Total. This is your distributive share of the
partnership's gross income.
Column (b). Partner determination. If income is reported in
column (b), it means that the partnership was unable to
determine the income's source. You must determine the source
of income in column (b). The source of income is important in
determining how to report income on your tax return. Each type
of income has its own sourcing rules. For example, if you have
capital gains listed in column (b), you must determine the source
of such gain under section 865. For more information on
18
Instructions for Sch. K-3 (Form 1065) (2023)
Although the partnership determined this income isn't
effectively connected to its trade or business, the income
could be effectively connected to your U.S. trade or
Line 10. Section 59(e)(2) expenditures. R&E expenses aren't
included on this line. R&E expenses that are also section 59(e)
(2) expenditures are included on line 2.
!
CAUTION
business. See Pub. 519, U.S. Tax Guide for Aliens, or the
Instructions for Form 1120-F for more information on when U.S.
source income is ECI.
Line 12. Net long-term capital loss. Line 12 doesn't include
losses reported on line 13.
Line 16. Charitable contributions. Charitable contributions
may be deducted whether or not they are effectively connected
with a U.S. trade or business. See sections 873(b)(2) and 882(c)
(1)(B), and Regulations section 1.882-4(b) for more information.
Column (f). U.S. source Non-ECI (Other). If you're engaged
in any trade or business within the United States, report these
amounts as ECI on your tax return as directed by the Instructions
for Form 1040-NR or the Instructions for Form 1120-F. If you
aren't so engaged, you don't need to report these amounts on
your tax return. Transportation income subject to tax under
section 887 is reported on Form 1040-NR, line 23c, and Form
1120-F, Section I, line 9, as applicable.
If box 6 of Part I is checked, interest or royalty expense
may include amounts for which the partner isn't allowed
!
CAUTION
a deduction under section 267A. See the statement with
respect to box 6 of Part I attached to the Schedule K-3.
Section 2—Deductions, Losses, and Net Income
Section 3—Allocation and Apportionment
Methods for Deductions
In figuring a foreign corporation's or nonresident alien's ECI,
deductions are allowed only if they are allocated and
Section 3 provides information you may use to apportion
deductions to ECI or non-ECI. See Regulations sections 1.861-8
through 1.861-20 and Temporary Regulations sections 1.861-8T
through -9T. The ratios listed below generally correspond to the
ratios on Schedule H (Form 1120-F), Part III.
apportioned to income effectively connected with a U.S. trade or
business; see sections 861(b), 873, and 882(c). To determine
ECI, a foreign corporation and nonresident alien individual must
allocate and apportion deductions and losses to gross income in
the ECI statutory grouping and to gross income in the non-ECI
residual grouping; see Regulations section 1.861-8(f)(1)(iv). For
additional guidance for foreign corporations, see Schedule H
(Form 1120-F), Deductions Allocated to Effectively Connected
Income Under Regulations Section 1.861-8, and Schedule I
(Form 1120-F), Interest Expense Allocation Under Regulations
Section 1.882-5. For additional guidance for nonresident aliens,
see the Instructions for Form 1040-NR. Section 2 also generally
corresponds to the deductions separately reported on Form
1065, Schedule K.
Add the foreign corporation's share of partnership expenses
to the foreign corporation's expenses and enter those expenses
on Schedule H (Form 1120-F). The following instructions provide
specific instructions for reporting expenses on Form 1120-F. See
the Instructions for Form 1040-NR to determine the appropriate
placement of the nonresident alien partner's share of the
partnership's expenses.
Line 1a. Gross ECI. Add the amount reported on this line to
other amounts you report on Schedule H (Form 1120-F), Part III,
line 21a.
Line 1b. Worldwide gross income. Add the amount reported
on this line to other amounts you report on Schedule H (Form
1120-F), Part III, line 21b.
Line 2a. Average U.S. assets (inside basis). If you use the
ratio of the U.S. assets (inside basis) to the worldwide assets
method to apportion expenses to ECI, check the "Yes" box on
Schedule H (Form 1120-F), Part III, line 24, and attach a
statement.
Line 3a. Average U.S.-booked liabilities of the partnership.
These amounts may be reported by the foreign partner on
Schedule P (Form 1120-F), Part III, line 11; and Schedule I
(Form 1120-F), line 8, column (b). As indicated in the instructions
for Part X, Section 2, line 7, the interest expense on U.S.-booked
liabilities as defined in Regulations section 1.882-5(d)(2)(vii)
should generally be reported by the foreign partner on
Schedule P (Form 1120-F), line 8; and Schedule I (Form
1120-F), line 9, column (b).
Column (b). Partner determination. Include the foreign
corporation's share of partnership expenses that must be
apportioned to ECI by the foreign corporation on Schedule H
(Form 1120-F), Part II. This includes R&E expenses and interest
expense.
Line 3b. Directly allocated partnership indebtedness.
These amounts may be reported by the foreign partner on
Schedule P (Form 1120-F), Part III, line 10a. The interest
expense on indebtedness described in Regulations section
1.882-5(a)(1)(ii)(B) should generally be reported by the foreign
partner on Schedule P (Form 1120-F), Part II, line 7; and
Schedule I (Form 1120-F), line 22.
Columns (c) through (e). Partner determination—non-ECI.
Enter the foreign corporation's share of partnership deductions
definitely related and allocated to non-ECI on Schedule H (Form
1120-F), Part I.
Columns(f) and (g). Partner determination—ECI. Enter the
foreign corporation's share of partnership deductions definitely
related and allocated to ECI on Schedule H (Form 1120-F), Part
I.
Line 4a. Personnel of U.S. trade or business. Add the
amount reported on this line to other amounts you report on
Schedule H (Form 1120-F), Part III, line 23a.
Line 2. R&E expense. Add the foreign corporation's share of
partnership R&E expenses to the foreign corporation's other
R&E expenses and apportion such R&E expenses to ECI. Enter
the resultant amount on Schedule H (Form 1120-F), Part I,
line 11. See Regulations section 1.861-17(f).
Line 4b. Worldwide personnel. Add the amount reported on
this line to other amounts you report on Schedule H (Form
1120-F), Part III, line 23b.
Line 5. Gross receipts from sales or services by SIC code.
If you have R&E expense, use the appropriate information from
this line.
Line 7. Interest expense on U.S.-booked liabilities. A foreign
corporate partner generally reports its share of interest expense
on the partnership's U.S.-booked liabilities, as described in
Regulations section 1.882-5(d)(2)(vii), on Schedule P (Form
1120-F), Part II, line 8. Then, the total interest expense on
U.S.-booked liabilities from Schedule P (Form 1120-F), line 8,
(including the amount from Schedule K-3, Part X, Section 2,
line 7, column (b)) will be entered on Schedule I (Form 1120-F),
line 9, column (b).
Lines 7 and 8. Other allocation and apportionment key.
Check the "Yes" box on Schedule H (Form 1120-F), Part III,
line 24 or 25, if you used another apportionment method based
on amounts entered on lines 7 and 8. Attach a statement to Form
1120-F.
19
Instructions for Sch. K-3 (Form 1065) (2023)
30 days after the transfer by any of the following transferors: (a) a
foreign person; (b) a domestic partnership that has a foreign
person as a direct partner; or (c) a domestic partnership that has
actual knowledge that a foreign person holds, through one or
more partnerships, an interest in the domestic partnership.
Section 4—Reserved for Future Use
Part XI. Section 871(m) Covered
Partnerships
If you're a U.S. or foreign person that has entered into a section
871(m) transaction that references units in the partnership, use
this part to determine your U.S. withholding tax and reporting
obligations with respect to those transactions under section
871(m) and related sections, including for purposes of
To determine the amount of gain or loss described in section
864(c)(8), generally, a foreign transferor must first determine its
gain or loss on the transfer of a partnership interest (outside gain
and outside loss). For this purpose, outside gain or loss is
determined under all relevant provisions of the Code and the
regulations thereunder. A foreign transferor may recognize
capital gain or loss (outside capital gain or outside capital loss)
and ordinary gain or loss (outside ordinary gain or outside
ordinary loss) on the transfer of its partnership interest and must
separately apply section 864(c)(8) with respect to its capital gain
or loss and its ordinary gain or loss. Part XIII, line 1, provides the
information for the partner to determine its outside ordinary gain
or outside ordinary loss. The partner then applies Regulations
section 1.751-1(a)(2) to determine its outside capital gain or
loss.
determining the amounts to report on Forms 1042 and 1042-S.
This part will be provided if the partnership is a PTP that (a) is
a covered partnership as defined in Regulations section
1.871-15(m)(1), or (b) directly or indirectly holds an interest in a
lower-tier partnership that is a covered partnership. The
information in this part is to permit you to determine your U.S.
withholding tax and reporting obligations under section 871(m)
and related rules if you're a U.S. or foreign person that has
entered into a section 871(m) transaction that references units in
the partnership, including for purposes of determining the
amounts to report on Forms 1042 and 1042-S.
If you have entered into a potential section 871(m) transaction
with another person that references units in the partnership, you
may need this information to determine your obligations under
section 871(m) and related rules. Generally, a potential section
871(m) transaction is a securities lending or sale-repurchase
transaction, a notional principal contract, or any other specified
financial transaction that references one or more underlying
securities, and an underlying security is any interest in an entity
that could give rise to a U.S. source dividend. See Regulations
section 1.871-15 for additional information, including the
definitions of underlying securities and potential section 871(m)
transactions.
Line instructions. The foreign transferor must compare the
outside gain or loss amounts with the relevant aggregate
deemed sale effectively connected gain or loss provided on Part
XIII, lines 2 and 3. The foreign transferor only includes in income
the lower of the outside amount and the deemed sale effectively
connected amount. This determination is made separately with
respect to capital gain or loss and ordinary gain or loss. For
example, a foreign transferor would compare its outside ordinary
gain to its aggregate deemed sale effectively connected ordinary
gain, treating the former as effectively connected gain only to the
extent it doesn't exceed the latter. Similarly, the foreign transfer
would compare its outside capital gain to its aggregate deemed
sale effectively connected capital gain, treating the former as
effectively connected gain only to the extent it doesn't exceed
the latter.
Part XII. Reserved for Future Use
Amounts entered on lines 4 and 5 are subsets of the amount
entered on line 3 and don't apply to a foreign transferor that is a
corporation.
Part XIII. Foreign Partner’s
Distributive Share of Deemed Sale
Items on Transfer of Partnership
Interest
Unless there is an amount only entered on line 7, use this
information as follows.
If you're a nonresident alien individual, foreign trust, or foreign
•
estate, complete Schedule P (Form 1040-NR).
If you're a foreign corporation, complete Schedule P (Form
Use this part to determine the information you must report with
respect to effectively connected gain or loss arising from the
transfer of an interest in a partnership.
•
1120-F), Parts IV and V.
If you're a foreign partnership, complete Form 4797 and Form
•
8949, Sales and Other Dispositions of Capital Assets, as
needed.
In general. Section 864(c)(8) requires a foreign partner that
directly or indirectly transfers part or all of an interest in a
partnership engaged in the conduct of a trade or business in the
United States to include in income the effectively connected gain
or loss from the transfer. A partnership distribution is considered
a transfer when it results in recognition of gain or loss. See
Regulations section 1.731-1(a).
If this is an installment sale, see Form 6252.
•
If an amount is only entered on line 7, use it to determine gain
or loss from the transfer of the partnership interest when
completing Form 8949.
Line 8 should be blank. A partnership that has the type of
gain described on line 8 will be engaged in a U.S. trade or
business and should have reported this gain on line 5.
Information regarding the transfer of an interest in a
partnership engaged in the conduct of a trade or business in the
United States must be provided to the partnership no later than
20
Instructions for Sch. K-3 (Form 1065) (2023)