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Form 1120-S Instructions for Schedule K-3

Shareholder's Instructions for Schedule K-3 (Form 1120-S) , Shareholder's Share of Income, Deductions, Credits, etc.„International (For Shareholder's Use Only)

Rev. 2023

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Department of the Treasury  
Internal Revenue Service  
2023  
Shareholder's Instructions  
for Schedule K-3  
(Form 1120-S)  
Shareholder's Share of Income, Deductions, Credits, etc.—International  
(For Shareholder's Use Only)  
Section references are to the Internal Revenue Code unless  
otherwise noted.  
Schedule K-1 (Form 1120-S) for instructions that are equally  
applicable with respect to the Schedule K-3. The S  
corporation reported items based on the information known  
to it, and the actual treatment of the items with respect to the  
shareholder may differ if any assumptions made by the S  
corporation are incorrect (such as ownership threshold levels  
and relatedness determinations). In such cases, the  
shareholder must treat the items according to the  
shareholder'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.  
Contents  
Page  
General Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 1  
Purpose of Schedule K-3 . . . . . . . . . . . . . . . . . . 1  
How To Use Schedule K-3 . . . . . . . . . . . . . . . . . . 1  
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 2  
Part I. Shareholder's Share of Corporation’s  
Other Current Year International  
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 2  
Part II. Foreign Tax Credit Limitation . . . . . . . . . . . 5  
S corporations with no or limited foreign activity. An S  
corporation with no foreign source income, no assets  
generating foreign source income, and no foreign taxes paid  
or accrued may be reporting information to you on  
Schedule K-3. For example, if you claim a credit for foreign  
taxes paid and/or accrued separately from your S corporation  
interest, you may need certain information from the S  
corporation to complete Form 1116, Foreign Tax Credit  
(Individual, Estate, or Trust).  
Part III. Other Information for Preparation of  
Form 1116 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7  
Part IV. Distributions From Foreign  
Corporations to S Corporation . . . . . . . . . . . . . 8  
Part V. Information on Shareholder’s Section  
951(a)(1) and Section 951A Inclusions . . . . . . . 8  
Part VI. Information Regarding Passive  
Foreign Investment Companies (PFICs) . . . . . . 9  
Part VII. Shareholder's Share of S  
How To Use Schedule K-3  
Corporation's Interest in Foreign  
Corporation Income (Section 960) . . . . . . . . . 12  
Reporting currency. All amounts are reported in U.S.  
dollars except where otherwise specified.  
Future Developments  
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 other  
shareholders such as Form 1041, U.S. Income Tax Return for  
Estates and Trusts.  
For the latest information about developments related to  
Schedule K-3 (Form 1120-S) and the Shareholder's  
Instructions for Schedule K-3 (Form 1120-S), such as  
legislation enacted after they were published, go to IRS.gov/  
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 in Specific Instructions.  
Part I. Used to determine any international tax items not  
reported elsewhere on Schedule K-3 (Form 1120-S).  
Part II. Used to determine your share of S corporation  
income and loss by source and separate category of income  
for purposes of the foreign tax credit limitation. Shareholders  
will use the information to figure a foreign tax credit on Form  
1116 or Form 1118, Foreign Tax Credit—Corporations.  
Part III. Used to determine the allocation and  
General Instructions  
The Shareholder’s Instructions for Schedule K-1 (Form  
1120-S) generally apply to the Schedule K-3, including  
instructions under Inconsistent Treatment of Items and  
Errors. These instructions provide additional instructions with  
respect to Schedule K-3 for tax years beginning in 2023.  
Purpose of Schedule K-3  
Schedule K-3 (Form 1120-S) is an extension of Schedule K-1  
(Form 1120-S) and is generally used to report to  
shareholders their share of the items reported on  
Schedule K-2. 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.  
apportionment of research and experimental (R&E) expense  
and interest expense for purposes of the foreign tax credit  
limitation. Also use this part to determine your share of the S  
corporation’s creditable foreign taxes paid or accrued.  
Shareholders will use the information to figure a foreign tax  
credit on Form 1116.  
See the Purpose of Schedule K-1, Inconsistent Treatment  
of Items, and Errors sections of the instructions for the  
Jan 10, 2024  
Cat. No. 74752V  
     
Part IV. Used, in combination with other information known  
to you, such as information reported on Schedule P (Form  
5471), Previously Taxed Earnings and Profits of U.S.  
Shareholder of Certain Foreign Corporations, to determine  
your share of distributions by foreign corporations to the S  
corporation that are attributable to previously taxed earnings  
and profits (PTEP) in your annual PTEP accounts with  
respect to the foreign corporations (which are excluded 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 are 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.  
Part V. Used to determine your income inclusions under  
sections 951(a) and 951A if you are a U.S. shareholder of any  
of the listed CFCs. Shareholders will use the information to  
complete Form 8992, U.S. Shareholder Calculation of Global  
Intangible Low-Taxed Income (GILTI), and Form 1040 with  
respect to subpart F income inclusions, section 951(a)(1)(B)  
inclusions, and section 951A inclusions.  
Part VI. Used to complete Form 8621, Information 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  
passive foreign investment company (PFIC).  
Part VII. Used to determine your deemed paid taxes on  
inclusions under section 951A or 951(a)(1). Shareholders  
making a section 962 election will use the information to  
figure a deemed paid foreign tax credit on Form 1118.  
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 Column  
Box 2. Foreign oil and gas taxes. A separate foreign tax  
credit limitation is applied with respect to foreign oil and gas  
taxes. See section 907(a) and Regulations section 1.907(a)-1  
for details. If the S corporation 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. You are not required to complete Form 1118;  
rather, use the partially completed Schedule I and the  
associated instructions to complete Form 1116, Part III,  
line 12, for the applicable reduction for individuals.  
Box 3. Splitter arrangements. Foreign taxes with respect  
to a foreign tax credit splitting event are suspended until the  
related income is taken into account by the taxpayer; see  
section 909. There is a foreign tax credit splitting event with  
respect to foreign taxes of a payor if in connection with a  
splitter arrangement (as defined in Regulations section  
1.909-2(b)) the related income was, is, or will be taken into  
account by a covered person; see Regulations section  
1.909-2(a). A covered person, as defined in Regulations  
section 1.909-1(a)(4), includes, for example, any entity in  
which the payor holds, directly or indirectly, at least a 10%  
ownership interest (determined by vote or value). A payor, as  
defined in Regulations section 1.909-1(a)(3), includes, for  
example, a person that takes foreign income taxes paid or  
accrued by an S corporation into account pursuant to section  
1373(a).  
If the S corporation 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 S corporation participates  
that would qualify as a splitter arrangement under section  
909. The box should be checked only if the S corporation  
knows, or has reason to know, that an entity that took into  
account related income from the arrangement is a covered  
person with respect to one or more shareholders. For  
example, you are a payor of a foreign tax if you take into  
account the foreign taxes paid or accrued by the S  
Specific Instructions  
Identifying Information  
Item E—Part applicability. The S corporation checked the  
Yes” box to indicate the applicable parts of Schedule K-3.  
The S corporation checked the “No” box to indicate the  
inapplicable parts of Schedule K-3.  
Part I. Shareholder's Share of  
Corporation’s Other Current Year  
International Information  
corporation under section 1366(a)(1)(A). For example, if the  
S corporation 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 S  
corporation, the reverse hybrid is a covered person with  
respect to you. You cannot credit the foreign taxes paid or  
accrued by the S corporation with respect to the reverse  
hybrid until you or the S corporation takes into account the  
related income of the reverse hybrid. Until then, the taxes are  
suspended. The S corporation reported your share of the  
potentially suspended taxes as a result of the application of  
section 909 on Part III, Section 3, line 2E. Include on Form  
1116, Part III, line 12, taxes suspended under section 909. If  
you are required to complete Form 5471, Information Return  
of U.S. Persons With Respect to Certain Foreign  
This part reports your information for international tax items  
not reported elsewhere on the 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. For  
purposes of section 904, if the S corporation sells  
non-depreciable personal property (other than inventory and  
certain intangible property), you, the shareholder, are treated  
as the seller. Therefore, you will need to determine the source  
of the gain reported in Part II, line 1, column (f). In general, if  
you are 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 section  
865(e)(1) and 865(h) for other sourcing provisions for which  
the information provided in box 1 may be helpful.  
Corporations, for a controlled foreign corporation (CFC),  
include in Schedule E (Form 5471), Income, War Profits, and  
Excess Profits Taxes Paid or Accrued, Schedule E-1, line 3b,  
column (d), taxes suspended under section 909.  
If the S corporation checked box 3, and the statement  
indicates that the S corporation 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  
If the S corporation 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  
2
Instructions for Schedule K-3 (Form 1120-S) (2023)  
   
unsuspended, in certain cases you might not be eligible to  
claim a credit for those taxes. To the extent you are eligible to  
claim a credit for unsuspended taxes, these amounts may be  
claimed on Form 1118 or 1116, as applicable. If you are  
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.  
Boxes 7 through 9. If applicable, the S corporation should  
have attached to the Schedule K-1 or Schedule K-3 the  
relevant portions of Form 5471; Form 5713, International  
Boycott Report; and other relevant international tax forms.  
With respect to Forms 8858, Information Return of U.S.  
Persons With Respect to Foreign Disregarded Entities  
(FDEs) and Foreign Branches (FBs); and/or 8621, the S  
corporation checked box 7 and/or 9, respectively, if the S  
corporation attached the Forms 8858 and/or 8621 to the  
Form 1120-S. If you need information from the Form 8858  
and/or 8621, request such information from the S  
corporation.  
Box 10. Shareholder loan transactions. If this box is  
checked, the S corporation identified upstream or  
downstream S corporation loan transactions. See  
Regulations section 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 S corporation.  
There might be a splitter arrangement with respect to  
the shareholder even if the S corporation did not  
!
CAUTION  
identify one, given that the S corporation did not have  
the information available to the shareholder. Therefore, you  
must identify such arrangement even if box 3 is not checked.  
Box 4. Foreign tax translation. If the S corporation  
checked box 4, it will attach a statement described in the  
instructions for Part III, Section 3.  
The shareholder may have additional shareholder  
Box 5. High-taxed income. If the S corporation checked  
box 5, you must determine if the passive income reported to  
you by the S corporation is treated as income in another  
separate category. Income received or accrued by a U.S.  
person that would otherwise be passive income is not treated  
as passive income if the income is determined to be  
high-taxed income; see section 904(d)(2)(B)(iii)(II). You must  
group your shares of passive income from an S corporation  
according to the rules in Regulations section 1.904-4(c)(3).  
However, the portion, if any, of the share of income  
attributable to income earned by an S corporation through a  
foreign qualified business unit (QBU) is separately grouped  
under the rules of Regulations section 1.904-4(c)(4); see  
Regulations section 1.904-4(c)(5)(ii). The S corporation  
should have attached Attachments 1 and/or 2. Use the  
attachments and your taxes on your other passive income  
(that is, passive income that is not attributable to your share  
of the S corporation’s income) to determine if you need to  
assign passive income and the associated taxes to another  
separate category of income. You must allocate and  
apportion the shareholder's expenses to this passive income  
to determine if the income is treated as income in another  
separate category. This includes both your share of S  
corporation expenses and expenses incurred by you directly.  
See the Instructions for Form 1116 for how to report your  
income and taxes reclassified under the high-taxed income  
rule.  
loan transactions not identified by the S corporation  
!
CAUTION  
due to information not known to the S corporation.  
Box 11. Entity treatment for certain S corporations. If  
this box is checked, the S corporation has made an election  
under Proposed Regulations section 1.958-1(e)(2), to be  
treated as owning stock of a CFC within the meaning of  
section 958(a), and, therefore, the S corporation may have an  
income inclusion under sections 951(a) and 951A that it  
reports on Schedule K-1, line 10, Other income (loss), and  
does not report in Schedule K-3, Part V.  
Box 12. Form 8865 information. This box alerts you that  
the S corporation attached Form(s) 8865, Return of U.S.  
Persons With Respect to Certain Foreign Partnerships, to the  
Form 1120-S. The S corporation is not required to attach a  
copy of the form to your Schedule K-3.  
Box 13. Other international items. If the S corporation has  
transactions, income, deductions, payments, or anything else  
that implicates the international tax provisions of the Internal  
Revenue Code and such items are not otherwise reported in  
this part or other parts of Schedules K-2 and K-3, the S  
corporation reported that information on an attachment and  
checked box 13.  
Parts II and III  
Parts II and III report information you use to figure the foreign  
tax credit. In general, a U.S. individual, or a U.S. citizen or  
U.S. resident individual beneficiary of certain domestic  
estates and trusts, may claim a credit for taxes paid or  
accrued, and in some cases deemed paid, to foreign  
countries or U.S. territories. The amount of foreign tax credit  
in a tax year is generally limited to the lesser of foreign taxes  
paid or accrued or 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. A shareholder will use Form 1116 to  
figure its foreign tax credit, but, if the shareholder makes a  
section 962 election, it must also complete Form 1118 solely  
with respect to its computation of deemed paid credits for  
section 951(a) or section 951A inclusions. 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 source and separate categories of  
income.  
Box 6. Section 267A disallowed deductions. If the S  
corporation checked box 6 in Part I and attached a statement  
titled “Section 267A Disallowed Deduction,prepare your tax  
return by taking into account that you are not allowed a  
deduction for any of the amounts listed in the statement.  
Thus, for example, do not claim as a deduction any amount  
reported on lines 41 through 43 of Schedule K-3, Part II,  
Section 2, to the extent listed in the statement as an amount  
for which a deduction is disallowed under section 267A.  
Box 6 and the accompanying statement describe  
only interest or royalty paid or accrued by the S  
!
CAUTION  
corporation for which the S corporation knows, or has  
reason to know, that you are disallowed a deduction under  
section 267A.  
For information about section 267A, see FAQs for section  
3
Instructions for Schedule K-3 (Form 1120-S) (2023)  
the seller. In cases in which the shareholder is a  
pass-through entity, the S corporation might not know the  
ultimate residence of the first non-pass-through shareholder.  
The share of the S corporation’s gain on the sale of personal  
property is not separately stated on Schedule K-1, but is  
reported in Schedule K-3, Part II.  
As another example, the shareholder’s R&E expense  
(which includes the share of the S corporation’s R&E  
expense) is allocated and apportioned by the shareholder;  
see Regulations section 1.861-17(f). R&E expense is  
allocated and apportioned based on the gross receipts by  
Standard Industrial Classification (SIC) code. The share of  
the R&E expense by SIC code is not separately stated on  
Schedule K-1, but is reported in Schedule K-3, Part II. Also,  
the shareholder needs Schedule K-3, Part III, Section 1, for  
the shareholder’s share of the S corporation’s gross receipts  
by SIC code for purposes of allocating and apportioning R&E  
expense.  
In some cases, the shareholder will be able to use the  
information reported in Parts II and III to increase the foreign  
tax credit limitation, and the amount of available foreign tax  
credit to the shareholder. For example, Schedule K-3, Part III,  
Section 2, provides the shareholder with the tax book value  
of the assets of the S corporation. In general, a shareholder  
apportions interest expense to reduce U.S. source gross  
income or foreign source gross income based on the tax  
book value of its assets, including the shareholder's share of  
the S corporation’s interest expense and assets; see section  
864(e)(2) and Regulations section 1.861-9(e). Taking into  
account the assets of an S corporation generating solely U.S.  
source income would result in more expense allocated to  
U.S. source gross income and less expense allocated to  
reduce foreign source gross income. Additional foreign  
source income increases the shareholder’s foreign tax credit  
limitation, and the ability of the shareholder to claim foreign  
tax credits. Schedule K-1 does not separately state the share  
of the S corporation’s interest expense, or the tax book value  
of the assets. See Regulations section 1.861-9(e). See the  
instructions for Part II, Section 2, lines 39 through 43; and  
Part III, Section 2, for further guidance.  
S corporation with limited or no foreign activity. In many  
instances, an S corporation with no foreign source income,  
no assets generating foreign source income, and no foreign  
taxes paid or accrued may have reported information on  
Schedule K-3. For example, if you claim the foreign tax credit,  
you generally need certain information from the S corporation  
in Schedule K-3, Parts II and III, to complete Form 1116. This  
information should have been reported to you in prior years,  
including before the Tax Cuts and Jobs Act, with or attached  
to the Schedules K-1, and is information you need to figure  
the foreign tax credit limitation, which determines the amount  
of foreign tax credit available to you.  
Exceptions. You may not have received Schedule K-3 if  
the S corporation was eligible for an exception. See domestic  
filing exception in the Instructions for Schedules K-2 and K-3  
(Form 1120-S). Also, if you (or, if you are a pass-through  
trust, your beneficiary), are eligible to claim a foreign tax  
credit, you did not need Schedule K-3, Parts II and III, if you  
or your beneficiaries are not required to complete Form 1116.  
This could be the case, for example, because you (or if you  
are a pass-through trust, your beneficiary) qualify for an  
exception to filing the Form 1116. See section 904(j) and  
Form 1116 Exemption in the Instructions for Schedules K-2  
and K-3 (Form 1120-S). However, see reasons below for  
requesting the Schedule K-3 when you are required to file  
Form 1116.  
Example 1. Domestic filing exception met—Issuance  
of Schedule K-3 not required. A married couple, U.S.  
citizens, each own a 50% interest in SC, an S corporation.  
SC invests in a regulated investment company. SC receives a  
Form 1099 from the regulated investment company reporting  
$100 of creditable foreign taxes paid or accrued on passive  
category foreign source income. SC does not have any  
foreign activity aside from that of the regulated investment  
company. SC notifies the couple on an attachment to the  
Schedule K-1 that they will not receive the Schedule K-3  
unless they so request. The married couple does not request  
Schedule K-3 from SC for tax year 2023. Because SC  
qualified for the domestic filing exception, SC did not  
complete Schedule K-3 for the couple.  
Example 2. Parts II and III required for S corporation  
with no foreign activity. U.S. citizens A and B own equal  
interests in SC, an S corporation. SC has no foreign activity.  
In Year 1, A pays $2,000 of foreign income taxes on passive  
category income other than capital gains reported to A on a  
payee statement. A has interest expense of $5,000 and SC  
does not have interest expense. None of A’s interest expense  
is directly allocable. A does not have an overall domestic loss  
in tax year 2023.  
Because A must complete Form 1116 to claim a foreign  
tax credit, A requests a Schedule K-3 by the 1-month date,  
and therefore the domestic filing exception does not apply to  
SC with respect to A. SC provided Parts II and III of  
Reasons to request Schedule K-3 from S corporations  
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 S corporation completed the  
Schedule K-3, Parts II and III, because the S corporation’s  
gross income, gross receipts, expenses, assets, and foreign  
taxes paid may affect the foreign tax credit available to the  
shareholder. The source of certain gross income is  
determined by the shareholder. In addition, some expenses  
of the S corporation are allocated and apportioned by the  
shareholder.  
Schedule K-3 to A. In Schedule K-3, Part III, Section 2,  
column (a), A’s share of the tax book value of SC’s assets is  
$50,000. Not including A’s share of the assets of SC, the tax  
book value of A’s assets is $50,000. Of A’s assets, $10,000  
generates passive category foreign source income and  
$40,000 generates U.S. source income. A has passive  
category foreign source taxable income before interest  
expense of $8,000. A’s U.S. tax rate is 25%. A’s interest  
expense and SC’s assets are characterized in the same  
category under sections 163 and 469 for purposes of  
Temporary Regulations section 1.861-9T(d). A uses the tax  
Because of this shareholder determination, it is not  
possible for the shareholder to assume that all income of the  
S corporation is U.S. source and all expenses of the S  
corporation reduce U.S. source income. Also, the allocation  
and apportionment of certain shareholder expenses take into  
account shares of assets and income of the S corporation  
that are not otherwise reported on the Schedule K-1.  
For example, for sourcing purposes, personal property  
sold by the S corporation is treated as sold by the  
shareholders; see section 865(i)(5) and section 1373(a).  
Generally, income from the sale of certain personal property  
(excluding inventory) is sourced according to the residence of  
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Instructions for Schedule K-3 (Form 1120-S) (2023)  
book value (as opposed to the alternative tax book value) to  
allocate and apportion interest expense.  
Part II. Foreign Tax Credit Limitation  
Column (a). U.S. source. Do not report amounts in this  
column on Form 1116 or 1118 unless you elect to resource  
such income under an applicable U.S. income tax treaty. See  
section 904(d)(6) and section 865(h). See the instructions for  
Forms 1116 and 1118 for income resourced by treaty  
reported as a separate category of income.  
A’s interest expense is apportioned between U.S. source  
and foreign source income ratably based on the tax book  
value of A’s U.S. source and foreign source assets. Without  
taking into account the share of SC’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%  
x $7,000) of the $2,000 of foreign taxes. See section 904.  
Taking into account the share of SC’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% x $7,500) of the $2,000 of  
foreign taxes—an additional foreign tax credit amount of  
$125 after taking into account A’s share of the tax book value  
of the S corporation assets.  
Columns (b) through (e). Foreign source. Add the  
amounts reported in these columns to your other income  
earned or received directly or through other pass-through  
entities in these separate categories and report the total  
amounts in the applicable Form 1116, Part I, or Form 1118,  
Schedule A.  
Column (f). Sourced by shareholder. 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 are 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 resource such income  
under an applicable income tax treaty. 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 1116 or  
1118 and Pub. 514 for additional details.  
B does not request a Schedule K-3 from SC for tax year  
2023. Under the domestic filing exception, SC did not  
complete Schedule K-3 for B.  
Example 3. Part II, not Part III, required for S  
corporation with no foreign activity. The facts are the  
same as in Example 2 except that A has $5,000 of expenses  
described in Regulations section 1.861-8(e)(9), and A and  
SC have no other expenses. Further, A’s share of SC’s gross  
income is $50,000. Not including A’s share of the income of  
SC, A’s gross income is $50,000. Of A’s gross income,  
$5,000 is passive category foreign source gross income and  
$45,000 is U.S. source gross income. SC does not have any  
gross income the source of which is determined by the  
shareholder.  
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.  
A’s expenses must be ratably apportioned based on A’s  
gross income (including A’s share of the income of SC); see  
Regulations section 1.861-8(c)(3). Therefore, SC provided  
Schedule K-3, Part II to A. Before taking into account the  
share of SC’s gross income, the amount of A’s expenses  
described in Regulations section 1.861-8(e)(9) that reduce  
foreign source 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% x $4,500) of the $2,000 of  
foreign taxes. See section 904.  
Taking into account the share of SC’s gross income, the  
amount of A’s expenses described in Regulations section  
1.861-8(e)(9) that reduce foreign source 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% 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 share of the  
gross income of SC.  
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. Lines 1 through 24 report  
for each gross income item, on a separate line (A, B, or C),  
the two-letter code (from the list at IRS.gov/CountryCodes)  
for the foreign country or U.S. territory within which the gross  
income is sourced. If a type of income is sourced from more  
than three countries, a statement is attached to expand  
Schedules K-2 and K-3, Part II, for that type of income to  
report the additional countries.  
Because A and SC do not have R&E expense or interest  
expense, and because SC did not pay or accrue any foreign  
taxes, SC did not provide Schedule K-3, Part III to A.  
Note. For Part II, column (f), the S corporation entered the  
code XX because it could not 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 if you  
are a pass-through trust, the residence of the beneficiary of  
the trust.  
Note. A shareholder may need the share of the S  
corporation’s gross income for purposes of allocating and  
apportioning expenses other than those described in  
Regulations section 1.861-8(e)(9).  
5
Instructions for Schedule K-3 (Form 1120-S) (2023)  
   
The S corporation entered for column (f) the foreign  
country to which the S corporation paid tax of at least 10% of  
the gain. See sections 865(e) and 865(g).  
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 are  
a U.S. resident, such gain or loss is U.S. source and would  
not be reported on Form 1116.  
Each gross income item (for example, sales vs. interest  
income) may have different countries listed on rows A, B, C,  
etc., given that the S corporation might not have sales  
income and interest income, for example, from the same  
country. Line 24 should sum each country’s total income  
reported in Part II, regardless of the line on which such  
income is reported, whether A, B, C, etc.  
Exceptions. The instructions for Forms 1116 and 1118  
specify exceptions from the requirement to report gross  
income by foreign country or U.S. territory with respect to  
regulated investment companies and section 863(b). See the  
instructions for Forms 1116 and 1118 for these exceptions  
that apply.  
Line 19. Section 951(a) inclusions. If you make a section  
962 election, on Form 1118, add the amount reported on  
line 19 to your other section 951(a) inclusions and report the  
total in Form 1118, Schedule A, column 3(a), by separate  
category.  
Line 21. Section 951A(a) inclusions. If you make a  
section 962 election, on Form 1118, add the amount reported  
on line 21 to your other section 951A(a) inclusions and report  
the total in Form 1118, Schedule A, column 3(a), by separate  
category.  
Line 24. Total gross income. Add the amounts reported in  
rows A, B, and C (and additional rows, 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 lines 11 through 15 and 27 through 30,  
or PTEP adjustments, as described earlier for lines 7, 8, 16,  
and 46.  
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.  
Lines 7 and 8. Ordinary dividends and qualified divi-  
dends. 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 thus  
excludable from your gross income. 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.  
Section 2—Deductions  
Lines 25 through 54. Form 1116 requires a taxpayer 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  
shareholder adds their share of the S corporation's  
deductions with other deductions incurred directly by the  
shareholder or through other pass-through entities. See  
Regulations section 1.861-8(e)(15). 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 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 affects the total  
amount on line 24. See the Instructions for Form 1116 for  
additional information. Report Schedule K-3, Part II, lines 27  
through 30, on Form 1116, Part I, line 5, by separate  
category.  
Line 12. Net long-term capital gain. Line 12 does not  
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 S  
corporation included an attachment indicating the amount of  
unrecaptured section 1250 gain that is also net section 1231  
gain.  
Lines 16 and 46. Section 986(c) gain and loss. These  
lines report the S corporation’s share of a lower-tier  
pass-through entity’s section 986(c) gain or loss, and the  
amount of section 986(c) gain or loss on distributions of  
PTEP sourced from the S corporation’s annual PTEP  
accounts. You will 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 IV.  
Line 28. Net long-term capital loss. Line 28 does not  
include losses reported on line 29.  
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 1116. See Regulations section 1.861-17(f).  
Line 38. Charitable contributions. Charitable contribution  
deductions should not be reported on Form 1116 because  
such deductions are allocable to U.S. source income.  
Lines 39 and 40. Interest expense specifically allocable  
under Regulations sections 1.861-10 and -10T. Report  
interest expense directly allocated under Regulations section  
1.861-10 and Temporary Regulations section 1.861-10T on  
Form 1116, Part I, line 2.  
The amount of foreign currency gain and loss that you  
report on Form 1040 will include your share of the S  
corporation’s foreign currency gain or loss under section  
986(c) and your own foreign currency gain or loss under  
section 986(c).  
6
Instructions for Schedule K-3 (Form 1120-S) (2023)  
is reported on one line on the Form 1116, there is no need to  
specify additional reporting on the lines below.  
Lines 41 through 43. Other interest expense. On Form  
1116, allocate and apportion the sum of the interest expense  
included on lines 41 through 43 in column (f) 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 Temporary Regulations section 1.861-10T. See  
Regulations section 1.861-9(e)(3) and Temporary  
Regulations section 1.861-9T(d)(1) and (3).  
Stewardship expenses. In the case of the shareholder’s  
stewardship expenses incurred to oversee the S corporation,  
the S corporation's value is determined and characterized  
under the asset method in Regulations section 1.861-9. See  
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the  
reporting in Part III, Section 2, generally applies to the  
shareholder’s stewardship expense apportionment.  
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.  
Example 4. Parts II and III. Asset method  
Exception. See Regulations section 1.861-9(e)(8) and (9)  
for special rules concerning downstream and upstream S  
corporation loans that require a matching of related interest  
income to interest expense allocations.  
apportionment of interest expense. A, a U.S. citizen,  
owns a 10% interest in SC, an S corporation. SC is engaged  
in the active conduct of a U.S. trade or business. SC’s  
business generates only domestic source income. SC  
separately has an investment portfolio consisting of several  
less-than-10% stock investments. SC 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 A’s share of those owned  
by SC. A’s only interest expense is that from A’s pro rata  
share of the SC loan.  
Exception. See Temporary 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) does not  
exceed $5,000. Such interest expense may be allocated  
entirely to U.S. source income.  
Line 45. Foreign taxes deductible, but not creditable.  
See the Instructions for Form 1116 for examples of foreign  
taxes deductible, but not creditable.  
A’s share of the interest expense for SC’s business is  
$2,000. It is apportioned on the basis of business assets.  
Because all business income is domestic source, the  
business assets are domestic assets and reported in  
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, column (f), line 41. It is apportioned to  
U.S. source gross income by the shareholder, and doesn’t  
need to be reported on Form 1116.  
Note. Foreign taxes that are creditable (even if a shareholder  
chooses to deduct such taxes) are not reported as expenses  
in Part II. Do not claim a foreign tax credit on Form 1116 for  
amounts reported on line 45. However, you may claim a  
deduction for such taxes on the applicable form, including  
Form 1040.  
Creditable foreign taxes are reported in Part III, Section 3.  
Part III. Other Information for  
Preparation of Form 1116  
Section 1—R&E Expenses Apportionment  
Factors  
This section reports the information 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 shareholder; see Regulations section 1.861-17(f)(1). Use  
this Section 1 to determine the R&E expense reported in  
Form 1116, Part I. See the Instructions for Form 1116.  
The interest expense for A’s share of SC’s investments is  
$2,000 and is reported on Schedule K-3, Part II, column (f),  
line 42. The investment interest must be apportioned on the  
basis of investment assets. A’s share of the adjusted basis in  
SC’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 ($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.  
Line 1. Add the amounts reported on line 1 by SIC code to  
Lines 7 and 8. The amounts reported on lines 7 and 8 are  
subsets of the amounts reported on line 6 representing the  
value of stock held by the S corporation in certain foreign  
corporations.  
The amount reported on line 7 is the value of stock of the  
S corporation-owned specified 10%-owned foreign  
corporation that is not a CFC.  
your other gross receipts to apportion your R&E expense.  
Line 2. Add the amounts reported on line 2 to the  
shareholder'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 Instructions for Form 1116 to  
determine the exclusive apportionment of the R&E expenses.  
The amount reported on line 8 is the value of the stock in  
S corporation-owned CFCs.  
Section 2—Interest Expense Apportionment  
Factors  
This section includes the information you need to allocate  
and apportion your interest expense for foreign tax credit  
limitation purposes. 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  
Section 3—Foreign Taxes  
Section 3 reports your share of the foreign taxes paid or  
accrued by the S corporation by separate category and  
source.  
Line 1. Report the taxes on line 1 in the applicable portions  
of Form 1116, Part II, for the applicable separate category of  
7
Instructions for Schedule K-3 (Form 1120-S) (2023)  
 
income. To complete these portions, refer to the statement  
attached to Schedule K-3, referred to earlier in the  
instructions with respect to Part I, box 4, with the following  
information.  
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 section 989(b)  
(1) and (3).  
Also use Part IV, in combination with other information  
known to you, to claim and figure a foreign tax credit on Form  
1116.  
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. A  
foreign corporation identified as a qualified foreign  
The dates on which the taxes were paid or accrued.  
The exchange rates used.  
The amounts in both foreign currency and U.S. dollars.  
See section 986(a).  
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).  
Note. The shareholder takes the shareholder's share of the  
S corporation’s foreign taxes into account in the  
shareholder’s tax year with or within which the S corporation’s  
tax year ends, regardless of whether the shareholder or S  
corporation takes foreign taxes into account on the cash or  
accrual basis.  
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, is  
not a qualified foreign corporation, regardless of whether it is  
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  
non-qualified foreign corporation in determining the amount  
of ordinary dividends you report on Form 1040, line 3b.  
Line 2. Report the total reduction of taxes for each separate  
category of income from line 2 on Form 1116, Part III, line 12.  
Line 3. Report the redetermined foreign taxes from line 3 on  
the Foreign Tax Redetermination Schedule of the Form 1116,  
and on an amended return, if required. See the Instructions  
for Form 1116 and Regulations sections 1.905-3 through -5  
for additional information.  
Use the information in the attachment provided by the S  
corporation to complete Schedule C (Form 1116), Foreign  
Tax Redeterminations.  
If the S corporation checked the “Contested tax” box and  
reported information about the contested tax on line 3, the S  
corporation has remitted a contested foreign income tax  
liability to a foreign country, and you as the shareholder may  
elect to claim a provisional foreign tax credit for your pro rata  
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  
Form 1118, and the instructions for Form 7204, for additional  
information.  
However, do not include the U.S. dollar amount of E&P  
distributions from a foreign corporation in determining the  
amount you report on Form 1040, line 3a or 3b, 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). See Notice  
2019-01, 2019-02 I.R.B. 275.  
Include the amount of foreign currency gain or loss that  
you are required to recognize under section 986(c) in  
determining the amount to report on Schedule 1 (Form  
1040), Additional Income and Adjustments to Income, line 8.  
If the S corporation received a distribution that is  
attributable to PTEP in an annual PTEP account of the S  
corporation, or attributable to E&P that are excludable from  
the S corporation’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) and,  
therefore, may be net investment income (NII PTEP), it will  
attach an attachment to the Schedule K-3 regarding your  
share of the S corporation’s NII PTEP. If you are 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, Net  
Investment Income Tax— Individuals, Estates, and Trusts, to  
figure and report your net investment income. See  
Note. If you are an accrual method taxpayer, generally you  
may not claim a credit for additional taxes reported on line 3  
by the S corporation unless those taxes have been paid. See  
section 905(c)(2) and Regulations section 1.905-3(a).  
Part IV. Distributions From Foreign  
Corporations to S Corporation  
Regulations sections 1.1411-1 through -10 for details. Note  
that your share of a distribution received by the S corporation  
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.  
Use Part IV to determine your share of distributions by foreign  
corporations to the S corporation (with your share being  
reported in this Part IV) that are attributable to PTEP in your  
annual PTEP accounts with respect to the foreign  
corporations (which you exclude from your gross income) or  
non-previously taxed E&P, and the amount of foreign  
currency gain or loss on distributed PTEP that you are  
required to recognize under section 986(c). The amount of  
foreign currency gain or loss on distributed PTEP that you are  
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  
Note. Columns (e) and (f) are reported in the foreign  
corporation’s functional currency.  
Part V. Information on Shareholder’s  
Section 951(a)(1) and Section 951A  
Inclusions  
maintained in a functional currency other than the U.S. dollar,  
the U.S. dollar amount of the distributed PTEP is determined  
Use Part V to determine your subpart F income inclusions  
and section 951(a)(1)(B) inclusions, or your share of the S  
8
Instructions for Schedule K-3 (Form 1120-S) (2023)  
   
corporation's subpart F income inclusions and section 951(a)  
(1)(B) inclusions, and to complete Form 8992.  
with respect to which no qualified electing fund (QEF) or  
section 1296 mark-to-market (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 VI  
(including any supplemental Attachments 5 and 6, 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 S corporation, use the information provided in this  
Schedule K-3, Part VI (including any supplemental  
Attachments 5 and 6, 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  
are 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. Note, however, if the S corporation  
elected to be treated as owning stock of a foreign corporation  
that is a PFIC/CFC within the meaning of section 958(a)  
under Proposed Regulations section 1.958-1(e)(2), and the S  
corporation is a U.S. shareholder of the PFIC/CFC during a  
tax year of the foreign corporation, the S corporation is not  
required to complete Schedules K-2 and K-3, Part VI, with  
information regarding that PFIC/CFC. You may, however,  
have inclusions with respect to that PFIC/CFC reported on  
Schedule K-1, line 10, Other income (loss).  
If the S corporation has made an election to be treated as  
owning stock of a foreign corporation within the meaning of  
section 958(a) under Proposed Regulations section  
1.958-1(e)(2), and is a U.S. shareholder of the foreign  
corporation during a tax year 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 S corporation, of which you  
generally include in gross income a share. In such a case,  
your share of the S corporation’s subpart F income inclusions  
and section 951(a)(1)(B) inclusions are reported on  
Schedule K-1, line 10, Other income (loss), and are not  
reported in Part V.  
If the S corporation (i) has not made an election to be  
treated as owning stock of a foreign corporation within the  
meaning of section 958(a) under Proposed Regulations  
section 1.958-1(e)(2); (ii) does not, pursuant to Regulations  
section 1.958-1(d)(4)(i), apply Regulations sections  
1.958-1(d)(1) through (3) to a tax year of the foreign  
corporation beginning before January 25, 2022; and (iii) is a  
U.S. shareholder of the foreign corporation during such tax  
year, then any subpart F income inclusions and section  
951(a)(1)(B) inclusions with respect to a foreign corporation  
for such a tax year are inclusions of the S corporation, of  
which you generally include in gross income a share. In such  
case, your share of the S corporation’s subpart F income  
inclusions and section 951(a)(1)(B) inclusions are reported  
on Schedule K-1, line 10, Other income (loss), and are not  
reported in Part V.  
If the S corporation elected to be treated as owning stock  
of a foreign corporation within the meaning of section 958(a)  
under Proposed Regulations section 1.958-1(e)(2), and the S  
corporation is a U.S. shareholder of the foreign corporation  
during a tax year of the foreign corporation, the S corporation  
determines its GILTI inclusion for its tax year in which or with  
which such tax year of the foreign corporation ends, of which  
you generally include in gross income a share. In such a  
case, your share of the S corporation’s GILTI inclusion is  
reported on Schedule K-1, line 10, Other income (loss), and  
is not reported in Part V.  
Section 1—General Information  
Columns (a) through (e). If you are required to complete  
Form 8621 with respect to a PFIC reported on this schedule,  
use this information to complete the Form 8621 background  
information.  
Columns (f) through (i). If you are 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.  
For each CFC listed in column (a) of which you are a U.S.  
shareholder, include the amounts of subpart F income and  
section 951(a)(1)(B) inclusion reported in Part V in  
determining the amount you report on Schedule 1 (Form  
1040), line 8.  
Note. If you are making an election under Regulations  
sections 1.1291-10, 1.1297-3, or 1.1298-3 with respect to a  
PFIC reported in this Schedule K-3, Part VI, you may need  
additional information from the S corporation regarding the  
value of the PFIC shares reported in column (i) that is not  
reported here.  
Column (j). This column will indicate to you (using the  
codes below) whether the S corporation has made an  
election with respect to the PFIC that binds the shareholders.  
For each CFC listed in column (a) of which you are a U.S.  
shareholder, report the tested income and tested loss for  
each CFC in Schedule A (Form 8992), Schedule of  
Controlled Foreign Corporation (CFC) Information To  
Compute Global Intangible Low-Taxed Income (GILTI),  
columns (c) and (d), respectively, and include your share of  
each CFC's items described in columns (i) through (n) in  
determining the amount to report in Schedule A (Form 8992),  
columns (e) through (j), respectively.  
S Corporation Election Codes for Column (j)  
Code  
QEF  
Election Type  
Part VI. Information Regarding  
Passive Foreign Investment  
Companies (PFICs)  
Qualified Electing Fund Election  
Section 1296 Mark-to-Market Election  
MTM  
U.S. persons may be required to complete and file Form  
8621 and/or include amounts in income with respect to  
PFICs owned through an S corporation. This includes PFICs  
Note. In general, if the S corporation has made a pedigreed  
QEF or section 1296 MTM election with respect to a PFIC,  
9
Instructions for Schedule K-3 (Form 1120-S) (2023)  
 
the S corporation is not required to complete Schedule K-3,  
Part VI, with respect to that PFIC if the S corporation 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 S corporation and reported to you in  
QEF Information  
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 made.  
If the S corporation has made a pedigreed QEF election  
with respect to a PFIC, and the S corporation files Form 8621  
for that PFIC, that PFIC will not be reported in Schedule K-3,  
Part VI. In that case, your share of the S corporation’s QEF  
inclusions, if any, will be reported to you in Schedule K-1, Part  
III. However, in the event the S corporation does not file Form  
8621 for a PFIC with respect to which the S corporation has  
made a pedigreed QEF election, or if the S corporation owns  
stock of an unpedigreed QEF, you may be required to file  
Form 8621 for that PFIC. See Regulations section  
Schedule K-1, Part III. However, if the S corporation has  
made a pedigreed QEF or section 1296 MTM election with  
respect to a PFIC for which the S corporation does not file  
Form 8621, if the S corporation owns stock of an  
unpedigreed QEF, or if the S corporation is making a section  
1296 MTM election with respect to stock in a PFIC in the  
current tax year if the current tax year is not the first year of  
the S corporation’s holding period in that stock (“non-initial  
section 1296 MTM election”), it is required to complete  
Schedule K-3, Part VI, 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 S corporation marks to market stock of a  
PFIC as described in Regulations section 1.1291-1(c)(4), the  
S corporation generally does not need to report information  
about the PFIC in Schedules K-2 and K-3, Part VI. In such a  
case, the S corporation should report its MTM gain or loss on  
Schedule K and report your share of those amounts in  
Schedule K-1, Part III. Note, however, in such a case there  
may be instances in which you will need additional  
information from the S corporation to meet your tax  
obligations with respect to a PFIC for which the S corporation  
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 S  
corporation in the first year of its holding period. In such  
instances, the S corporation should provide you with the  
needed information and may use Schedule K-3, Part VI, to do  
so.  
Columns (k) through (n). Use the information provided in  
these columns to make certain elections with respect to a  
PFIC in Form 8621, Part II. If you do not intend to make any  
election with respect to a PFIC reported in this Schedule K-3,  
Part VI, you may generally ignore these boxes for that PFIC.  
If you are making an election under Regulations sections  
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 S corporation that is not  
reported in this Schedule K-3, Part VI, including information  
regarding the PFIC’s E&P.  
1.1298-1(b)(2) for additional information.  
If you are required to file Form 8621 with respect to a PFIC  
reported in Schedule K-3, Part VI, enter your share of the S  
corporation’s QEF ordinary earnings and net capital gain  
inclusions 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 are making an election under section 1294 with respect  
to the QEF for the current tax year. If you are 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.  
Section 1296 Mark-to-Market Information  
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  
made (MTM PFIC), including PFICs with respect to which the  
S corporation is making a non-initial section 1296 MTM  
election.  
If the S corporation has made an MTM election under  
section 1296 with respect to a PFIC (other than a non-initial  
section 1296 MTM election), and the S corporation files Form  
8621 for that MTM PFIC, that MTM PFIC will not be reported  
in Schedule K-3, Part VI. In that case, your share of the S  
corporation’s MTM gain or loss, if any, will be reported to you  
in Schedule K-1, Part III. However, in the event the S  
corporation does not file Form 8621 for an MTM PFIC or if the  
S corporation is making a non-initial section 1296 MTM  
election with respect to a PFIC, the shareholder may have a  
reporting obligation with respect to that PFIC. See  
Regulations section 1.1298-1(b)(2) for additional information.  
The S corporation is also not required to complete  
Section 2—Additional Information on PFIC or  
Qualified Electing Fund (QEF)  
Schedule K-3, Part VI, with respect to a PFIC if it has marked  
stock of a PFIC to market as described in Regulations  
section 1.1291-1(c)(4), though it may provide you with certain  
information in Schedule K-3, Part VI, if the PFIC stock is not  
marked to market in the first year of the S corporation's  
holding period.  
Note. The S corporation will complete Section 2 with respect  
to each PFIC reported in Section 1, and each line completed  
for a PFIC in Section 1 corresponds to the same line in  
Section 2. If the PFIC has no current year activity, or has no  
other information for the corporation to report in columns (c)  
through (o), the S corporation will only include the name and  
employer identification number (EIN) of the PFIC or QEF in  
columns (a) and (b) and will leave columns (c) through (o)  
blank with respect to that PFIC.  
If you are required to file Form 8621 with respect to an  
MTM PFIC reported in Schedule K-3, Part VI, enter the  
amount from column (f) on Form 8621, Part IV, line 10a. You  
may need additional information from the S corporation  
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 S corporation’s adjusted tax basis in the MTM  
PFIC stock may be equal to your share of the fair market  
value (FMV) of the stock at the beginning of the prior tax year  
10  
Instructions for Schedule K-3 (Form 1120-S) (2023)  
reported in column (e). However, your share of the S  
corporation’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 S  
Where on Form 8621 To Report Distributions From  
PFICs  
IF you are a shareholder of a...  
THEN...  
corporation’s prior year income inclusions and the amounts  
for which the S corporation was allowed a deduction with  
respect to the MTM PFIC. Once you determine your share of  
the S corporation’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 in your U.S.  
federal income tax return.  
Section 1291 fund, PFIC with respect to which enter this amount on  
the S corporation is making a non-initial section Form 8621, Part V,  
1296 MTM election, or a PFIC that now may be line 15a.  
treated as a qualifying insurance corporation  
(QIC), and for which you are required to file  
Form 8621,  
QEF for which you are not making a section  
1294 election for the current tax year,  
you do not need to enter  
this on Form 8621.  
Additionally, if the S corporation is making a non-initial  
section 1296 MTM election with respect to a PFIC, you  
should use the information for that PFIC in 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  
pro rata share of the S corporation’s section 1296(a) gain for  
the tax year (if any) is treated as an excess distribution. This  
will help you determine any corresponding other income,  
additional tax, and interest charges under section 1291.  
QEF for which you are 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 S corporation is making a non-initial this on Form 8621.  
section 1296 MTM election),  
you do not need to enter  
Note. Deemed distributions by QEFs are not reported in  
Schedule K-3, Part VI. 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. See section 1294(f) and Temporary  
Regulations section 1.1294-1T for additional information.  
Section 1291 and Other Information  
Note. 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 S corporation.  
Column (g). This information is provided to help you assess  
your holding period in the PFIC stock through your ownership  
in the S corporation. Unless also provided in Section 1,  
column (g), with respect to an acquisition of stock in the PFIC  
during the S corporation’s tax year, these dates do not need  
to be entered on Form 8621 or on your U.S. federal income  
tax return.  
Note. If you have made a section 1294 election with respect  
to a QEF owned by the S corporation, 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 Temporary  
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 do not need to enter these dates on Form 8621 or on  
your U.S. federal income tax return.  
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 S corporation is making a non-initial section 1296  
MTM election in which you are a shareholder through your  
ownership in the S corporation. If you are required to file  
Form 8621 with respect to one of these types of PFICs  
owned by the S corporation, use this amount to determine  
your foreign tax credit to include on Part V, line 16d. See  
section 1291(g) for additional information on creditable  
foreign taxes.  
Note. The dates entered in this column (g) will be the dates  
on which the S corporation acquired the PFIC stock. If you  
acquired your interest in the S corporation 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 in different parts of Form 8621, or not reported at all  
on Form 8621.  
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 are a shareholder through your ownership in the S  
corporation or for a PFIC with respect to which the S  
corporation is making a non-initial section 1296 MTM  
election. If you are required to file Form 8621 with respect to  
one of these types of PFICs owned by the S corporation, use  
this amount to determine the amount to include on 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.  
11  
Instructions for Schedule K-3 (Form 1120-S) (2023)  
Note. The information in column (k) is only relevant with  
respect to section 1291 funds and PFICs with respect to  
which the S corporation is making a non-initial section 1296  
MTM election and is not relevant for any PFIC with respect to  
which a pedigreed QEF election or other section 1296 MTM  
election has been, or may be, made.  
Column (l). This information is provided to help you assess  
the treatment to you on any disposition by the S corporation  
of stock in a PFIC in combination with column (g). These  
dates do not need to be entered on Form 8621.  
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  
Note. Your holding period of the PFIC stock may have begun  
on a different date than the S corporation’s holding period.  
Columns (m) through (o). This information is to assist you  
in figuring any gain or loss on the S corporation’s disposition  
of PFIC stock.  
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 are not reported in this Schedule K-3, Part VII.  
For each section 1291 fund in which you are a shareholder  
through your ownership in the S corporation or for any PFIC  
with respect to which the S corporation is making a non-initial  
section 1296 MTM election for which you are required to file  
Form 8621, enter the amount from 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.  
For each MTM PFIC in which you are a shareholder  
through your ownership in the S corporation (including PFICs  
with respect to which the S corporation is making a non-initial  
section 1296 MTM election), and with respect to which you  
are required to file Form 8621, enter the amounts from  
columns (m) and (n), on Form 8621, Part IV, lines 13a 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.  
For each QEF in which you are a shareholder through your  
ownership in the S corporation with respect to which you  
have previously made a section 1294 election, and for which  
you are required to file Form 8621, if amounts are reported in  
columns (m) through (o) with respect to that 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 Temporary Regulations section  
1.1294-1T and the Form 8621 instructions for additional  
information.  
A shareholder electing under section 962 to claim a  
deemed paid credit with respect to an inclusion under section  
951 will use Schedule K-3, Part VII, to complete Form 1118,  
Schedule C; see section 960(a). The shareholder 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 shareholder 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 shareholder  
will use column (iv) (the total current year taxes by the  
subpart F income groups of the CFC), to report in Form 1118,  
Schedule C, column 7. The shareholder must also complete  
Form 1118, Schedule C, column 5, with information from  
Schedule K-3, Part VII.  
Note. The amount entered in Form 1118, Schedule C,  
column 8(a), will not 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 shareholder electing under section 962 to  
claim a deemed paid credit with respect to an inclusion under  
section 951A will use Schedule K-3, Part VII, to report on  
Form 1118, Schedule D; see section 960(d). The shareholder  
will use column (ii) (the shareholder's share of the foreign  
corporation's net income by tested income group) to report  
on Form 1118, Schedule D, column 5. The shareholder will  
use column (iii) (the foreign corporation's total net income by  
tested income group) to report on Form 1118, Schedule D,  
column 6. The shareholder will use column (iv) (the foreign  
corporation's current year tested foreign taxes for which  
credit is allowed by tested income groups) to report on Form  
1118, Schedule D, column 8.  
Part VII. Shareholder's Share of S  
Corporation's Interest in Foreign  
Corporation Income (Section 960)  
Example 5. Use Schedule K-3 to claim deemed paid  
credit. In Year 1, USC, an S corporation, has two U.S. citizen  
shareholders with equal interests in the S corporation. Both  
shareholders make elections under section 962. USC wholly  
owns CFC. CFC earns passive category interest income  
sourced from Country X of 100u and pays a withholding tax  
of $20 to a foreign country. The code for Country X is “X.”  
Note. Amounts in this part are reported in foreign currency.  
Individuals, estates, and trusts may claim a foreign tax  
credit for foreign income taxes deemed paid with respect to a  
CFC if they make an election under section 962.  
To figure the foreign taxes deemed paid by a shareholder  
that is U.S. shareholder of a CFC owned by an S corporation,  
12  
Instructions for Schedule K-3 (Form 1120-S) (2023)  
 
Example 5. USC’s Schedule K-3, Part VII for Shareholders  
In Schedule K-3, Part VII, USC reports the following to each of its shareholders.  
B
C
Separate category  
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PAS  
i
If PAS was entered on line B, applicable grouping under Regulations section 1.904-4(c)  
(i)  
(ii)  
(iii)  
Foreign  
(iv)  
Country code Shareholder’s share  
of foreign  
Foreign  
corporation’s total  
net income  
corporation’s  
current year foreign  
taxes for which  
credit allowed  
Amounts are in functional currency unless otherwise noted.  
Subpart F income groups  
corporation’s net  
income (functional (functional currency)  
currency)  
(U.S. dollars)  
1
a Dividends, interest, rents, royalties, and annuities (total)  
(1) Unit: CFC  
.
.
.
.
.
X
50u  
100u  
$20  
Example 5, Shareholder’s Form 1118, Schedule C  
On Form 1118, Schedule C, with respect to the passive category each shareholder reports with respect to the information  
received on Schedule K-3 as follows.  
6. Total Net  
Income in  
7. Total Eligible 8. Section 951(a)(1)  
9. Divide  
10. Tax  
Current Year  
Taxes in  
Inclusion Attributable Column 8(a) Deemed Paid  
5. Subpart F Income Group  
Subpart F  
to Subpart F Income  
Group  
by Column 6  
(multiply  
column 7 by  
column 9)  
1a. Name of  
Foreign  
Corporation  
Income Group  
(functional  
currency)  
Subpart F  
Income Group  
(U.S. dollars)  
(a) Reg. sec.  
(b) Reg. sec.  
(c) Unit  
CFC  
(a) Functional  
Currency  
1.960-1(d)(2)(ii) 1.904-4(c)(3)  
(B)(2)  
(i)-(iv)  
CFC  
DIRRA  
i
100u  
$20  
50u  
0.500  
$10  
13  
Instructions for Schedule K-3 (Form 1120-S) (2023)