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
Related Forms
- Form 1120-S Schedule K-3 - Shareholder's Share of Income, Deductions, Credits, etc. International
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
Part I. Shareholder's Share of Corporation’s
Other Current Year International
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
Part IV. Distributions From Foreign
Part V. Information on Shareholder’s Section
Part VI. Information Regarding Passive
Part VII. Shareholder's Share of S
How To Use Schedule K-3
Corporation's Interest in Foreign
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
(f). Sourced by shareholder, later.
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
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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
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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
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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),
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)