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                                                                                                             Department of the Treasury
                                                                                                             Internal Revenue Service
2023

S Corporation Instructions 

for Schedules K-2 and K-3 

(Form 1120-S)

Shareholders' Pro Rata Share Items—International and Shareholder's Share of 
Income, Deductions, Credits, etc.—International

Section references are to the Internal Revenue Code unless 
otherwise noted.                                                               General Instructions
Contents                                                                  Page The Instructions for Form 1120-S and the Instructions for 
General Instructions      . . . . . . . . . . . . . . . . . . . . . . . . . 1  Schedule K-1 (Form 1120-S) generally apply to the Schedules 
Purpose of Schedules K-2 and K-3                      . . . . . . . . . . . 1  K-2 and K-3. These instructions provide additional instructions 
Who Must File           . . . . . . . . . . . . . . . . . . . . . . . . . . 1  with respect to the Schedules K-2 and K-3 for tax years 
                                                                               beginning in 2023.
When and Where To File . . . . . . . . . . . . . . . . . . .                3
How To Complete Schedules K-2 and K-3                           . . . . . . 3  Purpose of Schedules K-2 and K-3
Specific Instructions     . . . . . . . . . . . . . . . . . . . . . . . . . 4  Schedule K-2 is an extension of Form 1120-S, Schedule K, and 
Schedule K-2 Identifying Information                    . . . . . . . . . . 4  is used to report items of international tax relevance from the 
Schedule K-3 Identifying Information                    . . . . . . . . . . 4  operation of an S corporation.
Part I. Corporation’s Other Current Year                                       Schedule K-3 is an extension of Schedule K-1 (Form 1120-S) 
      International Information           . . . . . . . . . . . . . . . . . 4  and is generally used to report to shareholders their shares of 
Part II. Foreign Tax Credit Limitation . . . . . . . . . .                  10 the items reported on Schedule K-2. Shareholders must include 
                                                                               the information reported on Schedule K-3 on their tax or 
Part III. Other Information for Preparation of                                 information returns.
      Form 1116 . . . . . . . . . . . . . . . . . . . . . . . . . .         12
Part IV. Distributions From Foreign                                            Who Must File
      Corporations to S Corporation . . . . . . . . . . . .                 16 Any S corporation that is required to file Form 1120-S and that 
Part V. Information on Shareholders' Section                                   has items relevant to the determination of the U.S. tax or 
      951(a)(1) and Section 951A Inclusions . . . . . .                     17 reporting obligations of its shareholders under the international 
                                                                               provisions of the Internal Revenue Code (Code) must complete 
Part VI. Information Regarding Passive                                         the relevant parts of Schedules K-2 and K-3. See each part and 
      Foreign Investment Companies (PFICs) . . . . .                        19 section for a more detailed description of who must file each part 
Part VII. S Corporation's Interest in Foreign                                  and section. Penalties may apply for filing Form 1120-S without 
      Corporation Income (Section 960)                  . . . . . . . . .   23 all required information or for furnishing Schedule K-3 to 
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 shareholders without all required information. The penalties that 
                                                                               apply with respect to Form 1120-S and Schedule K-1 apply with 
                                                                               respect to the Schedules K-2 and K-3, respectively. See the 
Future Developments                                                            Interest and Penalties section of the Instructions for Form 
                                                                               1120-S.
For the latest information about developments related to 
Schedule K-2 (Form 1120-S) and Schedule K-3 (Form 1120-S),                     Except as otherwise required by statute, regulations, or other 
and their instructions, such as legislation enacted after they were            IRS guidance, an S corporation is not required to obtain 
published, go to IRS.gov/Form1120S.                                            information from its shareholders to determine if it needs to file 
                                                                               each of these parts.
What’s New                                                                     An S corporation is only required to complete and file the 
Domestic filing exception.        A domestic filing exception that             relevant portions of Schedules K-2 and K-3, as applicable. For 
allows an exception for filing and furnishing Schedules K-2 and                example, if the S corporation does not own (within the meaning 
K-3 applies for 2023. See Domestic Filing Exception, later.                    of section 958) an interest in a foreign corporation other than 
                                                                               solely by reason of applying section 318(a)(3) (providing for 
Part VII. Part VII includes two new columns: column (iii) for the              downward attribution) as provided in section 958(b), it is not 
foreign corporation’s total net income, and column (iv) for the                required to complete Schedule K-2, Parts IV, V, VI, and VII or the 
foreign corporation’s current year foreign taxes for which credit is           corresponding Schedule K-3 parts.
allowed. Part VII also requests the functional currency of the 
foreign corporation. These additions will allow the preparer to                Schedules K-2 and K-3 consist of the most common 
include all information necessary for the section 960                          international tax provisions of the Code. However, not all 
computation in Part VII without attaching Schedule Q (Form                     provisions are specifically identified on these schedules. To the 
5471), CFC Income by CFC Income Groups.                                        extent that an international provision is implicated that is not 
                                                                               otherwise specifically identified, the S corporation should check 
                                                                               box 13 in Schedules K-2 and K-3, Part I, and attach a statement 
                                                                               to both Schedules K-2 and K-3 (for shareholder's share).

Jan 5, 2024                                                               Cat. No. 74486Y

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Note. An S corporation with no foreign source income, no 1-month date, the domestic filing exception is met and the S
assets generating foreign source income, and no foreign taxes corporation is not required to file the tax year 2023 Schedules
paid or accrued may still need to report information on K-2 and K-3 with the IRS or furnish the tax year 2023
Schedules K-2 and K-3. For example, if a shareholder claims a Schedule K-3 to the non-requesting shareholders. However, the
credit for foreign taxes paid or accrued by the shareholder, the S corporation is required to provide the tax year 2023
shareholder may need certain information from the S corporation Schedule K-3, completed with the requested information, to the
to complete Form 1116, Foreign Tax Credit (Individual, Estate, or requesting shareholder on the later of the date on which the S
Trust). See each part for applicability. corporation files the Form 1120-S or 1 month from the date on
which the S corporation receives the request from the
Domestic Filing Exception (Exception To Filing shareholder. See Example 3. The S corporation must complete
Schedules K-2 and K-3) and file tax year 2024 Schedules K-2 and K-3 with respect to the
requesting shareholder by the tax year 2024 Form 1120-S filing
An S corporation does not need to (i) complete and file with the deadline if that shareholder is still a shareholder in tax year
IRS the Schedules K-2 and K-3, or (ii) furnish to a shareholder 2024.
the Schedule K-3 (except where requested by a shareholder
after the 1-month date (defined in criterion 3)) if each of the Note for S corporations that satisfy criteria 1 and 2, but do
following are met with respect to the S corporation’s tax year not satisfy criterion 3. If the S corporation received a request
2023. from a shareholder for Schedule K-3 information on or before the
1-month date and therefore the S corporation does not satisfy
1. No or limited foreign activity. During an S corporation’s tax criterion 3, the S corporation is required to file the Schedules K-2
year 2023, the S corporation either has no foreign activity (as and K-3 with the IRS and furnish the Schedule K-3 to the
defined later), or if it does have foreign activity, such foreign requesting shareholder. The Schedules K-2 and K-3 are required
activity is limited to: to be completed only with respect to the parts and sections
• Passive category foreign income (determined without regard relevant to the requesting shareholder. For example, if a
to the high-taxed income exception under section 904(d)(2)(B) shareholder requests the information reported in Part III, Section
(iii)), 2 (Interest Expense Apportionment Factors), the S corporation is
• Upon which not more than $300 of foreign income taxes required to complete and file Schedule K-2, Part III, Section 2,
allowable as a credit under section 901 are treated as paid or with respect to the S corporation’s total assets and
accrued by the S corporation, and Schedule K-3, Part III, Section 2, with respect to the requesting
• Such income and taxes are shown on a payee statement (as shareholder’s pro rata share of the assets. On the date that the S
defined in section 6724(d)(2)) that is furnished or treated as corporation files Schedules K-2 and K-3 with the IRS, the S
furnished to the S corporation. corporation must provide a copy of the filed Schedule K-3 to the
Foreign activity. For purposes of the domestic filing requesting shareholder. The S corporation does not need to
exception, foreign activity means any of the following. complete, attach, file, or furnish any other parts or sections of the
• Foreign income taxes paid or accrued (as defined in section Schedules K-2 and K-3 to the IRS, the requesting shareholder,
901 and the regulations thereunder). or any other shareholder. The S corporation should keep records
• Foreign source income or loss (as determined in sections 861 of the information requested by the shareholder. See Example 2.
through 865, and section 904(h), and the regulations
thereunder). If an S corporation receives requests from shareholders for
• Ownership interest in a foreign partnership (as defined in Schedule K-3 information both on or before the 1-month date
sections 7701(a)(2) and (5)). and after the 1-month date, the S corporation is required to file
• Ownership interest in a foreign corporation (as defined in Schedules K-2 and K-3 as described in the prior paragraph only
sections 7701(a)(3) and (5)). with respect to the shareholder requests received on or before
• Ownership of a foreign branch (as defined in Regulations the 1-month date. With respect to requests received after the
section 1.904-4(f)(3)(vii)). 1-month date, the S corporation is required to provide the
• Ownership interest in a foreign entity that is treated as Schedule K-3, completed with that shareholder’s requested
disregarded as an entity separate from its owner (as defined in information, on the later of the date on which the S corporation
Regulations section 301.7701-3). files the Form 1120-S or 1 month from the date on which the S
corporation receives the request from the shareholder. See
2. Shareholder notification. With respect to an S corporation Examples 2 and 3, later.
that satisfies criterion 1, shareholders receive a notification from
the S corporation at the latest when the S corporation furnishes Example 1. Domestic filing exception met—Issuance of
the Schedule K-1 to the shareholder. The notice can be provided Schedule K-3 not required. A married couple, U.S. citizens,
as an attachment to the Schedule K-1. The notification must each own a 50% interest in SC, an S corporation. SC and the
state that shareholders will not receive Schedule K-3 from the S married couple has a tax year end of December 31. SC invests
corporation unless the shareholders request the schedule. in a regulated investment company. With respect to tax year
2023, SC receives a Form 1099 from the regulated investment
3. No 2023 Schedule K-3 requests by the 1-month date. company reporting $100 of creditable foreign taxes paid or
The S corporation does not receive a request from any accrued on passive category foreign source income. SC does
shareholder for Schedule K-3 information on or before the not have any foreign activity other than that from the regulated
1-month date. The 1-month date is 1 month before the date the investment company. The married couple receive notification
S corporation files the Form 1120-S. For tax year 2023 calendar from SC as an attachment to Schedule K-1 that they will not
year S corporations, the latest 1-month date is August 15, 2024, receive the Schedule K-3 unless they so request. The married
if the S corporation files an extension. Any request from a couple do not request Schedule K-3 from SC for tax year 2023.
shareholder for Schedule K-3 information for a year prior to tax SC qualifies for the domestic filing exception, and, as such, SC
year 2023 will be considered a request for a tax year 2023 need not complete Schedules K-2 and K-3.
Schedule K-3 as well. Example 2. Domestic filing exception not met. The facts
Note. If an S corporation receives a request from a shareholder are the same as in Example 1 except that the married couple
for the Schedule K-3 information after the 1-month date for the each own a 40% interest in SC, and A, a U.S. citizen, owns a
tax year 2023 and has not received a request from any other 20% interest in SC. A requests Schedule K-3 from SC for tax
shareholder for Schedule K-3 information on or before the year 2023 and SC receives this request on February 1, 2024.

2 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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After requesting an extension, SC files Form 1120-S on August reprints the most recent applicable revenue procedure. Pub.
31, 2024. SC does not qualify for the domestic filing exception 1167 is available at IRS.gov/Pub1167. The procedures relevant
because A requested the Schedule K-3 by the 1-month date to Form 1120-S and the Schedule K-1 (Form 1120-S) apply for
(July 31, 2024). As such, SC must complete and file with the IRS purposes of the Schedules K-2 and K-3.
the parts and sections of the Schedules K-2 and K-3 that are
relevant to A. With respect to the Schedules K-2 and K-3 filed How To Complete Schedules K-2 and K-3
with the IRS, SC does not need to complete, attach, or file any
parts or sections relevant to the married couple. SC must provide Reporting currency. Report all amounts in U.S. dollars except
a copy of the filed Schedule K-3 to A on the date that SC files its where specified otherwise.
Form 1120-S. SC does not need to furnish a Schedule K-3 to the Form references. These instructions refer to other forms. If the
married couple. referenced form has been succeeded by another form, the
Example 3. Domestic filing exception met—Issuance of references to those prior forms encompass any successor forms.
Schedules K-3 still required. The facts are the same as in References in these instructions to Form 1040, U.S. Individual
Example 2 except that SC receives the request from A on August Income Tax Return, are intended, if applicable, to include Form
20, 2024. SC qualifies for the domestic filing exception because 1040-SR, U.S. Tax Return for Seniors, as well as other tax
A requested the Schedule K-3 after the 1-month date. SC is not returns for noncorporate shareholders such as Form 1041, U.S.
required to file the tax year 2023 Schedules K-2 and K-3 with the Income Tax Return for Estates and Trusts.
IRS or furnish the Schedule K-3 to the married couple. However, Uses of the parts of Schedules K-2 and K-3, in general.
SC is required to provide the Schedule K-3, completed with the
requested information, to A on September 20, 2024, the later of Part I of Schedule K-2 (and Part I of Schedule K-3). Used
the date on which SC files the Form 1120-S or 1 month from to report international tax items not reported elsewhere on
August 20, 2024. Because A requested a Schedule K-3 for tax Schedule K-2 or K-3.
year 2023, SC must file tax year 2024 Schedules K-2 and K-3 Part II of Schedule K-2 (and Part II of Schedule K-3).
with the IRS with respect to the information requested by A to the Used to figure the S corporation's income or loss by source and
extent that A is still a shareholder in tax year 2024. separate category of income, and to report the shareholder's
share of such income or loss. Shareholders will use the
Note. If an S corporation does not meet the domestic filing information to figure and claim a foreign tax credit on Form 1116
exception, it may meet the Form 1116 exemption to filing the or Form 1118, Foreign Tax Credit—Corporations.
Schedules K-2 and K-3. See Form 1116 Exemption, later. Part III of Schedule K-2 (and Part III of Schedule K-3).
Used to report information necessary for the shareholder to
When and Where To File determine the allocation and apportionment of research and
Attach Schedules K-2 and K-3 to your Form 1120-S and file both experimental (R&E) expense and interest expense for the foreign
by the due date (including extensions) for that return. tax credit limitation. Also used to report foreign taxes paid or
accrued by the S corporation and the shareholder's share of
Provide Schedule K-3 to your shareholders according to the such taxes. Shareholders will use the information to figure and
timeline for providing the Schedule K-1. See the Instructions for claim a foreign tax credit on Form 1116.
Form 1120-S. Part IV of Schedule K-2 (and Part IV of Schedule K-3).
See the Instructions for Form 1120-S for requirements with Used to report information the shareholder needs, in
respect to recordkeeping. combination with other information known to the shareholder, to
determine the amount of each distribution from a foreign
See the Instructions for Form 1120-S for instructions corporation that is treated as a dividend or excluded from gross
concerning amendments or adjustments to Schedules K-2 and income because the distribution is attributable to previously
K-3. taxed earnings and profits (PTEP) in the shareholder’s annual
PTEP accounts with respect to the foreign corporation, and the
Computer-Generated Schedules K-2 and K-3 amount of foreign currency gain or loss on the PTEP that the
Generally, all computer-generated forms must receive prior shareholder is required to recognize under section 986(c).
approval from the IRS and are subject to an annual review. Shareholders will report the dividends and foreign currency
However, see the Exception later. Requests for approval may be gain or loss on Form 1040.
submitted electronically to substituteforms@irs.gov; or requests
may be mailed to: Part V of Schedule K-2 (and Part V of Schedule K-3).
Used to provide information the shareholder needs to determine
Internal Revenue Service any inclusions under sections 951(a)(1) and 951A. Shareholders
Attn: Substitute Forms Program will use the information to complete Form 8992, U.S.
SE:W:CAR:MP:P:TP Shareholder Calculation of Global Intangible Low-Taxed Income
1111 Constitution Ave. NW, Room 6554 (GILTI), and Form 1040, with respect to subpart F income
Washington, DC 20224 inclusions, section 951(a)(1)(B) inclusions, and section 951A
inclusions.
Exception. If computer-generated Schedules K-2 and K-3 Part VI of Schedule K-2 (and Part VI of Schedule K-3).
conform to and do not deviate from the official form and Used to provide information needed by shareholders to
schedules, they may be filed without prior approval from the IRS. complete Form 8621, Information Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing
Important. Be sure to attach the approval letter to Fund, and to provide shareholders with information to determine
computer-generated Schedules K-2 and K-3. However, if the income inclusions with respect to the passive foreign investment
computer-generated form is identical to the IRS prescribed form, company (PFIC).
it does not need to go through the approval process, and an Part VII of Schedule K-2 (and Part VII of Schedule K-3).
attachment is not necessary. Used to provide the foreign corporation's net income in the
Every year, the IRS issues a revenue procedure to provide income groups for purposes of the shareholder's deemed paid
guidance for filers of computer-generated forms. In addition, taxes computation with respect to inclusions under sections
every year, the IRS issues Pub. 1167, General Rules and 951A and 951(a)(1). Shareholders will use the information to
Specifications for Substitute Forms and Schedules, which figure and claim a deemed paid foreign tax credit on Form 1118.

Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023) 3

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international tax information reporting forms or other international
Specific Instructions tax forms that may impact the shareholders tax returns.
This part is used to report information for international tax
If the information required in a given section exceeds the items not reported elsewhere on the Schedule K-2. Check the
! space provided within that section, do not enter “See box to indicate whether any of the following international tax
CAUTION attached” in the section or leave the section blank.
items are applicable in the tax year. If applicable, attach
Instead, complete all entry spaces in the section and attach the statements, as described later, to the Schedule K-2.
remaining information on additional sheets. For all attachments,
include the part, section, line number, and column of the relevant If applicable, the S corporation must also complete
portion of Schedules K-2 and K-3. The additional sheets must Schedule K-3, Part I, and include with the Schedule K-3 the
conform with the IRS version of that section. attachment(s) as described later with the shareholder's share of
the amounts.
Box 1. Gain on personal property sale. In general, income
Schedule K-2, Identifying Information from the sale of personal property is sourced according to the
At the top of each new page, enter the name of the S corporation residence of the seller; see section 865. For purposes of section
as it appears on the Form 1120-S. At the top of each new page, 904, personal property sold by the S corporation is treated as
enter the EIN of the S corporation as it appears on the Form sold by the shareholders; see section 865(i)(5) and section
1120-S. 1373(a). A U.S. citizen or resident alien individual with a tax
Item A—Part applicability. Check the “Yes” box to indicate the home (as defined in section 911(d)(3)) in a foreign country is
applicable parts of Schedules K-2 and K-3. Complete and attach treated as a nonresident with respect to the sale of personal
each applicable part to Form 1120-S and Schedule K-1 (Form property only if an income tax of at least 10% of the gain derived
1120-S). Check the “No” box to indicate the inapplicable parts of from the sale is actually paid to a foreign country, with respect to
Schedules K-2 and K-3. Do not complete and attach the that gain; see section 865(g). In addition, if a U.S. resident
inapplicable parts to the filed Form 1120-S or the Schedule K-3. maintains an office or other fixed place of business in a foreign
country, income from the sale of personal property attributable to
Schedule K-3, Identifying Information such office or other fixed place of business is foreign source only
if an income tax of at least 10% of the income from the sale is
Items A and B. Items A and B should be the same as reported actually paid to a foreign country with respect to such income;
on Schedule K-1 (Form 1120-S), Part I, Items A and B. see section 865(e)(1).
Items C and D. Items C and D should be the same as reported If the S corporation has income from the sale of personal
on Schedule K-1 (Form 1120-S), Part II, Items E and F. property (other than inventory, depreciable personal property,
and certain intangible property excepted from the general rule of
Item E. Item E should correspond to Schedule K-2, Identifying section 865(a)) and the S corporation pays income tax to a
Information, Item A. foreign country with respect to income from the sale or the
income is eligible for re-sourcing under an applicable treaty, it
Schedule K-2, Part I (Corporation’s must check box 1 and attach a statement to Schedules K-2 and
Other Current Year International K-3 (for shareholder’s share) with Table 1, Information on
Personal Property Sold. Each item of property sold must be
Information), and Schedule K-3, Part I listed separately with Table 1 completed. The S corporation may
combine sales of stock property by country. Otherwise, do not
(Shareholder's Share of Corporation's combine sales of property. In column (b), if the gain is capital,
Other Current Year International enter “long-term” or “short-term.” For column (f), enter the
two-letter code from the list at IRS.gov/CountryCodes. Do not
Information) enter “various” or “OC” for the country code. If the property sale
is taxed by more than one country, complete a separate line for
Note. Shareholders will use the information reported in the that country, but denote in some manner (for example, a
attachments with respect to boxes 1 through 5 and 10 to claim footnote) that the property entered on both lines is the same
and figure a foreign tax credit on Form 1116 or 1118. Section property.
1373(a) treats an S corporation as a partnership for purposes of
sections 901 through 909 and sections 951 through 965. Box 2. Foreign oil and gas taxes. A separate foreign tax credit
limitation is applied with respect to foreign oil and gas taxes. See
Note. Shareholders will also use the information reported in section 907(a) and Regulations section 1.907(a)-1 for details. If
attachments with respect to box 6 to prepare their tax returns the S corporation has such taxes, it must check box 2 and attach
(Form 1040) by taking into account that under section 267A they a completed Schedule I (Form 1118), Reduction of Foreign Oil
are not allowed deductions for the amounts listed in the and Gas Taxes, to the Schedules K-2 and K-3 (with the
statement with respect to box 6. shareholder’s share). The S corporation need not complete
Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through
Note. Shareholders will use the information reported in 4; or Part III, lines 1 and 3. The S corporation must attach
attachments with respect to boxes 7 through 9 to identify any Schedule I (Form 1118) because the limitation applies to
individuals eligible to claim a foreign tax credit.

Table 1—Information on Personal Property Sold (for use with Schedules K-2 and K-3 (Form 1120-S), Part I, box 1)

(a) Property (b) Long-term/Short-term (c) Gains (d) Amount of tax paid in (e) Amount of tax paid (f) Taxing country
description local currency in U.S. dollars (enter two-letter country
code)

4 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Note. The S corporation attaches a partially completed 4. Amount of related income on which such taxes were paid
Schedule I (Form 1118), so that the shareholder has the or accrued in the origin year of the splitter arrangement.
information it needs to complete Form 1116. The S corporation 5. The two-letter code for the country to which the taxes
is not attaching Schedule I (Form 1118), as a form required to be were paid or accrued from the list at IRS.gov/CountryCodes. Do
filed by the S corporation for purposes of the S corporation not enter “various” or “OC” for the country code.
determining creditable taxes because an S corporation cannot
claim a foreign tax credit. 6. The separate category and source of income to which the
taxes are assigned if determinable by the S corporation.
Box 3. Splitter arrangements. Foreign taxes with respect to a 7. Amount of related income taken into account in the
foreign tax credit splitting event are suspended until the related current tax year and the amount of taxes originally paid that
income is taken into account by the taxpayer. See section 909. relate to that portion of the related income if determinable by the
There is a foreign tax credit splitting event with respect to foreign S corporation.
taxes of a payor if in connection with a splitter arrangement, as
defined in Regulations section 1.909-2(b), the related income Box 4. Foreign tax translation. If the S corporation reports any
was, is, or will be taken into account by a covered person. See foreign taxes in Schedules K-2 and K-3, Part III, Section 3, it
Regulations section 1.909-2(a). A covered person, as defined in must check the box for item 4 and attach to Schedules K-2 and
Regulations section 1.909-1(a)(4), includes, for example, any K-3 the statement described in the instructions for those
entity in which the payor holds, directly or indirectly, at least a sections.
10% ownership interest (determined by vote or value). A payor,
as defined in Regulations section 1.909-1(a)(3), includes, for Box 5. High-taxed income. If the S corporation has passive
example, a person that takes foreign income taxes paid or income, the S corporation must check box 5 and attach a
accrued by an S corporation into account pursuant to section statement to Schedules K-2 and K-3 with Attachment 1 or 2, or
1373(a). both, completed. These attachments will provide the
shareholder with the information to determine whether its
The S corporation must report foreign taxes that are passive income is high-taxed passive income.
potentially suspended on Schedule K-2, Part III, Section 3,
line 2E, and each shareholder's share of such taxes on Income received or accrued by a U.S. person that would
Schedule K-3, Part III, Section 3, line 2E. An S corporation may otherwise be passive income is not treated as passive income if
not be able to determine whether taxes are suspended and the income is determined to be high-taxed income. See section
whether related income is taken into account. However, where 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
the S corporation is able to determine that taxes are potentially a shareholder must group its shares of passive income from an S
suspended, or potentially unsuspended, it must report such corporation according to the rules in Regulations section
taxes and the information requested in these instructions for 1.904-4(c)(3), except that the portion, if any, of the share of
box 3. income attributable to income earned by an S corporation
through a foreign qualified business unit (QBU) is separately
For example, where an S corporation owns a reverse hybrid grouped under the rules of Regulations section 1.904-4(c)(4).
and the foreign country assesses tax on the S corporation with See also Regulations section 1.904-4(c)(5)(ii). For this purpose,
respect to income earned by the reverse hybrid, the S a foreign QBU is a qualified business unit (as defined in section
corporation should report such taxes as potentially suspended 989(a)), other than a controlled foreign corporation (CFC) or
taxes. noncontrolled 10%-owned foreign corporation, that has its
Check box 3 and attach a statement to both Schedules K-2 principal place of business outside the United States. See
and K-3 that includes the following for each arrangement in Regulations section 1.904-4(c)(3).
which the S corporation participates that would qualify as a
splitter arrangement under section 909 if one or more Note. Passive income is not treated as subject to a withholding
shareholders are covered persons with respect to an entity that tax or other foreign tax when a credit is disallowed in full for such
took into account related income from the arrangement. foreign tax, for example, under section 901(k).
Section 1 of attached statement—Potentially suspended
taxes. Example 4. Part I, box 5. High-taxed income. USC is an S
corporation, with two U.S. citizen individual shareholders with
1. Explanation of the splitter arrangement (for example, equal interests in the S corporation. In Year 1, USC receives
reverse hybrid owned by the S corporation). $100 of passive dividend income from a noncontrolled
2. Amount of taxes paid or accrued by the S corporation in 10%-owned foreign corporation subject to a 15% withholding
connection with the splitter arrangement. tax. USC also receives $150 of passive interest income from an
3. Amount of related income on which such taxes were paid unrelated person subject to a 30% withholding tax. USC incurs
or accrued. $80 of expenses that are allocable to the interest income. USC
also receives $50 of passive dividend income from a CFC, which
4. The two-letter code for the country to which the taxes is not subject to tax. No expenses are allocable to the dividend
were paid or accrued from the list at IRS.gov/CountryCodes. Do income. USC's branch operation in Country X that is treated as a
not enter “various” or “OC” for the country code. QBU under section 989(a) receives $100 of passive dividend
5. The separate category and source of income to which the income subject to a 15% withholding tax. Finally, USC earns
taxes are assigned if determinable by the S corporation. $400 of passive income with respect to its branch operation in
Section 2 of attached statement—Potentially Country X that is treated as a QBU under section 989(a). Such
unsuspended taxes. income is subject to foreign tax (but not withholding tax) of $40.
Expenses of $120 are allocable to the share of branch income.
1. Origin year of the splitter arrangement. No expenses are allocable to the dividend income.
2. Explanation of the splitter arrangement (for example, For Year 1, USC checks box 5 in Part I of Schedule K-2 (Form
reverse hybrid owned by the S corporation). 1120-S) and attaches Attachments 1 and 2 to Form 1120-S,
3. Amount of taxes paid or accrued by the S corporation in Schedule K-2.
connection with the splitter arrangement in the origin year of the
splitter arrangement.

Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023) 5

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Attachment 1 for Schedule K-2, Part 1, Box 5

                                                                                               I. Passive Income Net of      II. Taxes 
                                                                                               Allocable Expenses
  A Passive income subject to withholding tax of 15% or more
  B Passive income subject to withholding tax of less than 15% but greater than zero
  C Passive income not subject to any foreign tax
  D Passive income subject to no withholding tax, but subject to other foreign tax
Reference: Regulations section 1.904-4(c)(3)

Attachment 2 for Schedule K-2, Part 1, Box 5

Name of foreign QBU:
Complete a separate Attachment 2 for each foreign QBU.                                         I. Passive Income Net of      II. Taxes 
                                                                                               Allocable Expenses
  A Passive income subject to withholding tax of 15% or more
  B Passive income subject to withholding tax of less than 15% but greater than zero
  C Passive income not subject to any foreign tax
  D Passive income subject to no withholding tax, but subject to other foreign tax
Reference: Regulations section 1.904-4(c)(4)
  USC completes the same attachments with the shareholder                         Schedule-B-Other-Information-Question-22 for additional 
shares and attaches those attachments to each Schedule K-3                        information regarding section 267A. In addition, for each 
provided to the shareholders.                                                     shareholder that is disallowed a deduction under section 267A, 
                                                                                  the corporation should check box 6 in Part I of the specific 
Box 6. Section 267A disallowed deduction.              Shareholders               shareholder’s Schedule K-3 and attach to the Schedule K-3 a 
will also use the information from box 6 to prepare their tax                     statement titled “Section 267A Disallowed Deduction” that 
returns (Form 1040) by taking into account that under section                     separately lists the following information.
267A they are not allowed deductions for the amounts listed in                    • The amount of interest paid or accrued by the S corporation 
the statement with respect to box 6.                                              for which the shareholder is not allowed a deduction under 
  Check box 6 if the S corporation paid or accrued any interest                   section 267A.
or royalty for which the S corporation knows, or has reason to                    • The amount of royalty paid or accrued by the S corporation for 
know, that one or more of its shareholders is not allowed a                       which the shareholder is not allowed a deduction under section 
deduction under section 267A. See the instructions for Form                       267A.
1065, Schedule B, line 22, and FAQs for section 267A at                           • The extent to which information reported in other parts of the 
IRS.gov/Businesses/Partnerships/FAQs-for-Form-1065-                               Schedule K-3 (for example, a line in Part II, Section 2) reflects 

Attachment 1 for Example 4

                                                                                               I. Passive Income Net of      II. Taxes 
                                                                                               Allocable Expenses
  A Passive income subject to withholding tax of 15% or more                                   $170                          $60
  B Passive income subject to withholding tax of less than 15% but greater than zero           0                             0
  C Passive income not subject to any foreign tax                                              50                            0
  D Passive income subject to no withholding tax, but subject to other foreign tax             0                             0
Reference: Regulations section 1.904-4(c)(3)

Attachment 2 for Example 4

Name of foreign QBU: Country X QBU
Complete a separate Attachment 2 for each foreign QBU.                                         I. Passive Income Net of      II. Taxes 
                                                                                               Allocable Expenses
  A Passive income subject to withholding tax of 15% or more                                   $100                          $15
  B Passive income subject to withholding tax of less than 15% but greater than zero           0                             0
  C Passive income not subject to any foreign tax                                              0                             0
  D Passive income subject to no withholding tax, but subject to other foreign tax             280                           40
Reference: Regulations section 1.904-4(c)(4)

6                                                                                      Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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interest or royalty for which the shareholder is not allowed a Note. If the S corporation attached any of the forms identified in
deduction under section 267A. boxes 7, 8, and 9 to the Form 1120-S, the S corporation need not
attach them again to the Schedule K-2. See Other Forms and
When completing other parts of Schedules K-2 and K-3
Statements That May Be Required in the Instructions for Form
! (for example, a line in Part II, Section 2), list an amount 1120-S.
CAUTION without regard to whether the shareholder is disallowed
a deduction under section 267A for the amount. Box 10. Shareholder loan transactions. Check box 10 and
attach a statement with the information in the applicable Table 2
Note for boxes 7, 8, and 9. If the filer meets an exception, or Table 3, if the S corporation knows or has reason to know that
such as the multiple filer exception, to filing Forms 5471, 8865, it (i) received a loan from its shareholder (“downstream loan”), as
and/or 8858, the filer is not required to complete and attach described in Regulations section 1.861-9(e)(8), or (ii) loaned an
those forms. However, the filer must still attach to the Form amount to its shareholder (“upstream loan”), as described in
1120-S any required statements to qualify for the exception to Regulations section 1.861-9(e)(9).
filing the Forms 5471, 8865, and/or 8858. Downstream loan. On an attachment to both the Schedules
Box 7. Form 8858 information. Check box 7 and ensure that K-2 and K-3, provide the details with respect to any downstream
Form(s) 8858 is attached to the Form 1120-S if the S corporation loans from its shareholder, including the amount of interest
filed one or more Forms 8858, Information Return of U.S. expense paid or accrued by the S corporation. Report the
Persons With Respect to Foreign Disregarded Entities (FDEs) information separately for each separate loan. The reporting
and Foreign Branches (FBs), or if another person filed the should be as follows in Table 2.
Form(s) 8858 on behalf of the S corporation. With respect to
Schedule K-3, the S corporation should check box 7 if the S Table 2. Downstream Loans
corporation checked box 7 on the Schedule K-2. The S
corporation need not attach Form 8858 to the Schedules K-1 or Name of lender Lender’s TIN Date of loan Amount of loan Interest expense
for year
K-3.
Box 8. Form 5471 information. Check box 8 and attach
Form(s) 5471 to Form 1120-S and Schedule K-1 (Form 1120-S) Upstream loan. On an attachment to both the Schedules K-2
if either of the following apply. and K-3, provide the details with respect to any upstream loans
• The S corporation filed one or more Forms 5471, Information to its shareholder, including the amount of interest income
Return of U.S. Persons With Respect to Certain Foreign received or accrued by the S corporation. Report the information
Corporations. separately for each separate loan. The reporting should be as
• The S corporation received Form(s) 5471 as an attachment to follows in Table 3.
a Schedule K-3 issued to the S corporation.
Table 3. Upstream Loans
Form 5471 does not need to be attached to the Schedules
K-1 or K-3 if the S corporation knows or has reason to know that Name of Borrower’s TIN Date of loan Amount of loan Interest income
its direct shareholder (and any indirect shareholder) does not borrower for year
need the information on Form 5471 to prepare its tax return. For
example, the S corporation would not need to attach the Form
5471 to Schedules K-3 for certain tax-exempt shareholders. Box 11. Entity treatment for certain S corporations. Check
A pass-through entity shareholder that receives a Form 5471 box 11 if the S corporation has made an election under
with a Schedule K-1 or K-3 must provide the relevant portions of Proposed Regulations section 1.958-1(e)(2), to be treated as
Form 5471 to its shareholder unless the pass-through entity owning stock of a CFC within the meaning of section 958(a).
knows or has reason to know that its direct shareholder (and any Box 12. Box 12 is reserved for future use on Schedule K-2. Box
indirect shareholder) does not need the information on the Form 12 is used for Form 8865 information on Schedule K-3. If the S
5471 to prepare its tax return. corporation filed one or more Forms 8865, Return of U.S.
If a shareholder only needs certain information from the Form Persons With Respect to Certain Foreign Partnerships, check
5471, such as the Schedule Q, the S corporation need only box 12 on Schedule K-3 and attach such form(s) to Form
attach that portion to the Schedule K-3, and not the complete 1120-S. The Form(s) 8865 need not be attached to the
Form 5471. Schedules K-3.
Box 9. Other forms. Check box 9 if the S corporation filed any Box 13. Other international items. If the S corporation has
other international tax forms, or if another person filed these transactions, income, deductions, payments, or anything else
forms on behalf of the S corporation, or if the S corporation that implicates the international tax provisions of the Code and
received these forms as an attachment to a Schedule K-1 or K-3 such events are not otherwise reported in this part or other parts
issued to the S corporation. Attach those form(s) to Form 1120-S of Schedules K-2 and K-3, report that information on an
and Schedule K-3, if applicable to the shareholder. This attachment to the Schedules K-2 and K-3 and check box 13. As
includes, but is not limited to, the following forms. an example, an S corporation should attach Form 926, Return by
• Form 5713, International Boycott Report. a U.S. Transferor of Property to a Foreign Corporation.
• Form 8833, Treaty-Based Return Position Disclosure Under
Section 6114 or 7701(b). Schedule K-2, Parts II and III, and
• Form 8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund. Schedule K-3, Parts II and III
Exception for Form 8621. With respect to Schedule K-3, the
S corporation should check box 9 if the S corporation checked Note. Shareholders will use the following information to claim
box 9 on the Schedule K-2. The S corporation should indicate in and figure a foreign tax credit on Form 1116 or 1118.
an attachment to the Schedule K-3 that Form(s) 8621 is attached If the S corporation does not qualify for the Domestic Filing
to Schedule K-2. The S corporation need not attach Forms 8621 Exception, Schedules K-2 and K-3, Parts II and III, must be
to the Schedule K-1 or K-3. completed unless (a) the S corporation does not have a direct or
indirect shareholder that is eligible to claim a foreign tax credit, or

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(b) no direct or indirect shareholder would have to file a Form shareholder. In addition, some expenses of the S corporation are
1116 or 1118 to claim the foreign tax credit. allocated and apportioned by the shareholder. Because of this
shareholder determination, it is not possible for the shareholder
Shareholders Eligible To Claim Credit to assume that all income of the S corporation is U.S. source and
A shareholder that is eligible to claim a foreign tax credit includes all expenses of the S corporation reduce U.S. source income.
(i) a U.S. citizen or resident, and (ii) a U.S. citizen or resident Also, the allocation and apportionment of certain shareholder
beneficiary of domestic trusts and estates. See sections 901 and expenses take into account their shares of assets and income of
906. the S corporation that are not otherwise reported on the
Schedule K-1.
Form 1116 Exemption Exception For example, for purposes of section 904, personal property
Under section 904(j), certain shareholders are not required to file sold by the S corporation is treated as sold by the shareholders;
a Form 1116 (Form 1116 exemption). Also see Foreign Tax see section 865(i)(5) and section 1373(a). Generally, income
Credit - How to Figure the Credit on IRS.gov. An S corporation is from the sale of certain personal property (excluding inventory) is
not required to complete Schedules K-2 and K-3 if all sourced according to the residence of the seller. In cases in
shareholders are eligible for the Form 1116 exemption and the S which the shareholder is a pass-through entity, the S corporation
corporation receives notification of the shareholders’ eligibility for might not know the ultimate residence of the first
such exemption by the 1-month date (as defined earlier). If an S non-pass-through shareholder. The S corporation is not required
corporation receives notification from only some of the to separately state gain from the sale of personal property on
shareholders that they are eligible for the Form 1116 exemption, Schedules K and K-1 since it is generally included in ordinary
the S corporation need not complete the Schedule K-3 for those income. However, the gain is separately reported in Schedules
exempt shareholders but must complete the Schedules K-2 and K-2 and K-3, Part II.
K-3 with respect to the other shareholders to the extent that the As another example, the shareholder’s R&E expense (which
S corporation does not qualify for the domestic filing exception. includes the share of the S corporation’s R&E expense) is
An S corporation that does not have or receive sufficient allocated and apportioned by the shareholder; see Regulations
information or notice regarding a direct or indirect shareholder section 1.861-17(f). R&E expense is allocated and apportioned
must presume such shareholder is eligible to claim a foreign tax based on the gross receipts by Standard Industrial Classification
credit and such shareholder would have to file a Form 1116 to Manual (SIC) code. R&E expense by SIC code is not reported on
claim a credit. As such, the S corporation must complete the Schedules K and K-1, but is reported in Schedules K-2 and K-3,
Schedules K-2 and K-3, including Parts II and III, accordingly. Part II. Also, the shareholder needs Schedule K-3, Part III,
Section 1, for the shareholder’s share of the S corporation’s
Example 5. Form 1116 exemption. A married couple, U.S. gross receipts by SIC code for purposes of allocating and
citizens, each own a 50% interest in SC, an S corporation. The apportioning R&E expense.
couple and SC each have a calendar tax year. SC invests in a
regulated investment company. SC receives a Form 1099 from In some cases, the shareholder will be able to use the
the regulated investment company reporting $400 of creditable information reported in Parts II and III to increase the foreign tax
foreign taxes paid or accrued on passive category foreign source credit limitation, and the amount of available foreign tax credit to
income. SC’s only foreign activity is that from the regulated the shareholder. For example, Part III, Section 2, provides the
investment company. The couple do not pay or accrue any shareholder with the tax book value of the assets of the S
foreign taxes other than their pro rata share of SC’s foreign taxes. corporation. In general, a shareholder apportions interest
The couple also do not have any other foreign source income. expense to reduce U.S. source income or foreign source income
The couple qualify for the Form 1116 exemption and notify SC by based on the tax book value of its assets, including its share of
the 1-month date that they do not need the Schedule K-3. Even the S corporation’s interest expense and assets; see section
though SC does not qualify for the domestic filing exception 864(e)(2) and Regulations section 1.861-9(e). Taking into
because the creditable foreign taxes paid or accrued by SC are account the assets of an S corporation generating solely U.S.
greater than $300, because the couple notify SC by the 1-month source income would result in more expense allocated to reduce
date that they do not need the Schedule K-3 under the Form U.S. source income and less expense allocated to reduce
1116 exemption, SC need not complete Schedules K-2 and K-3. foreign source income. Additional foreign source income
increases the shareholder’s foreign tax credit limitation, and the
S corporations with limited or no foreign activity. In many ability of the shareholder to claim foreign tax credits. Schedules
instances, an S corporation with no foreign source income, no K and K-1 contain net amounts but do not include separately
assets generating foreign source income, and no foreign taxes stated reporting for the S corporation’s interest expense for
paid or accrued may still need to report information on international tax reporting purposes, or the tax book value of the
Schedules K-2 and K-3. For example, if the shareholder claims assets; see Regulations section 1.861- 9(e). See the instructions
the foreign tax credit, the shareholder generally needs certain for Part II, lines 39 through 43, and Part III, Section 2, for further
information from the S corporation in Schedule K-3, Parts II and guidance.
III, to complete Form 1116. This information should have been Example 6. Parts II and III required for S corporation
reported in prior years, including before the Tax Cuts and Jobs with no foreign activity. U.S. citizens A and B own equal
Act, with the Schedules K and K-1, and is information the interests in SC, an S corporation. SC has no foreign activity. In
shareholder needs to figure the foreign tax credit limitation, Year 1, A pays $2,000 of foreign income taxes on passive
which determines the amount of foreign tax credit available to category income other than capital gains reported to A on a
the shareholder. See Domestic Filing Exception, earlier. payee statement. A has interest expense of $5,000 and SC does
Section 904 generally limits the foreign tax credit to the not have interest expense. None of A’s interest expense is
portion of U.S. tax liability attributable to foreign source taxable directly allocable. A does not have an overall domestic loss in tax
income. Foreign source taxable income is foreign source gross year 2023.
income less allocable expenses. In general, the S corporation Because A must complete Form 1116 to claim a foreign tax
must complete the Schedules K-2 and K-3, Parts II and III, credit, A requests a Schedule K-3 by the 1-month date, and
because the S corporation’s gross income, gross receipts, therefore the domestic filing exception does not apply to SC with
expenses, assets, and foreign taxes paid may affect the foreign respect to A. SC must complete the relevant portions of Parts II
tax credit available to the shareholder. The source of certain and III of Schedules K-2 and K-3 (for A). The tax book value of
gross income and gross receipts is determined by the

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SC’s assets is $100,000 (reported on Schedule K-2, Part III, Because A and SC do not have R&E expense or interest
Section 2, column (a)) and A’s share of those assets is $50,000 expense, and because SC did not pay or accrue any foreign
(reported on Schedule K-3, Part III, Section 2, column (a)). Not taxes, SC does not need to complete Schedules K-2 and K-3,
including A’s pro rata share of the assets of SC, the tax book Part III.
value of A’s assets is $50,000. Of A’s assets, $10,000 generates
passive category foreign source income and $40,000 generates Note. A shareholder may need the share of the S corporation’s
U.S. source income. A has passive category foreign source gross income for purposes of allocating and apportioning
taxable income before interest expense of $8,000. A’s U.S. tax expenses other than those described in Regulations section
rate is 25%. A’s interest expense and SC’s assets are 1.861-8(e)(9).
characterized in the same category under sections 163 and 469 General filing instructions. In Schedules K-2 and K-3, Parts II
for purposes of Temporary Regulations section 1.861-9T(d). A and III, the S corporation reports its gross income, gross
uses the tax book value (as opposed to the alternative tax book receipts, cost of goods sold (COGS), certain deductions, and
value) to allocate and apportion interest expense. taxes by source and separate category. The S corporation also
A’s interest expense is apportioned between U.S. source and reports information that the shareholders will need to allocate
foreign source income ratably based on the tax book value of A’s and apportion expenses and determine the source of certain
U.S. source and foreign source assets. Without taking into items of gross income and gross receipts. Unless specifically
account the pro rata share of SC’s assets, the amount of A’s noted later, the S corporation reports in Schedule K-3, Parts II
interest expense that would reduce passive category foreign and III, the shareholder's share of the S corporation's gross
source income is $1,000 ($5,000 x $10,000 / $50,000). receipts, gross income, COGS, certain deductions, and taxes by
Therefore, A’s passive category foreign source taxable income source and separate category. The shareholder adds its share of
would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A the S corporation's foreign source gross receipts, gross income,
may only use $1,750 (25% x $7,000) of the $2,000 of foreign COGS, certain deductions, and taxes by separate category to its
taxes. See section 904. other foreign source gross receipts, gross income, COGS,
Taking into account the pro rata share of SC’s assets, the certain deductions, and taxes in that separate category to figure
amount of A’s interest expense that reduces passive category its foreign tax credit. The S corporation also reports on the
foreign source income is $500 ($5,000 x $10,000 / $100,000). Schedule K-3 the share of expenses and the allocation and
Therefore, A’s passive category foreign source taxable income apportionment factors so that the shareholder may determine
would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, A may expenses allocated and apportioned to foreign source income.
use $1,875 (25% x $7,500) of the $2,000 of foreign taxes—an S corporation determination. The source and separate
additional foreign tax credit amount of $125 after taking into category of certain gross income, gross receipts, COGS, as well
account A’s share of the tax book value of the S corporation as the allocation and apportionment of certain deductions, can
assets. be determined by the S corporation. This includes deductions
B does not request a Schedule K-3 from SC for tax year that are definitely related to certain gross income and gross
2023. Under the domestic filing exception, SC does not need to receipts of the S corporation. See Regulations section
complete Schedule K-3 for B. 1.861-8(b)(1). See Schedule K-2, Part II, columns (a) through
Example 7. Part II, not Part III, required for S corporation (e), and Part III, Section 1, columns (a) through (e). In Part III,
with no foreign activity. The facts are the same as in Section 2, columns (a) through (e), some S corporation assets
Example 6, except that A has $5,000 of deductions that are not may be characterized by source and separate category by the S
definitely related to any gross income as described in corporation. This includes certain assets that attract directly
Regulations section 1.861-8(e)(9), and A and SC have no other allocated interest expense under Temporary Regulations section
expenses. Further, A’s share of SC’s gross income is $50,000. 1.861-10T(b) and (c). See Temporary Regulations section
Not including A’s pro rata share of the income of SC, A’s gross 1.861-10T(d)(2).
income is $50,000. Of A’s gross income, $5,000 is passive In Part III, Section 3, in the U.S. and foreign columns, the S
category foreign source gross income and $45,000 is U.S. corporation assigns foreign taxes paid or accrued to a separate
source gross income. SC does not have any gross income the category and source.
source of which is determined by the shareholder. The shareholder's share of the amounts determined by the S
A’s expenses must be ratably apportioned based on A’s gross corporation are reported on equivalent columns in Schedule K-3,
income (including A’s pro rata share of the income of SC); see Parts II and III.
Regulations section 1.861-8(c)(3). Therefore, SC must complete Certain gross income, gross receipts, COGS, assets,
Schedule K-2, Part II, and Schedule K-3, Part II (for A). Before deductions, and taxes are not assigned to a source or separate
taking into account the pro rata share of SC’s gross income, the category by the S corporation. See Shareholder determination,
amount of A’s expenses described in Regulations section later.
1.861-8(e)(9) that reduce foreign source income is $500 ($5,000
x $5,000/$50,000). Therefore, A’s foreign source taxable income Foreign branch category income. An S corporation itself
would be $4,500 ($5,000 − $500). At a 25% U.S. tax rate, A may does not have foreign branch category income. However, report
only use $1,125 (25% x $4,500) of the $2,000 of foreign taxes. all amounts that would be foreign branch category income of its
See section 904. shareholders as if all shareholders were U.S. persons that were
not pass-through entities. See Schedule K-2, Part II, column (b);
Taking into account the pro rata share of SC’s gross income, Part III, Sections 1 and 2, column (b); and Part III, Section 3,
the amount of A’s expenses described in Regulations section column (c). The shareholder's share of the amounts determined
1.861-8(e)(9) that reduce foreign source income is $250 ($5,000 by the S corporation are reported in equivalent columns in
x $5,000/$100,000). Therefore, A’s foreign source taxable Schedule K-3, Parts II and III.
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 Section 901(j) income. Income derived from each sanctioned
foreign taxes in Year 1—an additional foreign tax credit amount country is subject to a separate foreign tax credit limitation. If the
of $62.50 after taking into account A’s pro rata share of the gross S corporation derives such income, enter code 901j on the line
income of SC. after category code. See Schedule K-2, Part II, column (e); Part
III, Sections 1 and 2, column (e); Part III, Section 3, column (f).
The shareholder's share of the amounts determined by the S

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corporation are reported on equivalent columns in Schedule K-3, In Schedule K-2, Part III, Section 3, in the shareholder
Parts II and III. See the Instructions for Form 1116 for the column, enter the foreign taxes that are assigned to a source of
potential countries to be listed with the section 901(j) category of income by the shareholder. This includes taxes imposed on
income. certain sales income. The shareholder's share of the amounts
determined by the S corporation are reported on equivalent
Note. At the time these instructions went to print, section 901(j) columns in Schedule K-3, Parts II and III.
is the only category reported in Part II, Sections 1 and 2, column
(e), and Part III, Sections 1 and 2, column (e). Schedule K-2, Part II, and
Section 951A category income. Section 951A category Schedule K-3, Part II (Foreign Tax
income is any amount of Global Intangible Low-Taxed Income
(GILTI) includible in gross income under section 951A (other Credit Limitation)
than passive category income). If the S corporation pays or
accrues tax on the receipt of a distribution of PTEP assigned to Section 1—Gross Income
the reclassified section 951A PTEP or section 951A PTEP
groups, the S corporation must assign those taxes to section Lines 1 through 24. Form 1116 requires an individual to
951A category income. The S corporation will enter these taxes separately report gross income and gross receipts by source
in Part III, Section 3, column (b). Section 951A category income and separate category. See sections 861 through 865 (and
is not otherwise reported on the Schedules K-2 and K-3. section 904(h) and, in some cases, U.S. income tax treaties).
See also sections 1366 and 1373(a). Therefore, shareholders
Note. An S corporation may have an income inclusion under will report line 24 by country on their Form 1116, Part I, line 1a.
section 951A if it made an election under Proposed Regulations Section 1 also generally follows the types of gross income and
section 1.958-1(e)(2), to be treated as owning stock of a CFC gross receipts separately reported on Form 1120-S, Schedule K.
within the meaning of section 958(a). Shareholders making a section 962 election, in addition to
completing the Form 1116, complete the Form 1118 solely with
Income resourced by treaty. If a sourcing rule in an applicable
respect to the deemed paid credit for inclusions under sections
income tax treaty treats any U.S. source income as foreign
951(a) and 951A.
source, and there is an election to apply the treaty, the income
will be treated as foreign source. This category applies if the S For each line, report the total for each country in column (g).
corporation pays or accrues foreign taxes on receipt of a Country code. Forms 1116 and 1118 require the taxpayer to
distribution of PTEP that is sourced from an annual PTEP report the foreign country or U.S. territory with respect to which
account that corresponds to the separate category relating to the gross income and gross receipts are sourced. On lines 1
U.S. source income included under section 951(a)(1) or 951A through 24, for each gross income and gross receipts item, enter
and resourced as foreign source income under a treaty. on a separate row (A, B, or C) the two-letter code from the list at
The designations below are only relevant for Part III, Section IRS.gov/CountryCodes for the foreign country or U.S. territory
3, column (f). within which the gross income and gross receipts are sourced. If
a type of income is sourced from more than three countries,
Code RBT PAS. If an applicable income tax treaty treats any
attach a schedule with the information required in Schedule K-2,
U.S. source passive category income as foreign source passive
Part II, and Schedule K-3, Part II, for that type of income.
category income, and there is an election to apply the treaty,
enter code RBT PAS. If income is U.S. source, enter “US.” Do not enter “various” or
“OC” for the country code.
Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general Note. For Part II, column (f), enter the code XX if the S
category income, and there is an election to apply the treaty, corporation cannot determine the country or U.S. territory with
enter code RBT GEN. respect to which the gross income and gross receipts are
Code RBT 951A. If an applicable income tax treaty treats any sourced because the source is determined by the shareholder.
U.S. source section 951A category income as foreign source However, do not enter the code XX for Part II, column (f), if an
section 951A category income, and there is an election to apply income tax of at least 10% of the gain derived from the sale is
the treaty, enter code RBT 951A. actually paid to a foreign country with respect to that gain. See
sections 865(e) and 865(g). Instead, enter for Part II, column (f),
Shareholder determination. In Schedule K-2, Part II, Section the foreign country to which the S corporation paid the tax of at
1, column (f), and Part III, Section 1, column (f), enter the gross least 10% of the gain.
income, income adjustments, and gross receipt of the S
corporation that is required to be sourced by the shareholder. Each gross income and gross receipts item (for example,
This includes income from the sale of most personal property sales vs. interest income) may have different countries listed on
other than inventory, depreciable property, and certain intangible rows A, B, C, etc., given that the S corporation might not have
property sourced under section 865. See sections 1366 and sales income and interest income, for example, from the same
1373(a). This also includes certain foreign currency gain on country. Line 24 should sum each country's total income
section 988 transactions. See the Instructions for Form 1116 and reported in Part II, regardless of the line on which such income is
Pub. 514, Foreign Tax Credit for Individuals, for additional reported, whether A, B, C, etc.
details. Attach a statement to the Form 1120-S, to identify the Exceptions. The instructions for Forms 1116 and 1118
separate category of income under section 904(d) of the specify exceptions from the requirement to report gross income
amounts listed in Part II, Section 1, column (f). and gross receipts by foreign country or U.S. territory with
In Schedule K-2, Part II, column (f), include deductions that respect to regulated investment companies and section 863(b).
are allocated and apportioned by the shareholder. This includes See the instructions to the Forms 1116 and 1118 for these
most interest and R&E expense. See Regulations sections exceptions that apply in completing the Schedules K-2 and K-3,
1.861-9(e) and 1.861-17(f). Parts II and III. Do not enter a foreign country or U.S. territory (to
In Schedule K-2, Part III, Section 2, column (f), enter the report on a country-by-country basis) for lines 16 through 18.
assets that are assigned to a source and separate category by Note. Schedules K-2 and K-3 request that gross income and
the shareholder. gross receipts be reported by country or U.S. territory because

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such information is requested on Forms 1116 and 1118. Income
and taxes are reported by country on the Forms 1116 and 1118 Foreign Source
so that, for example, the IRS may initially evaluate whether Description (a) U.S. source (c) Passive category
taxpayers are claiming credits for compulsory payments to income
foreign governments. 11 Net short-term capital gain
Example 8. Part II. Multiple country sources—Gross A US $1,000
income. In Year 1, USC, an S corporation, has employees who
perform services in Country X and Country Y. USC earns B FR $400
$25,000 of general category services income, $10,000 with C CA (300)
respect to Country X, and $15,000 with respect to Country Y. D HA (200)
The two-letter code for Country X is AA and the two-letter
country code for Country Y is YY. USC makes the following
entries on the first two rows of Schedule K-2, Part II, under line 2.
Line 12. Net long-term capital gain. Report net long-term
Example 8 Table capital gain on line 12. Do not include gains reported on lines 13,
14, and 15 on line 12.
Foreign source
Line 13. Collectibles (28%) gain. Report collectibles gain on
Description (d) General category line 13 and not on line 12.
income
2 Gross income from performance of Line 14. Unrecaptured section 1250 gain. Report
services unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
A AA $10,000 1231 gain, report the gain on line 14 and not on line 15. Include
B YY $15,000 an attachment indicating the amount of unrecaptured section
1250 gain that is also net section 1231 gain.
Line 15. Net section 1231 gain. Report net section 1231 gain
Lines 3 and 4. Rental income. These lines are reported on line 15 and not on line 12 unless such amount is also
separately because they are reported separately on Form unrecaptured section 1250 gain. See the instructions for line 14.
1120-S, Schedule K. The sourcing rule may be the same for both
types of rental income. Lines 16 and 46. Section 986(c) gain and loss. Include the S
corporation’s share of a lower-tier pass-through entity’s section
Lines 7 and 8. Ordinary dividends and qualified dividends. 986(c) gain or loss, and the amount of section 986(c) gain or
Enter only ordinary dividends on line 7 and only qualified loss on distributions of PTEP sourced from the S corporation’s
dividends on line 8. Do not include as ordinary dividends or annual PTEP accounts. This is not reported as a net amount but,
qualified dividends the amount of any distributions received to rather, total section 986(c) gains for the year are reported on
the extent that they are attributable to PTEP in annual PTEP line 16. Total section 986(c) losses for the year are reported on
accounts of the S corporation. See the instructions for line 19 for line 46.
when an S corporation might have an income inclusion with
respect to a foreign corporation. Note. An S corporation is only responsible for figuring and
reporting foreign currency gain or loss under section 986(c) with
Note. The amount of distributions that are attributable to PTEP respect to distributed PTEP sourced from an annual PTEP
in annual PTEP accounts of a person other than the S account of the S corporation. It is not responsible for figuring or
corporation (for example, a shareholder) is not determined by the reporting foreign currency gain or loss under section 986(c) with
S corporation and therefore is not taken into account for respect to distributed PTEP sourced from an annual PTEP
purposes of determining the ordinary dividends to be entered on account of a person other than the S corporation (for example, a
line 7 or the qualified dividends to be entered on line 8. shareholder).
Lines 11 through 15 and 27 through 30. Capital gains and Lines 17 and 47. Section 987 gain and loss. The source of
losses. These lines generally match the types of gains and section 987 gain or loss is generally determined by reference to
losses reported separately on Form 1120-S, Schedule K. the source of the income or asset giving rise to such gain or loss.
Further, section 904(b)(2)(B) contains rules regarding An S corporation may also obtain section 987 gain or loss
adjustments to account for capital gain rate differentials (as information from Form 8858. This is not reported as a net
defined in section 904(b)(3)(D)) for any tax year. amount but rather total section 987 gains for the year are
Example 9. Parts II and III. Capital gains and losses. S reported on line 17. Total section 987 losses for the year are
corporation has the following amounts for the tax year 2023. reported on line 47.
Lines 18 and 48. Section 988 gain and loss. The source of
Short-term capital gains (losses) foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
Total $900 taxpayer or QBU on whose books the asset, liability, or item of
U.S. source 1,000 income or expense is properly reflected. If the source is
Passive category (France) 400 determined by reference to the residence of the taxpayer
shareholder, the section 988 gain and loss would be reported in
Passive category (Canada) (300) column (f).
Passive category (Haiti) (200) Line 19. Section 951(a) inclusions. Report section 951(a)
inclusions if the S corporation takes into account such income.
An S corporation may not have subpart F income inclusions with
S corporation reports these amounts on Schedule K-2, Part II, respect to a foreign corporation for tax years of the foreign
Section 1, line 11, as follows. corporation beginning on or after January 25, 2022, under
Regulations section 1.958-1(d)(1) if the S corporation has not

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made an election to be treated as owning stock of the foreign income generated by such S corporation property. See
corporation within the meaning of section 958(a) under Temporary Regulations section 1.861-9T(e)(1).
Proposed Regulations section 1.958-1(e)(2). An S corporation
Lines 41 through 43. Other interest expense. A
may not have subpart F income inclusions with respect to a
shareholder's share of an S corporation's interest expense that is
foreign corporation for tax years of the foreign corporation
not directly allocable to income from specific S corporation
beginning before January 25, 2022, if the S corporation has not
property is generally allocated and apportioned by the
made an election to be treated as owning stock of a foreign
shareholder, subject to certain exceptions, and included in
corporation within the meaning of section 958(a) under
column (f); see Temporary Regulations section 1.861-9T(e)(1).
Proposed Regulations section 1.958-1(e)(2) and, pursuant to
Regulations section 1.958-1(d)(4)(i), applies Regulations section Interest expense incurred by certain individuals, estates, and
1.958-1(d)(1) through (3) to such tax years. trusts is characterized based on the categories of interest
expense in sections 163 and 469: active trade or business
Line 20. Other income. Attach a statement to the Schedules interest, investment interest, or passive activity interest, adjusted
K-2 and K-3 describing the amount and type of other income. for any interest expense directly allocated under Temporary
Line 21. Section 951A(a) inclusions. Report section 951A(a) Regulations section 1.861-10T; see Regulations section
inclusions if the S corporation takes into account such income. 1.861-9T(d). The amounts in each category of interest expense
An S corporation will not have an income inclusion under section are reported on lines 41 through 43. See Example 10, later.
951A unless it made an election under Proposed Regulations Exception. See Regulations sections 1.861-9(e)(8) and (9)
section 1.958-1(e)(2) to be treated as owning stock of a CFC for a special rule for S corporation loans. See also the
within the meaning of section 958(a). instructions for box 10 of Part I.
Line 24. Total gross income. Enter the total gross income Note. Interest expense is always included on lines 39 to 43 and
received from all sources on line 24. Then add the gross income not on other lines.
on lines 1 through 23 by country or territory and enter the total by
country in rows A, B, and C (and additional rows if more than Line 45. Foreign taxes not creditable but deductible. See
three countries). The sum of the amounts in rows A, B, C, etc., the instructions for Forms 1116 and 1118 for examples of foreign
do not need to equal the amount on line 24 given that not every taxes that are deductible, but not creditable.
gross income amount is required to be reported by country.
Note. Foreign taxes that are creditable (even if a shareholder
Section 2—Deductions chooses to deduct such taxes) are not reported as expenses in
Part II. Creditable taxes are reported in Part III, Section 3.
Lines 25 through 54. Deductions of the S corporation must be
allocated and apportioned according to certain rules. See, for Lines 49 and 50. Other deductions. Attach a statement to the
example, Regulations sections 1.861-8 through -20 and Schedules K-2 and K-3 describing the amount and type of other
Temporary Regulations sections 1.861-8T and -9T. See also deductions. The statement must conform to the format of Part II.
sections 1366 and 1373(a). For purposes of allocating and
apportioning expenses, in general, a shareholder adds the share Schedule K-2, Part III, and
of the S corporation's deductions to its other deductions incurred Schedule K-3, Part III (Other
directly by the shareholder. See Regulations section 1.861-8(e)
(15). The shareholder reports such deductions on Form 1116, Information for Preparation of Form
Part I, lines 2 through 5. Section 2 also generally corresponds to
the deductions separately reported on Form 1120-S, 1116)
Schedule K.
Section 1—R&E Expenses Apportionment
Line 28. Net long-term capital loss. Report net long-term Factors
capital loss on line 28. Do not include losses reported on line 29.
This section requires the S corporation to report information that
Line 29. Collectibles loss. Report collectibles loss on line 29 a shareholder will use to allocate and apportion its R&E expense
and not on line 28. for foreign tax credit limitation purposes.
Line 32. Research & experimental (R&E) expenses. In An S corporation is not required to complete Section 1 of Part
general, R&E expenses are allocated and apportioned by the III unless either (i) the S corporation incurs R&E expense, or (ii)
shareholder and reported in column (f). See Regulations section the shareholder is expected to license, sell, or transfer its
1.861-17(f). R&E expenses, as described in section 174, are intangible property to the S corporation (as provided in
ordinarily definitely related to gross intangible income Regulations section 1.861-17(f)(3)).
reasonably connected with relevant broad product categories of Deductible R&E expenses, as described in section 174, are
the taxpayer and are allocable to gross intangible income as a ordinarily definitely related to gross intangible income
class related to such product categories. The product categories reasonably connected with relevant broad product categories of
are determined by reference to the three-digit classification of the taxpayer and are allocable to gross intangible income as a
the Standard Industrial Classification Manual (SIC) code class related to such product categories. The product categories
available at OSHA.gov/data/sic-manual. are determined by reference to the three-digit classification of
Line 38. Charitable contributions. Charitable contribution the SIC code. In general, R&E expenses are apportioned based
deductions are apportioned solely to U.S. source gross income; on gross receipts.
see Regulations section 1.861-8(e)(12). Therefore, this R&E expenses are allocated and apportioned by the
deduction should be reported in column (a). shareholder; see Regulations section 1.861-17(f)(1). The
Lines 39 and 40. Interest expense specifically allocable un- regulations require the S corporation to report to its shareholders
der Regulations sections 1.861-10 and -10T. Apart from the gross receipts by SIC code according to source and
interest expense entered on line 39, enter on line 40 interest separate category of income. They also require the S
expense that is directly allocable under Temporary Regulations corporation to report the amount of R&E expense performed in
section 1.861-10T to income from specific S corporation the United States and outside the United States to apply
property. Such interest expense is treated as directly allocable to exclusive apportionment; see Regulations section 1.861-17(f)
(2).

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Column (e). As of the date of these instructions, the only reported on Schedule K-2. Include on line 1, assets without
separate category that could be included in column (e) is the directly identifiable yield referred to in Temporary Regulations
section 901(j) category of income. See the Instructions for Form section 1.861-9T(g)(3)(iii).
1116 for the potential countries to be listed with the section Lines 3 and 4. On Schedule K-2, report reductions in the S
901(j) category of income. corporation's asset values to reflect the S corporation's directly
Line 1. Enter the gross receipts by SIC code for each grouping. allocable interest under Regulations section 1.861-10(e) and
Such gross receipts include both the S corporation's gross Temporary Regulations section 1.861-10T, see also Temporary
receipts and certain other parties' gross receipts; see Regulations section 1.861-9T(e)(1). On Schedule K-3, report the
Regulations section 1.861-17(d)(3) and (4). Sales of parties shareholder's share of the reduction in the S corporation's assets
controlled by the S corporation should be included on line 1 if reported on Schedule K-2.
such controlled parties can reasonably be expected to benefit Line 5. On Schedule K-2, report the average value of assets
from the R&E expense connected with the product categories. excluded from the apportionment formula; see section 864(e)(3).
This includes sales that benefit from the shareholder's R&E On Schedule K-3, report the shareholder's share of the excluded
expenses if licensed through the S corporation. Sales of assets reported on Schedule K-2. Include on line 5 assets
uncontrolled parties are also taken into account if such sales without directly identifiable yield referred to in Temporary
involve intangible property that was licensed or sold to the Regulations section 1.861-9T(g)(3)(iii).
uncontrolled party if the uncontrolled party can reasonably be
expected to benefit from the R&E expense. Line 6. Shareholders must generally apportion interest expense
by reference to the shareholder's assets, including the
Line 2. Report the amount of R&E expense related to activity shareholder's pro rata share of S corporation assets. See
performed in the United States and the amount of R&E expense Regulations section 1.861-9(e)(3) and Temporary Regulations
related to activity performed outside the United States by SIC section 1.861-9T(d). Interest expense must be apportioned
code. The total of the amounts on Schedule K-2, Part III, Section according to the interest expense classifications under sections
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the 163 and 469. This includes reporting the assets according to
total of the amounts on Schedule K-3, Part III, Section 1, line 2, such classifications.
must equal Schedule K-3, Part II, line 32.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
Note. Line 2 is not reported according to source or separate and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
category. and 6d.
Example 10. Parts II and III. Asset method
Note. The SIC code for line 2B(i) does not need to be the same apportionment of interest expense. A, a U.S. citizen, has a
SIC code for line 2A(i). 10% interest in S corporation. S corporation is engaged in the
active conduct of a U.S. trade or business. S corporation’s
Section 2—Interest Expense Apportionment business generates only domestic source income. S corporation
Factors has an investment portfolio consisting of several less-than-10%
This section requires the S corporation to report information that stock investments. S corporation has a bank loan. The proceeds
a shareholder will use to allocate and apportion its interest of the bank loan were divided equally between the business and
expense for foreign tax credit limitation purposes. the investment portfolio. A’s only assets attracting interest
expense are those owned by S corporation. A’s only business
Complete this Section 2 only if the S corporation or the assets and investment assets are its pro rata share of those
shareholders have interest expense or stewardship expense. owned by S corporation. A’s only interest expense is that from A’s
pro rata share of the S corporation loan.
Stewardship expenses. In the case of the shareholder's
stewardship expenses incurred to oversee the S corporation, the A’s share of the interest expense for the loan with respect to S
S corporation's value is determined and characterized under the corporation’s business is $2,000. It is apportioned on the basis
asset method in Regulations section 1.861-9. See Regulations of business assets. Because all business income is domestic
section 1.861-8(e)(4)(ii)(C). Therefore, the reporting later with source, the business assets are domestic assets and reported
respect to Part III, Section 2, for interest expense apportionment on Schedules K-2 and K-3, Part III, Section 2, line 6b, column
factors generally applies to the shareholder's stewardship (a). A’s $2,000 share of the interest expense is reported on
expense apportionment. Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S.
source gross income by the shareholder.
Interest expense is apportioned based on the average value
of assets; see Regulations section 1.861-9(g)(2)(i)(A). A The interest expense for A’s share of the loan with respect to
S corporation’s investments is $2,000 and is reported in
taxpayer can use either the tax book value or the alternative
book value of its assets; see Regulations section 1.861-9(i). Schedule K-3, Part II, line 42, column (f). The investment interest
must be apportioned on the basis of investment assets. Applying
When reporting the basis in an asset that is stock in nonaffiliated
10%-owned corporations, adjust such amount for earnings and the asset method, $80,000 of S corporation’s adjusted basis in
its investment portfolio stock generates domestic source income
profits (E&P); see Regulations section 1.861-12(c)(2)(i)(A).
and $120,000 of S corporation’s adjusted basis in the stock
Note. Attach to Form 1120-S, a second Part III, Section 2, if the generates foreign source passive income. S corporation reports
S corporation reports both the tax book value and the alternative these amounts on Schedule K-2, Part III, Section 2, line 6c,
tax book value of its assets to the shareholders. columns (a) and (c), respectively. A’s share of the adjusted basis
in S corporation’s stock is $8,000 with respect to the stock
Column (b). The S corporation characterizes its pro rata share generating domestic source income and $12,000 with respect to
of the S corporation assets that give rise to foreign branch the stock generating foreign source passive income. Such
category income as assets in the foreign branch category. See amounts are reported on Schedule K-3, Part III, Section 2,
Regulations section 1.861-9(e)(10). line 6c, columns (a) and (c), respectively. With respect to the
Line 1. On Schedule K-2, report the average of the interest expense on the loan for S corporation’s investments,
beginning-of-year and end-of-year bases in the S corporation's $800 ($8,000/$20,000 x $2,000) is apportioned to domestic
assets; see Regulations section 1.861-9(g)(2)(i)(A). On source income and $1,200 ($12,000/$20,000 x $2,000) is
Schedule K-3, report the shareholder's share of the assets apportioned to foreign source passive income.

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Lines 7 and 8. The amounts reported on lines 7 and 8 are Codes for Types of Tax
subsets of the amounts reported on line 6 representing the value
of stock held by the S corporation in certain foreign corporations. Code Type of Tax
With respect to an S corporation-owned specified 10% WHTD Withholding tax on dividends
foreign corporation that is not a CFC, the S corporation will report
on line 7, columns (a) through (e), the total value of the stock in WHTP Withholding tax on distributions of PTEP
all such foreign corporations. The value of the stock is the S WHTB Withholding tax on branch remittances
corporation’s basis in the stock adjusted to take into account the WHTR Withholding tax on rents, royalties, and license fees
E&P of the foreign corporations as explained in Regulations
section 1.861-12(c)(2). The S corporation must attach a WHTI Withholding tax on interest
statement to the Schedules K-2 and K-3 with the following ECI Taxes paid or accrued to foreign countries or territories on
information for each foreign corporation for which adjusted basis certain effectively connected income
is reported on line 7. OTHS Other foreign taxes paid or accrued on sales income
• Name of foreign corporation. OTHR Other foreign taxes paid or accrued on services income
• EIN or reference ID number. Do not enter “FOREIGNUS” or
“APPLIED FOR.” OTH Other foreign taxes paid or accrued
• Percentage of voting and value of stock owned by the S
corporation in such foreign corporation. If there are multiple types of tax for the same country,
• Value of the stock in such corporation included in each of the generate multiple alpha rows for the same country, one row for
groupings in 6b through 6d (denoting separately each of those each type of tax. For example, see below.
groupings).
With respect to S corporation-owned CFCs, the S corporation Description (a) Type of tax
will report on line 8, column (f), the total value of its stock in all 1 Direct (section 901 or 903) foreign taxes:
such foreign corporations. The value of the stock is the S
corporation's basis in the stock adjusted to take into account the Paid Accrued
E&P of the foreign corporations as explained in Regulations A AA WHTD
section 1.861-12(c)(2). The S corporation must attach a B AA OTH
statement to the Schedules K-2 and K-3 with the following
information for each foreign corporation for which basis is
reported on line 8.
• Name of foreign corporation. Column (b). Taxes assigned to section 951A category in-
• EIN or reference ID number. Do not enter “FOREIGNUS” or come. Taxes assigned to section 951A category income are
“APPLIED FOR.” taxes paid or accrued on distributions of PTEP assigned to the
• Percentage of voting and value of stock owned by the S reclassified section 951A PTEP and section 951A PTEP groups.
corporation in such foreign corporation. An S corporation might not be able to complete this column due
• Value of the stock in such corporation. to lack of information regarding the treatment of the current year
distributions.
Section 3—Foreign Taxes
Note. An S corporation may have an income inclusion under
Do not complete this Section 3 if the S corporation does section 951A if it made an election under Proposed Regulations
TIP not pay or accrue foreign taxes. section 1.958-1(e)(2) to be treated as owning stock of a CFC
within the meaning of section 958(a).
In Part III, Section 3, the S corporation assigns foreign taxes Column (f). Other category.
paid or accrued (including on U.S. source income) to a separate
category and source. Include taxes paid or accrued to foreign Foreign taxes paid or accrued to sanctioned countries.
countries or to U.S. territories. No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries.
Attachment. As previously mentioned in the instructions for Foreign taxes related to PTEP resourced by treaty. If the
Schedules K-2 and K-3, Part I, box 4, for each of the amounts S corporation pays or accrues foreign taxes on receipt of a
listed on lines 1 through 3, attach a statement to the Schedules distribution of PTEP that is sourced from an annual PTEP
K-2 and K-3 reporting the following information. account that corresponds to the separate category relating to
• The dates on which the taxes were paid or accrued. U.S. source income included under section 951(a)(1) and
• The exchange rates used. resourced as foreign source income under a treaty, such taxes
• The amounts in both foreign currency and U.S. dollars. See are included in column (f).
section 986(a). On the line after category code, enter one of the following
Column (a). Enter the code for the type of tax. codes.
Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
category income, and there is an election to apply the treaty,
enter code RBT PAS.
Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general
category income, and there is an election to apply the treaty,
enter code RBT GEN.
Code RBT 951A. If an applicable income tax treaty treats any
U.S. source section 951A category income as foreign source
section 951A category income, and there is an election to apply
the treaty, enter code RBT 951A.

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Line 1. Enter in U.S. dollars the total foreign taxes (described in PTEP for which a foreign tax credit may be partially or entirely
section 901 or section 903) that were paid or accrued by the S disallowed. However, it is important to track this amount as a tax
corporation (according to its method of accounting for such on a distribution.
taxes). Do not reduce the amount that you report on line 1 by the G. Other. Attach a statement to the Schedules K-2 and K-3
reductions reported on line 2. Do not report redetermined taxes indicating the reason for the reduction.
on line 1. Report such taxes on line 3. There is no need to report the amounts on line 2 by country.
Note. Do not include on line 1 any foreign taxes not creditable Line 3. Enter in U.S. dollars the change in foreign tax as a result
but deductible as reported on Part II, Section 2, line 45. of a foreign tax redetermination. See section 905(c) and
Regulations sections 1.905-3 through -5. If the amount is less
If the S corporation uses the cash method of accounting for than the original foreign tax, report the change as a negative
foreign taxes, check the “Paid” box and enter foreign taxes paid amount. If the amount is more than the original foreign tax, report
during the tax year on line 1. Report each shareholder's share on the change as a positive amount.
line 1 of Section 3 of Schedule K-3, Part III.
If the S corporation uses the accrual method of accounting for Note. Payment of additional foreign taxes that relate to an
foreign taxes, check the “Accrued” box and enter foreign taxes earlier tax year by an S corporation that has the cash method of
accrued on line 1. Report each shareholder's share on line 1 of accounting does not result in a foreign tax redetermination; see
Section 3 of Schedule K-3, Part III. Regulations section 1.905-3(a). Such amounts should be
reported on line 1 as foreign taxes paid by the S corporation in
Note. Check only one box “Paid” or “Accrued” depending on the the current year. Report the U.S. tax year to which the foreign tax
method of accounting the S corporation uses to account for relates. This is the U.S. tax year that includes the close of the
foreign taxes. foreign tax year to which the tax relates. Report the date on
Enter on a separate line, indicated by the letters A through F, which the tax was paid. If there is more than one date tax is paid,
taxes paid or accrued to each country. Enter the two-letter code enter one of the dates paid on the schedule itself and then attach
from the list at IRS.gov/CountryCodes. Do not enter “various” or a statement to the Schedules K-2 and K-3, including all of the
“OC” for the country code. information reported on the schedule with the other dates paid.
Exceptions. The instructions for Forms 1116 and 1118 If there is more than one redetermination in a year with
specify exceptions from the requirement to report gross income respect to different countries, report such redeterminations on
and gross receipts by foreign country or U.S. territory with separate lines. Enter the two-letter code from the list at IRS.gov/
respect to regulated investment companies and section 863(b). CountryCodes.
These exceptions apply as well to reporting of taxes in this Exceptions. The instructions for Forms 1116 and 1118
section. specify exceptions from the requirement to report gross income
Example 11. Part III, Section 3. Multiple country and gross receipts by foreign country or U.S. territory with
sources—Foreign taxes. The facts are the same as in respect to regulated investment companies and section 863(b).
Example 8, earlier. USC has the cash method of accounting and Do not enter “various” or “OC” for the country code.
pays taxes of $1,000 and $3,000 to Countries AA and YY, Similarly, if there is more than one redetermination in a year
respectively. USC completes Part III, Section 3, line 1, as follows. with respect to the same country, but the redeterminations are
related to different years, report such redeterminations on
Example 11 Table separate lines.
In addition, attach a statement that includes the information in
(e) General Schedule C (Form 1116), Parts I and II, as applicable, with
Description (a) Type of category respect to each foreign tax redetermination.
tax income Contested taxes. In general, a contested foreign income tax
Foreign liability does not accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
1 Direct (section 901 or 903) foreign taxes: contested foreign income tax liability is not a reasonable
Paid Accrued approximation of the final foreign income tax liability and,
A AA OTHR 1,000 therefore, is not considered an amount of tax paid for purposes
of section 901 until the contest is resolved. Thus, an S
B YY OTHR 3,000 corporation generally does not take into account a contested
liability as a creditable foreign tax expenditure until the contest is
Line 2. Enter on line 2, as negative number, the sum of the resolved and the liability has been paid; see Regulations section
taxes in the following categories. 1.905-1(f)(1). However, to the extent that an S corporation has
A. Taxes on foreign mineral income (section 901(e)). remitted a contested foreign income tax liability to a foreign
B. Reserved. country, shareholders may elect to claim a provisional foreign tax
C. Taxes attributable to boycott operations (section 908). credit for the shareholder's pro rata share of such contested
D. Reduction in taxes for failure to timely file (or furnish all of foreign income tax liability. See Regulations section 1.905-1(f)
the information required on) Forms 5471 and 8865 (section (2).
6038(c)). S corporations that are contesting a foreign income tax
E. Foreign income taxes paid or accrued during the current liability with a foreign country but that have remitted all or a
tax year with respect to splitter arrangements under section 909. portion of such contested liability should report information about
F. Foreign taxes on foreign corporate distributions. For the contested tax on line 3, and check the “Contested tax” box.
example, include taxes on distributions of PTEP assigned to the In addition, S corporations should attach a statement and
following PTEP groups: reclassified section 965(a) PTEP, include information necessary for shareholders to complete
reclassified section 965(b) PTEP, section 965(a), and section Form 7204 and Schedule C (Form 1116), including a description
965(b) PTEP, a portion of which is not creditable. The S of the contest and a description of the contested foreign income
corporation may be unable to determine the amount of a tax.
distribution that is attributable to non-previously taxed E&P or

Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023) 15

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Attachment 3 (Schedule K-2)

(d) Functional
(a) Name of (b) EIN or reference (c) Date of currency of (e) Amount of NII (f) Spot rate (g) Amount of NII
distributing foreign ID number distribution distributing foreign PTEP in functional (functional currency PTEP in U.S. dollars
corporation corporation currency to U.S. dollars)

S corporations must also file a statement each year for which and owns 50% of the foreign corporation's stock through a
there are one or more contested liabilities outstanding or in partnership, then distributions by the foreign corporation to the S
which a contested tax is resolved that includes information corporation and partnership are to be reported on separate rows
necessary for shareholders to complete Schedule C (Form in Part IV of the S corporation’s Schedule K-2 (Form 1120-S). If
1116), Part V. the S corporation owns stock of a foreign corporation through a
partnership from which it receives a Part V of Schedule K-3
Schedule K-2, Part IV, and (Form 1065 or 8865), the S corporation must replicate each line
of Part V, Schedule K-3 (Form 1065 or 8865) in Part IV of its
Schedule K-3, Part IV (Distributions Schedule K-2 (Form 1120-S). Rows for distributions with respect
From Foreign Corporations to S to an S corporation’s direct ownership of foreign corporation
stock should be listed before rows for distributions with respect
Corporation) to an S corporation's ownership of foreign corporation stock
Note. Shareholders will use the following information, in through a pass-through entity.
combination with other information known to the shareholders, The S corporation may have annual PTEP accounts with
including Schedule P (Form 5471), to exclude from gross income respect to the foreign corporation, or the foreign corporation may
distributions to the extent that they are attributable to PTEP in have E&P that, when distributed, is excludable from the S
their annual PTEP accounts and report foreign currency gain or corporation’s gross income under section 1293(c). Do not report
loss with respect to the PTEP on Form 1040. distributions to the extent that they are attributable to PTEP in
annual PTEP accounts of the S corporation or to E&P that is
Use Schedule K-2, Part IV, to report the distributions made by excludable from the S corporation’s gross income under section
foreign corporations to the S corporation. 1293(c). Distributions by the foreign corporation to the S
Use Schedule K-3, Part IV, to report the shareholder's share corporation that are attributable to PTEP in annual PTEP
of the amounts reported in Schedule K-2, Part IV. accounts of the S corporation should be properly reflected on the
Exception. Schedule K-2, Part IV, is not required to be Schedules J (Form 5471) for the foreign corporation. The S
completed with respect to distributions by a foreign corporation if corporation should provide this information to its shareholders,
the S corporation knows that none of the distributions by the as appropriate.
foreign corporation are attributable to PTEP in annual PTEP However, to the extent a distribution is attributable to PTEP in
accounts of any direct or indirect shareholder. Nevertheless, the an annual PTEP account of the S corporation with respect to a
S corporation may be required to append Attachment 3 to the foreign corporation, or attributable to E&P that is excludable from
Schedule K-2 (discussed later). the S corporation’s gross income under section 1293(c), that
Exception. Schedule K-3, Part IV, for a shareholder does not corresponds to a tax year of the foreign corporation that ended
need to be completed with respect to distributions by a foreign with or within a tax year of the S corporation (i) that began after
corporation if the S corporation knows that none of the December 31, 2012, and (ii) for which an election under
distributions by the foreign corporation are attributable to PTEP Regulations section 1.1411-10(g) was not made by the S
in annual PTEP accounts of the shareholder or any U.S. person corporation NII PTEP, append Attachment 3 to Schedule K-2 and
that is treated as indirectly owning stock of the foreign an Attachment 4 to each K-3 in the following format, adding
corporation through the shareholder. Nevertheless, the S additional rows as necessary for each distribution by a foreign
corporation may be required to append Attachment 4 to the corporation. For more information about net investment income
Schedule K-3 for the shareholder (discussed later). If this and net investment income tax relating to CFCs and QEFs, see
exception is applicable with respect to a foreign corporation, the Regulations section 1.1411-10.
sum of the amounts reported in Schedules K-3, Part IV, with
respect to the foreign corporation may not equal the amounts Note. If additional rows are required, attach statements to the
reported in Schedule K-2, Part IV, with respect to the foreign Schedules K-2 and K-3 that look like the current version of
corporation. Schedules K-2 and K-3, Part IV, respectively.
Rows A through O. Use rows A through O to report information Column (b). Enter the EIN or reference ID number of the
with respect to each distribution by a foreign corporation with distributing foreign corporation. Do not enter “FOREIGNUS” or
respect to its stock that the S corporation (directly or through “APPLIED FOR.” For basic information about reference ID
pass-through entities) owns (within the meaning of section 958) numbers (including the requirements as to the characters
other than solely by reason of applying section 318(a)(3) permitted), see the Instructions for Form 1118.
(providing for downward attribution) as provided in section Column (c). Enter the year, month, and day in which the
958(b). Each row should relate the S corporation's direct distribution was made using the format YYYYMMDD.
ownership of stock in the foreign corporation or direct ownership
of the ownership interests in a pass-through entity that (directly Column (d). Enter the applicable three-character alphabet
or through other pass-through entities) owns (within the meaning code for the foreign corporation’s functional currency using the
of section 958) stock in the foreign corporation other than solely ISO 4217 standard. These codes are available at ISO.org/
by reason of applying section 318(a)(3) (providing for downward ISO-4217-currency-codes.html.
attribution) as provided in section 958(b). For example, if an S
corporation directly owns 50% of the foreign corporation's stock Note. Columns (e) and (f) are reported in functional currency.

16 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Attachment 4 (Schedule K-3)

                                                               (d) Functional 
(a) Name of          (b) EIN or reference (c) Date of             currency of       (e) Shareholder’s    (f) Spot rate        (g) Shareholder’s 
distributing foreign    ID number         distribution         distributing foreign share of NII PTEP in (functional currency share of NII PTEP in 
corporation                                                       corporation       functional currency  to U.S. dollars)        U.S. dollars

Column (e).  This represents the S corporation’s share of the                 Generally, a foreign corporation is a CFC if more than 50% of 
amount distributed in functional currency. See Schedule R (Form       either the total combined voting power of all classes of stock 
5471), Distributions From a Foreign Corporation, column (c).          entitled to vote or the total value of the stock of the corporation is 
                                                                      owned (within the meaning of section 958(a)) or is considered as 
Column (f).  This represents the S corporation’s share of the         owned by applying the rules of section 958(b) by U.S. 
amount of E&P distributed in functional currency. See                 shareholders. For this purpose, a U.S. shareholder is a U.S. 
Schedule R (Form 5471), column (d). The total of the amounts          person (as defined in section 957(c)) who owns (within the 
reported in column (f) with respect to a distributing foreign         meaning of section 958(a)), or is considered as owning by 
corporation should equal the S corporation’s share of the total       applying the rules of ownership of section 958(b), 10% or more 
reported on line 9 of all Schedules J (Form 5471), Accumulated        of the total combined voting power of all classes of stock entitled 
Earnings and Profits (E&P) of Controlled Foreign Corporation, on      to vote, or 10% or more of the total value of shares of all classes 
a separate category of income basis as reported in Schedule J         of stock of such foreign corporation.
(Form 5471) TOTAL filed with respect to the distributing foreign 
corporation.                                                                  If the S corporation is treated as not owning stock of a foreign 
If a Schedule J (Form 5471) with code “TOTAL” entered on              corporation within the meaning of section 958(a) for a tax year of 
line a (at the top of page 1 of Schedule J) is not filed with respect the foreign corporation (because the S corporation has not made 
to the distributing foreign corporation, then the total of the        an election under Proposed Regulations section 1.958-1(e)(2) 
amounts reported in column (f) with respect to a distributing         and, in the case of a tax year beginning before January 25, 2022, 
foreign corporation should equal the S corporation’s share of the     the S corporation, pursuant to Regulations section 1.958-1(d)(4)
amount reported on line 9, column (f), of the Schedule J (Form        (i), applies Regulations sections 1.958-1(d)(1) through (3) to 
5471) filed with respect to the distributing foreign corporation.     such tax year), or the S corporation is not a U.S. shareholder of 
                                                                      the foreign corporation during such tax year, the information 
Column (g).  Enter the exchange rate on the date of distribution      regarding subpart F income inclusions and section 951(a)(1)(B) 
used to translate the amount of the distribution in functional        inclusions that are reported in Schedule K-2, Part V, columns (e) 
currency to U.S. dollars. See section 989(b)(1). Report the           and (f) with respect to the foreign corporation for such tax year, 
exchange rate using the “divide-by convention” specified under        are not inclusions of the S corporation. Schedule K-3, Part V, 
Reporting exchange rates on Form 5471 in the Instructions for         columns (e) and (f), report the information shareholders will need 
Form 5471.                                                            to figure and report their subpart F income inclusions and 
Column (h).  Enter the amount of the distribution in U.S. dollars.    section 951(a)(1)(B) inclusions with respect to the CFC.
Translate column (e) using the spot rate reported in column (g).
                                                                      Note.         If the S corporation is treated as owning stock of a foreign 
Column (i).  Enter the amount of E&P distributed in U.S. dollars.     corporation within the meaning of section 958(a) for a tax year of 
Translate column (f) using the spot rate reported in column (g).      a foreign corporation (because the S corporation elected to be 
Column (j).  If the distributing foreign corporation is a qualified   so treated under Proposed Regulations section 1.958-1(e)(2) or, 
foreign corporation, determined without regard to section 1(h)        in the case of a tax year of the foreign corporation beginning 
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).              before January 25, 2022, the S corporation, pursuant to 
                                                                      Regulations section 1.958-1(d)(4)(i), does not apply Regulations 
Schedule K-2, Part V (Information on                                  sections 1.958-1(d)(1) through (3)) to such tax year, and is a 
                                                                      U.S. shareholder of the foreign corporation during such tax year, 
Shareholders’ Section 951(a)(1) and                                   then any subpart F income inclusions and section 951(a)(1)(B) 
                                                                      inclusions with respect to the foreign corporation for such tax 
Section 951A Inclusions), and                                         year are inclusions of the S corporation, which are therefore not 
Schedule K-3, Part V (Information on                                  reported in Schedules K-2 and K-3, columns (e) and (f), and are 
                                                                      instead reported on Schedules K and K-1, line 10, Other income 
Shareholder’s Section 951(a)(1) and                                   (loss).
Section 951A Inclusions                                               Note.         If the S corporation elects to be treated as owning stock of 
                                                                      a foreign corporation within the meaning of section 958(a) under 
Note. Shareholders will use the following information to              Proposed Regulations section 1.958-1(e)(2), and the S 
complete Form 8992 and Form 1040 with respect to income               corporation is a U.S. shareholder of the foreign corporation 
inclusions under section 951(a) (subpart F income inclusions),        during a tax year of the foreign corporation, then the S 
section 951(a)(1)(B) inclusions, and section 951A inclusions.         corporation determines its GILTI inclusion for its tax year in which 
Schedules K-2 and K-3, Part V, must be completed with                 or with which such tax year of the foreign corporation ends, 
respect to a CFC if the S corporation owns (within the meaning        which it reports on Form 1120-S, Schedule K, line 10, Other 
of section 958) stock of the CFC, unless the S corporation owns       income (loss). Schedule K-1, line 10, Other income (loss), 
stock of the CFC solely by reason of applying section 318(a)(3)       reports the shareholders’ share of the S corporation’s GILTI 
(providing for downward attribution) as provided in section           inclusion. An S corporation that has made an election under 
958(b).                                                               Proposed Regulations section 1.958-1(e)(2), and is a U.S. 
                                                                      shareholder of the foreign corporation during a tax year of the 
                                                                      foreign corporation, does not complete columns (g) through (n) 
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)                                                                                            17

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of Part V of Schedules K-2 and K-3 for such foreign corporation anticipated to be figured by multiplying the percentage in column
with respect to such tax year. (d) by the amount of subpart F income or GILTI item,
Exception. Schedule K-2, Part V, does not need to be respectively. For example, in general, a shareholder’s share
completed with respect to a CFC if the S corporation knows that through its ownership interest in the S corporation of tested
it does not have a direct or indirect shareholder (through income in column (i) is anticipated to be figured by multiplying
pass-through entities only) that is a U.S. shareholder of the CFC the percentage in column (d) by the amount of tested income in
required to include in gross income a subpart F income inclusion column (g).
and/or section 951(a)(1)(B) inclusion with respect to the CFC, or Line a. Complete a separate Part V for each applicable
figure section 951A inclusions by taking into account GILTI items separate category of income. However, all GILTI items must be
(defined later) of the CFC. reported in only one Part V. If GILTI items include passive
Exception. Schedule K-3, Part V, for a shareholder does not category income, report all GILTI items in the Part V completed
need to be completed with respect to a CFC if the S corporation for passive category income; otherwise, report all GILTI items in
knows that (i) the shareholder is not a U.S. shareholder of the the Part V completed for general category income. Enter the
CFC required to include in gross income a subpart F income appropriate code on line a.
inclusion and/or section 951(a)(1)(B) inclusion with respect to
the CFC, or figure section 951A inclusions by taking into account Note. The other reporting requirements of an S corporation with
GILTI items (defined later) of the CFC; and (ii) no U.S. person respect to reporting income by separate category do not change
that indirectly owns (through pass-through entities only) an by reason of the S corporation reporting GILTI items that include
interest in the CFC through the shareholder is a U.S. shareholder general category income in a Part V completed for passive
of the CFC required to include in gross income a subpart F category income.
income inclusion and/or section 951(a)(1)(B) inclusion with
respect to the CFC, or figure section 951A inclusions by taking Codes for Categories of Income
into account GILTI items (defined later) of the CFC. If the S
corporation does not complete Part V of Schedule K-3 for a
shareholder with respect to a CFC, the sum of each Code Category of Income
shareholder's share of the CFC's subpart F income, section PAS Passive Category Income
951(a)(1)(B) inclusion with respect to the CFC, and share of the 901j Section 901(j) Income
CFC's GILTI items (defined later) reported on all Schedules K-3
may not equal the aggregate share of subpart F income of the GEN General Category Income
CFC, the aggregate section 951(a)(1)(B) inclusion with respect
to the CFC (defined later), and the aggregate share of the CFC's
GILTI items (defined later), respectively, reported on the Line b. If any portion of a CFC item is U.S. source, complete a
Schedule K-2. separate Part V for U.S. source CFC items, and check the box on
Use Schedule K-2, Part V, to report the information on the S line b in such separate Part V.
corporation’s share of the amounts its shareholders will need to Line 1. Use lines A through K to report information with respect
figure their subpart F income inclusions, section 951(a)(1)(B) to each CFC owned (within the meaning of section 958) by the S
inclusions, and their GILTI inclusions, with respect to CFCs corporation, and for which Part V of Schedules K-2 and K-3 must
owned (within the meaning of section 958) by the S corporation. be completed. If the S corporation owns a CFC through a
Use Schedule K-3, Part V, to report each shareholder’s share of partnership from which it receives a Schedule K-3 (Form 1065 or
the amounts needed to determine its subpart F income 8865), Part VI, the S corporation must replicate each line of Part
inclusions, section 951(a)(1)(B) inclusions, and GILTI inclusion, VI, Schedule K-3 (Form 1065 or 8865) that is related to the CFC
with respect to CFCs owned (within the meaning of section 958) in its Schedule K-2 (Form 1120-S), Part V. For example, if an S
by the S corporation. corporation directly owns 50% of the CFC's stock and owns 50%
If the S corporation must complete Schedules K-2 and K-3, of the CFC's stock through a partnership, the CFC should be
Part V, with respect to a CFC because an exception described listed on two lines with one line related to the S corporation's
earlier does not apply, then the S corporation must complete direct ownership and the other line related to the S corporation's
Schedules K-2 and K-3, Part V, by assuming that each ownership through the partnership. Lines related to an S
shareholder in the S corporation is a U.S. shareholder of the corporation's direct ownership of CFCs should be listed before
CFC and is required to include in gross income its share of the lines related to an S corporation's non-direct ownership of CFCs.
CFC's subpart F income, section 951(a)(1)(B) inclusion, and its If additional lines are required, attach a statement to the
GILTI. Schedules K-2 and K-3 that looks like the current version of Part
V.
A shareholder's GILTI is figured based upon its share of the
following amounts for each CFC with respect to which it is a U.S. Column (a). Enter the name of each CFC for which Part V must
shareholder: tested income, tested loss, QBAI, tested loss QBAI be completed.
amount, tested interest income, and tested interest expense Column (b). Enter the EIN or reference ID number of the CFC.
(collectively, GILTI items) (a CFC's subpart F income and GILTI Do not enter “FOREIGNUS” or “APPLIED FOR.” For basic
items, CFC items). information about reference ID numbers (including the
A shareholder's share of a CFC's subpart F income, amounts requirements as to the characters permitted), see the
used to determine its section 956 amount with respect to a CFC, Instructions for Form 1118.
and a CFC's GILTI items may not be limited to the shareholder's
Column (c). Enter the end of the CFC’s tax year using the
share of such income, amounts, or items through its ownership
format YYYYMMDD.
in the S corporation. However, for purposes of completing
Schedules K-2 and K-3, Part V, use only the shareholder's share Column (d). Enter the shareholders' shares of CFC items
of a CFC's subpart F income, amounts used to determine its through the shareholders' ownership in the S corporation
section 956 amount with respect to a CFC, and a CFC's GILTI (aggregate share). See Regulations sections 1.951-1(b),
items through the shareholder's ownership in the S corporation. 1.951-1(e), and 1.951A-1(d)(1) for rules on determining the
A shareholder’s share through its ownership in the S shareholders' shares.
corporation of subpart F income and GILTI items is generally

18 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Note. An S corporation that has made an election to be treated 
as owning stock of a CFC within the meaning of section 958(a)     Schedule K-2, Part VI, and 
under Proposed Regulations section 1.958-1(e)(2) (or, in the      Schedule K-3, Part VI (Information 
case of a tax year of a CFC beginning before January 25, 2022, 
does not, pursuant to Regulations section 1.958-1(d)(4)(i), apply Regarding Passive Foreign 
Regulations sections 1.958-1(d)(1) through (3) to such tax year), 
and is a U.S. shareholder of a CFC listed in column (a) during a  Investment Companies (PFICs))
tax year of the CFC, does not report amounts in columns (e) or 
(f) with respect to the CFC for such tax year.                    Note. Shareholders will use the following information to 
                                                                  complete Form 8621 and/or determine income inclusions with 
Column (e). Enter the aggregate share of the amount of the        respect to the PFICs reported in Schedules K-2 and K-3, Part VI.
CFC's subpart F income, if any. Note that an amount determined 
under section 956(a) is not considered subpart F income. For        Except as otherwise provided, Schedules K-2 and K-3, Part 
guidance on figuring a CFC's subpart F income and the             VI, must be filed by every S corporation that owns PFIC stock, 
shareholders' shares of a CFC's subpart F income, see             directly or indirectly. However, the following exceptions apply.
Worksheet A in the Instructions for Form 5471.                    • An S corporation that has elected to treat a PFIC as a 
                                                                  pedigreed qualified electing fund (QEF) or made a 
Column (f). Enter the amount determined under section 956         mark-to-market (MTM) election under section 1296 with respect 
with respect to the shareholders that relate to the shareholders' to a PFIC applicable to the S corporation’s tax year (other than if 
ownership in the S corporation, as described in these             the S corporation is making an MTM election under section 1296 
instructions for column (f) (aggregate section 951(a)(1)(B)       with respect to PFIC stock in the current tax year if the current 
inclusion). In determining the section 956 amount, use only the   tax year is not the first year of the S corporation’s holding period 
shareholders' shares through their ownership in the S             in that stock (non-initial section 1296 MTM election)) is not 
corporation of:                                                   required to complete Schedules K-2 and K-3, Part VI, with 
• The average of the amounts of U.S. property held (directly or   information regarding that PFIC if the S corporation files Form 
indirectly) by the CFC as of the close of each quarter of the     8621 for that PFIC. The term “pedigreed QEF” is defined in 
CFC’s tax year, and                                               Regulations section 1.1291-1(b)(2)(ii).
• The applicable earnings of the CFC.                             • An S corporation that owns stock of a foreign corporation that 
  For guidance on figuring the shareholders' share of a CFC's     is treated as a qualifying insurance corporation (QIC) (as defined 
earnings invested in U.S. property, see Worksheet B in the        in section 1297(f)(1)) and which is not treated as a PFIC by 
Instructions for Form 5471.                                       reason of section 1298(b)(1), or an S corporation that satisfies 
                                                                  the deemed election requirements of Regulations section 
Note. An S corporation that has made an election to be treated    1.1297-4(d)(5)(iv) with respect to a foreign corporation eligible to 
as owning stock of a CFC within the meaning of section 958(a)     be treated as a QIC (and that is not treated as a PFIC by reason 
under Proposed Regulations section 1.958-1(e)(2), and is a U.S.   of section 1298(b)(1)), is not required to complete Schedules 
shareholder of the CFC during a tax year of the CFC, does not     K-2 and K-3, Part VI, with respect to that foreign corporation.
complete columns (g) through (n) of Part V of Schedules K-2 and   • An S corporation that knows that all of its direct and indirect 
K-3 with respect to the CFC for such tax year.                    shareholders that are U.S. persons are (i) not subject to the PFIC 
Column (g). Enter the CFC's tested income, if any, from line 6    rules with respect to the corporation under section 1297(d) 
of Schedule I-1 (Form 5471), Information for Global Intangible    because they are subject to the subpart F rules with respect to 
Low-Taxed Income, for each CFC.                                   the corporation; or (ii) tax-exempt entities that are not subject to 
                                                                  the PFIC rules with respect to the corporation under Regulations 
Column (h). Enter the CFC's tested loss, if any, from line 6 of   section 1.1291-1(e) is not required to complete Schedules K-2 
Schedule I-1 (Form 5471) for each CFC. The loss amounts           and K-3, Part VI, with respect to the corporation.
should be shown as negative numbers.                              • An S corporation that marks to market stock of a PFIC as 
Column (i). Enter the aggregate share of the tested income        described in Regulations section 1.1291-1(c)(4) does not need 
listed in column (g) for each CFC with tested income.             to report information about the PFIC in Schedules K-2 and K-3, 
                                                                  Part VI. The S corporation should report its MTM gain or loss on 
Column (j). Enter the aggregate share of the tested loss listed   Schedule K (Form 1120-S), and report the shareholders’ shares 
in column (h) for each CFC with tested loss. The loss amounts     of those amounts in Schedule K-1 (Form 1120-S), Part III. Note, 
should be shown as negative numbers.                              however, there may be instances in which the S corporation will 
Column (k). If the CFC has a tested loss in column (h), enter     need to provide its shareholders with additional information to 
zero. If the CFC has tested income in column (g), enter the       meet their tax obligations with respect to a PFIC the stock of 
aggregate share of QBAI. A CFC's QBAI is reported on              which the S corporation has marked to market as described in 
Schedule I-1 (Form 5471), line 8.                                 Regulations section 1.1291-1(c)(4), such as when the section 
                                                                  1291 rules apply because the stock was not marked in the first 
Column (l). If the CFC has tested income in column (g), enter     year of the S corporation’s holding period. In such instances, the 
zero. If the CFC has a tested loss in column (h), enter as a      S corporation may use Part VI to provide the needed information.
negative number the aggregate share of the CFC's tested loss      • An S corporation that has elected to be treated as an entity for 
QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A        purposes of applying section 951A as provided in Notice 
CFC's tested loss QBAI amount is reported on Schedule I-1         2020-69, 2020-39 I.R.B. 604, is not required to complete 
(Form 5471), line 9c, which must be translated to U.S. dollars.   Schedules K-2 and K-3, Part VI, with respect to any PFIC that 
Column (m). Enter the aggregate share of the CFC's tested         also constitutes a CFC (PFIC/CFC) with respect to which the S 
interest income. A CFC's tested interest income is reported on    corporation is a U.S. shareholder.
Schedule I-1 (Form 5471), line 10c.
                                                                    Use Schedule K-2, Part VI, to report certain information with 
Column (n). Enter the aggregate share of the CFC's tested         respect to any PFIC owned, directly or indirectly, by the S 
interest expense. A CFC's tested interest expense is reported on  corporation for which reporting is required, including PFICs with 
Schedule I-1 (Form 5471), line 9d.                                respect to which no QEF or section 1296 MTM election has 
                                                                  been made and unpedigreed QEFs (section 1291 funds), and 
                                                                  PFICs with respect to which pedigreed QEF, section 1296 MTM, 
Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)                                                                                19

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or other elections have been, or may be, made and for which the Note. If the S corporation acquired shares in a PFIC on multiple
S corporation is not filing a Form 8621. dates during the tax year, append a completed Attachment 5 to
S corporations must also use Schedule K-2, Part VI, to report Schedule K-2, Part VI, and its corresponding Schedules K-3,
information for any PFIC with respect to which the S corporation Part VI, providing those dates.
is making a non-initial section 1296 MTM election, and for any
foreign corporation eligible to be treated as a QIC that is treated Attachment 5
as a PFIC by reason of section 1298(b)(1), regardless of whether
it files Form 8621 for that PFIC. See section 1296(j)(1)(A) and Additional Information for Part VI, Section 1
Regulations section 1.1296-1(i) for more information related to General Information Annual Information
non-initial section 1296 MTM elections. (a) Name of PFIC (b) EIN or (g) Dates PFIC shares
reference ID acquired during tax year
Use Schedule K-3, Part VI, to report the shareholder’s share, number (if applicable)
through its ownership in the S corporation, of the amounts
reported on Schedule K-2, Part VI.
Complete only one line in both Sections 1 and 2 for each
PFIC for which reporting in Schedules K-2 and K-3, Part VI, is
required. Each line completed for a PFIC in Section 1 should
correspond to the same line on Section 2. If there is no
information to report with respect to a PFIC in Section 2,
columns (c) through (o), only complete the name and EIN of the
PFIC in Section 2, columns (a) and (b), and leave columns (c) Column (h). Enter the total number of all classes of shares of
through (o) blank for that PFIC. For additional information on the PFIC the S corporation owned at the end of its tax year.
determining indirect ownership of PFICs, see Regulations Column (i). Enter the total value of all shares in the PFIC held
section 1.1291-1(b)(8). by the S corporation at the end of the tax year. If the PFIC shares
are not publicly traded, the S corporation may rely upon periodic
The S corporation may have additional required information account statements provided at least annually to determine the
with respect to a PFIC for certain columns (for example, value of a PFIC unless the S corporation has actual knowledge
scenarios where the S corporation may have multiple different or reason to know based on readily accessible information that
events with respect to the PFIC in the same tax year, such as the statements do not reflect a reasonable estimate of the PFIC's
multiple dates of acquisitions of, or distributions with respect to, value and the information provides a more reasonable estimate
the PFIC stock). In that case, complete Schedules K-2 and K-3, of the PFIC's value.
Part VI, with the first of those entries for a PFIC and attach a
statement including the remaining entries for the PFIC to Note. A shareholder may need additional information not
Schedule K-2, Part VI, and its corresponding Schedules K-3, required to be reported in this Schedule K-2, Part VI (or the
Part VI, with Attachments 5 and/or 6 completed. shareholder’s Schedule K-3, Part VI), from the S corporation with
If the S corporation has additional PFICs for which to report respect to the value of the PFIC shares as of a particular date to
information that does not fit in single Schedules K-2 and K-3, aid the shareholder in making certain elections under
Part VI, it can attach additional Parts VI of Schedules K-2 and Regulations section 1.1291-10, 1.1297-3, or 1.1298-3.
K-3, as needed. Column (j). If the S corporation has made either of the following
elections with respect to the PFIC, indicate which election was
Section 1—General Information made using the following codes. If the S corporation has not
made an election with respect to the PFIC, leave this column
Columns (a) through (c). Enter the name, U.S. EIN or blank with respect to that PFIC.
reference ID number, and address of each PFIC held directly or
indirectly by the S corporation during its tax year. Do not enter
“FOREIGNUS” or “APPLIED FOR. ” S Corporation Election Codes
For basic information about reference ID numbers (including
the requirements as to the characters permitted), see the Code S Corporation Election Type
Instructions for Form 8621. QEF Qualified Electing Fund Election
Columns (d) and (e). Enter the beginning and end of the MTM Section 1296 Mark-to-Market Election
PFIC’s tax year using the format YYYYMMDD.
Column (f). Enter each class of shares in the PFIC owned by Reminder. If the S corporation has made a pedigreed QEF
the S corporation using the following codes. election or section 1296 MTM election (other than a non-initial
section 1296 MTM election) with respect to a PFIC, and the S
corporation files Form 8621 for that PFIC, it is not required to
Codes for Classes of PFIC Shares report information regarding that PFIC in Schedule K-2 or K-3,
Part VI. If the S corporation has marked stock in a PFIC to
Code Class of PFIC Shares market as described in Regulations section 1.1291-1(c)(4), it is
COM Common or Ordinary Shares not required to report information regarding that PFIC in
PRE Preferred Shares Schedule K-2 or K-3, Part VI.
OTH Other Equity Interest
VAR Multiple Classes of Shares or Equity Interests Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations section 1.1297-4 for
Column (g). If the S corporation acquired any PFIC shares additional information on QICs.
during the tax year, provide the date(s) of acquisition of those
shares using the format YYYYMMDD. If the S corporation Column (l). Check the box if the PFIC has indicated that its
acquired no shares in a particular PFIC during its tax year, leave shares are “marketable stock” as defined in section 1296(e) and
this column blank with respect to that PFIC. Regulations section 1.1296-2.

20 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Column (m). Check the box if the PFIC is a PFIC/CFC.                      amounts. See Regulations section 1.1295-1(g) for additional 
                                                                          information on annual PFIC statements. The S corporation must 
Note. If the PFIC is a PFIC/CFC, a shareholder may need                   complete columns (c) and (d) only for PFICs with respect to 
certain additional information with respect to the PFIC/CFC’s             which it has made a pedigreed QEF election but for which it 
E&P not required to be reported in this Schedule K-2, Part VI (or         does not file Form 8621, and for any PFIC it has elected to treat 
the shareholder’s Schedule K-3, Part VI), from the S corporation          as an unpedigreed QEF.
to aid the shareholder in making certain elections under                  Reminder. If the S corporation has made a pedigreed QEF 
Regulations sections 1.1291-9, 1.1297-3, or 1.1298-3.                     election with respect to a PFIC, and if the S corporation files 
Reminder. An S corporation that knows that all of its direct and          Form 8621 for that PFIC, the S corporation is not required to 
indirect shareholders that are U.S. persons are not subject to the        report information regarding that PFIC in Schedule K-2, Part VI, 
PFIC rules with respect to a PFIC/CFC under section 1297(d)               or Schedule K-3, Part VI. The S corporation should report its 
because they are subject to the subpart F rules with respect to           inclusion of its share of the QEF’s ordinary earnings and net 
the PFIC/CFC is not required to complete Schedules K-2 and                capital gain on Schedule K, and report the shareholders’ shares 
K-3, Part VI, with respect to the PFIC/CFC. Additionally, an S            of those amounts in Schedule K-1, Part III.
corporation that has elected to be treated as an entity for 
purposes of applying section 951A as provided in Notice                   Section 1296 Mark-to-Market Information
2020-69 is not required to complete Schedules K-2 and K-3, Part 
VI, for any PFIC that is a PFIC/CFC with respect to which the S           Columns (e) and (f). Enter the fair market value (FMV) of the 
corporation is a U.S. shareholder.                                        PFIC stock at the beginning and end of the S corporation’s tax 
                                                                          year in columns (e) and (f), respectively. If any shares of the 
Column (n). Complete column (n) in the following manner.                  PFIC were acquired during the tax year for which the Form 
                                                                          1120-S is being filed, the FMV in column (e) should reflect the 
IF...                                                    THEN...          FMV of those shares as of the date of acquisition. The S 
• this is the first year of the S corporation’s holding  check the box.   corporation must complete columns (e) and (f) only for PFICs 
period in stock of the foreign corporation, and                           with respect to which it has made a section 1296 MTM election 
• the S corporation has determined (directly or                           but for which it does not file Form 8621 and for any PFIC with 
otherwise) that the foreign corporation is a PFIC under                   respect to which it is making a non-initial section 1296 MTM 
the income test or asset test of section 1297(a),                         election.
• the foreign corporation was a PFIC in a prior tax year check the box.   Reminder. If the S corporation has made an MTM election 
of the S corporation’s holding period, and                                under section 1296 with respect to a PFIC (other than a 
• the S corporation has not determined (directly or                       non-initial section 1296 MTM election), and if the S corporation 
otherwise) the foreign corporation is a former PFIC                       files Form 8621 for that PFIC, the S corporation is not required to 
within the meaning of Regulations section 1.1291-9(j)(2)                  report information regarding that PFIC in Schedule K-2, Part VI, 
(iv),
                                                                          or Schedule K-3, Part VI. The S corporation should report its 
• the foreign corporation was a PFIC in a prior tax year do not check the section 1296(a) MTM gain or loss on Schedule K, and report the 
of the S corporation’s holding period, and               box.             shareholders’ shares of those amounts in Schedule K-1, Part III.
• the S corporation has determined (directly or 
otherwise) the foreign corporation is a former PFIC                       If the S corporation has marked stock in a PFIC to market as 
within the meaning of Regulations section 1.1291-9(j)(2)                  described in Regulations section 1.1291-1(c)(4), it is not 
(iv),
                                                                          required to report information regarding that PFIC in 
                                                                          Schedule K-2 or K-3, Part VI, though it may use Part VI to 
                                                                          provide the shareholder with additional information to meet its 
Note. If the foreign corporation is a former PFIC within the              tax obligations with respect to the PFIC in certain instances, 
meaning of Regulations section 1.1291-9(j)(2)(iv), a shareholder          such as when the section 1291 rules apply because the stock 
may need additional information not required to be reported in            was not marked in the first year of the S corporation's holding 
this Schedule K-2, Part VI (or the shareholder’s Schedule K-3,            period.
Part VI), from the S corporation with respect to the PFIC to aid 
the shareholder in making certain elections under Regulations             Note. If the S corporation has made an MTM election under 
section 1.1298-3.                                                         section 1296 with respect to a PFIC but does not file Form 8621 
                                                                          for that PFIC, a shareholder may need additional information not 
Section 2—Additional Information on PFIC or                               required to be reported in this Schedule K-2, Part VI (or the 
                                                                          shareholder’s Schedule K-3, Part VI), regarding its share of the S 
Qualified Electing Fund (QEF)                                             corporation’s adjusted tax basis in the S corporation’s MTM PFIC 
General Information                                                       stock in order to complete Form 8621.
Columns (a) and (b). Enter the name and U.S. EIN (or 
reference ID number) of each PFIC held directly or indirectly by          Section 1291 and Other Information
the S corporation during its tax year. Do not enter “FOREIGNUS”           Note. Generally, the information in columns (g) through (o) is to 
or “APPLIED FOR.”                                                         assist shareholders of section 1291 funds in satisfying any 
                                                                          information reporting obligations and in figuring income 
QEF Information                                                           inclusions with respect to section 1291 funds. However, this 
                                                                          information may be relevant to PFICs with respect to which a 
Columns (c) and (d). Enter the S corporation’s share of the               QEF election (pedigreed or unpedigreed), section 1296 MTM 
total ordinary earnings and net capital gain (as defined in               election (including a non-initial section 1296 MTM election), or 
Regulations section 1.1293-1(a)(2)) of the PFIC for the S                 other election has been made by the S corporation, shareholder, 
corporation’s tax year in which or with which the tax year of the         or other indirect PFIC shareholder. Accordingly, the S 
PFIC ends in columns (c) and (d), respectively. The PFIC should           corporation must complete columns (g) through (o) with respect 
provide the S corporation with a statement that provides                  to each PFIC for which reporting in Schedule K-2, Part VI, and 
information to assist the S corporation in determining these 

Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)                                                                                      21

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Schedule K-3, Part VI, is required. However, note the instructions instructions for Form 8621, Part V, line 16d, for additional
for column (k) regarding reporting distributions from PFICs with information on creditable foreign taxes attributable to PFIC
respect to which the S corporation has made a pedigreed QEF distributions, including apportioning creditable foreign taxes to
election or section 1296 MTM election (other than a non-initial the portion of a distribution that constitutes an excess distribution
section 1296 MTM election) and for which the S corporation and certain rules related to creditable foreign taxes on a
does not file Form 8621. disposition of PFIC stock.
Reminder. If the S corporation has additional required Column (k). Enter the total amount of distributions the S
information with respect to a PFIC for any of columns (g) through corporation received from the PFIC in the 3 preceding tax years,
(j) or (l) through (m) (for example, multiple distributions with or, if shorter, the total amount of distributions the S corporation
respect to the PFIC stock), it must complete the column with the received during its holding period of the PFIC stock. However, do
first of those entries and attach a statement including the not enter any amount in this column with respect to a PFIC for
remaining entries to Schedule K-2, Part VI, and its which the S corporation has made a pedigreed QEF election or
corresponding Schedules K-3, Part VI, with the information section 1296 MTM election (other than a non-initial section 1296
contained in Attachment 6. MTM election) and for which the S corporation does not file Form
8621.
Column (g). Enter the date(s) on which the S corporation
initially acquired each block of stock in the PFIC using the format Column (l). Enter the date(s) on which the S corporation
YYYYMMDD. disposed of any block of stock in the PFIC during the S
corporation’s tax year, if any, using the format YYYYMMDD.
Column (h). Enter the amount of each distribution of cash
and/or the FMV of any other property distributed to the S Column (m). If the S corporation disposed of any block of stock
corporation by the PFIC during the tax year, if any. in the PFIC during the S corporation’s tax year, enter the amount
realized by the S corporation on each disposition.
Note. Deemed distributions by QEFs do not need to be
reported on this Schedule K-2 (or the shareholder’s Column (n). If the S corporation disposed of any block of stock
Schedule K-3). However, shareholders that have made, or intend in the PFIC during the S corporation’s tax year, enter the S
to make, an election under section 1294, and that are deemed to corporation’s tax basis in the shares of the PFIC on the date of
have received a distribution from the QEF, may need this disposition.
information to complete any computations under section 1294 Schedule K-3. Enter the shareholder’s share, through its
(including for Form 8621, if required). See section 1294(f) and ownership in the S corporation, of the S corporation’s tax basis in
Temporary Regulations section 1.1294-1T for additional the PFIC shares.
information. Column (o). Enter the S corporation’s gain or loss on the
Column (i). Enter the date(s) of distribution of the amounts disposition of PFIC shares. This equals column (m) minus
entered in column (h) using the format YYYYMMDD. column (n).
Column (j). Enter the total creditable foreign taxes attributable
to a distribution from the PFIC. See section 1291(g) and the

Attachment 6

Additional Information for Part VI, Section 2
General Information Section 1291 and Other Information
(a) Name of (b) EIN or (g) Dates (h) Amount of (i) Dates of (j) Total (l) Dates PFIC (m) Amount (n) Tax basis (o) Gain or
PFIC reference ID PFIC shares cash and FMV distribution creditable shares realized on of PFIC (loss) on
number were acquired of property foreign taxes disposed of disposition of shares on disposition of
distributed by attributable to during tax PFIC shares date of PFIC shares
PFIC during distribution by year (if disposition
the current tax PFIC applicable)
year (if
applicable)

22 Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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                                                                   (2) with respect to the PTEP groups. The PTEP groups are not 
Schedule K-2, Part VII (S                                          reported in this Part VII.
Corporation’s Interest in Foreign                                  Lines 1 through 4.  The S corporation’s share of the CFC’s net 
Corporation Income (Section 960)),                                 income in each of the subpart F income groups, tested income 
                                                                   group, and residual income group by unit is reported on lines 1 
and Schedule K-3, Part VII                                         through 4.
(Shareholder’s Share of S                                          The CFC’s net income and taxes in each of these groups are 
                                                                   figured on Schedule Q (Form 5471), and then included in 
Corporation's Interest in Foreign                                  columns (iii) and (iv), respectively. See Schedule Q in the 
                                                                   Instructions for Form 5471, for the meaning of unit.
Corporation Income (Section 960))
                                                                   Do not include on line 1 (including lines 1a through 1j and any 
Note. Shareholders will use the following information to figure a  subset lines (1), (2), etc., under line 1) any amounts excluded 
deemed paid foreign tax credit on Form 1118.                       from subpart F income under the high-tax exception in section 
                                                                   954(b)(4) (subpart F high-tax exception); these amounts are 
Reporting currency. Report all amounts in Part VII in functional   reported on line 4 (including any subset lines (1), (2), etc., under 
currency.                                                          line 4).
The S corporation must complete a separate Schedule K-2,           Also do not include on line 3 (or lines (1), (2), etc., under 
Part VII, for each CFC with respect to which it has a direct or    line 3) any amounts excluded under the GILTI high-tax exclusion 
indirect interest, unless the S corporation does not have a        in Regulations section 1.951A-2(c) (7) (“GILTI high-tax 
shareholder that is eligible to make a section 962 election to     exclusion”); these amounts are reported on line 4 (and on lines 
claim a deemed paid foreign tax credit with respect to such CFC.   (1), (2), etc., under line 4).
An indirect interest means that the CFC is owned by the S          The PTEP groups are not reported in Part VII. Do not report 
corporation through one or more partnerships.                      by unit with respect to the following subpart F income groups: (i) 
Schedule K-3, Part VII, must be completed and provided to          international boycott income; (ii) bribes, kickbacks, and other 
shareholders who may be eligible to make a section 962 election    payments; and (iii) section 901(j) income. Also do not report by 
to claim a deemed paid foreign tax credit.                         unit with respect to the recaptured subpart F income group.
An S corporation that does not have or receive sufficient          Columns (i) through (iv).      In Schedule K-2, Part VII, the S 
information or notice regarding a shareholder must presume the     corporation reports in column (ii) its share of the CFC's net 
shareholder is eligible to claim the indirect credit and must      income by income groups and by units. In column (iii), the S 
complete the Schedules K-2 and K-3, Part VII, accordingly.         corporation reports the CFC’s total net income by income groups 
Exception. Part VII is not required to be completed with           and units as reported in column (xvi) of Schedule Q (Form 
respect to dormant foreign corporations (as defined in section 3   5471). In column (iv), the S corporation reports the CFC’s current 
of Rev. Proc. 92-70). See also Domestic Filing Exception, earlier. year foreign taxes for which credit is allowed by income groups 
                                                                   and units as reported in column (xii) of Schedule Q (Form 5471). 
In general, if a section 962 election is in effect, a U.S.         In column (i), consistent with the reporting requirement on Form 
shareholder of a CFC is deemed to pay all or a portion of the      1118, enter the two-letter code (from the list at IRS.gov/
foreign income taxes paid or accrued by the CFC that are           CountryCodes) of each foreign country and U.S. territory within 
properly attributable to subpart F income or tested income of the  which income is sourced and/or to which taxes were paid or 
CFC that the U.S. shareholder includes in its gross income. See    accrued. Enter “US” for income sourced in the United States. Do 
section 960(a) and (d).                                            not enter “various” or “OC” for the country code. Do not enter a 
To figure the foreign taxes deemed paid by the U.S.                country in column (i) of line 5. See the instructions for line D for 
shareholder, the income, deductions, and taxes of the CFC must     further information.
be assigned to separate categories of income and then included     In Schedule K-3, Part VII, the S corporation reports each 
in income groups within those separate categories. See             shareholder's share of the net income in the income group by 
Regulations section 1.960-1(c)(1). The applicable separate         unit and country.
categories of income are general category income, passive 
category income, and section 901(j) income. The income groups      Line A. On line A, enter the EIN or reference ID number of the 
include the subpart F income groups, the tested income group,      CFC as listed on Form 5471. Do not enter “FOREIGNUS” or 
and the residual income group. Each single item of foreign base    “APPLIED FOR.”
company income as defined in Regulations section 1.954-1(c)(1)     Line B. The S corporation must file separate Schedules K-2 and 
(iii) is a separate subpart F income group. See Regulations        K-3, Part VII, to report the net income or loss of the CFC in each 
section 1.960-1(d)(2)(ii)(B).                                      separate category. Use the applicable code from the table below.
Line 1f allows the S corporation to report foreign personal 
holding company income under section 954(c)(1)(F) (income          Category of Income Codes
from notional principal contracts); (G) (payments in lieu of 
dividends); and (H) (personal service contracts). An S 
corporation must report a separate line 1f for income in each of   Code      Category of Income
sections 954(c)(1)(F), (G) and (H). Income within one of these     PAS       Passive Category Income
income groups may need to be further subdivided on separate        901j      Section 901(j) Income
lines to the extent it is attributable to more than one country, 
source of income, passive grouping, etc. See the instructions for  GEN       General Category Income
Schedule Q (Form 5471) in the Instructions for Form 5471.
The tested income group consists of tested income within a         Line C. With respect to passive category income, separate 
section 904 category; see Regulations section 1.960-1(d)(2)(ii)    Schedules K-2 and K-3, Part VII, must be completed for each 
(C). The residual income group consists of any income not in the   applicable grouping under Regulations section 1.904-4(c). This 
other income groups or in a PTEP group; see Regulations            includes the groups in Regulations section 1.904-4(c)(3) 
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)   reported on the Schedule Q (Form 5471).

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The S corporation should use the following codes to report                                    Example 12. Part VII. Subpart F income group reporting 
each of these groupings for each unit.                                                    by unit.    In Year 1, USC, an S corporation, wholly owns foreign 
                                                                                          corporation CFC with reference ID number 1234. The CFC owns 
Passive Grouping Codes                                                                    a foreign disregarded entity organized in Country X. CFC has 
                                                                                          two separate units, the foreign disregarded entity and the CFC 
                                                                                          itself.
Code                                   Passive Group
   i   All passive income received during the tax year that is subject to a 
       withholding tax of 15% or greater must be treated as one item of 
       income. See Regulations section 1.904-4(c)(3)(i).
   ii  All passive income received during the tax year that is subject to a 
       withholding tax of less than 15% (but greater than zero) must be 
       treated as one item of income. See Regulations section 1.904-4(c)
       (3)(ii).
   iii All passive income received during the tax year that is subject to no 
       withholding tax or other foreign tax must be treated as one item of 
       income. See Regulations section 1.904-4(c)(3)(iii).
   iv  All passive income received during the tax year that is subject to no 
       withholding tax but is subject to foreign tax other than a withholding 
       tax must be treated as one item of income. See Regulations 
       section 1.904-4(c)(3)(iv). 

Example 12. Foreign Source Income

For the Year 1 tax year, the two units have the following foreign source income.
                                                                                        Tax                               Country Code                Net Income
Country X Foreign Disregarded Entity (FDE) Passive Interest                   20% withholding tax                                 XX                  100u
Income
CFC Passive Rental Income                                                     10% withholding tax                                 YY                  50u
CFC General Category Tested Income                                                    No tax                                      ZZ                  300u

Example 12. USC’s 1st Schedule K-2, Part VII

USC completes Schedule K-2, Part VII, as follows.
A  Enter EIN or reference ID number of controlled foreign corporation   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1234
B  Separate category (enter code) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAS
C  If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c)       . . . . . . . . . . . . . . . . . .    i
                                                      (i) Country code          (ii) S corporation’s share of     (iii) Foreign corporation’s     (iv) Foreign corporation’s 
Enter amounts in functional currency of the                                     foreign corporation’s net               total net income        current year foreign taxes for 
foreign corporation (unless otherwise noted).                                             income                      (functional currency)       which credit allowed (U.S. 
                                                                                    (functional currency)                                             dollars)
1      Subpart F income groups
   a   Dividends, interest, rents, royalties, and 
       annuities (total) . . . . . . . . . . . .
       (1) Unit: Country X FDE                                XX                            100u                              100u                    $20

24                                                                                                  Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Example 12. USC’s 2nd Schedule K-2, Part VII

USC completes another Schedule K-2, Part VII, as follows.
A Enter EIN or reference ID number of controlled foreign corporation      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1234
B Separate category (enter code) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   PAS
C If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c)          . . . . . . . . . . . . . . . . . .  ii
                                                        (i) Country code          (ii) S corporation’s share of     (iii) Foreign corporation’s    (iv) Foreign corporation’s 
Enter amounts in functional currency of the                                         foreign corporation’s net             total net income         current year foreign taxes 
foreign corporation (unless otherwise noted).                                               income                      (functional currency)        for which credit allowed 
                                                                                      (functional currency)                                                (U.S. dollars)
1   Subpart F income groups
  a Dividends, interest, rents, royalties, and 
    annuities (total) . . . . . . . . . . . . .
    (1) Unit:     CFC                                           YY                              50u                             50u                            $5

Example 12. USC’s 3rd Schedule K-2, Part VII

USC completes a third Schedule K-2, Part VII, as follows.
A  Enter EIN or reference ID number of controlled foreign corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        1234
B  Separate category (enter code)     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  GEN
                                                        (i) Country code        (ii) S corporation’s share of       (iii) Foreign corporation’s    (iv) Foreign corporation’s 
Enter amounts in functional currency of the                                       foreign corporation’s net               total net income         current year foreign taxes 
foreign corporation (unless otherwise noted).                                               income                      (functional currency)        for which credit allowed 
                                                                                      (functional currency)                                                (U.S. dollars)
3   Tested income group (total) . . . . . .
    (1) Unit:     CFC                                           ZZ                            300u                              300u                           $0
USC also completes Schedule K-3, Part VII, with each                                      CFC with reference ID number 1234. USC has two U.S. citizen 
shareholder’s share of the S corporation’s net income in each                             shareholders. CFC has only one unit, the CFC itself, and no 
income group.                                                                             other separate units. CFC has general category foreign source 
                                                                                          foreign base company sales income (FBCSI) sourced in Country 
Line D. If net income in an income group is sourced from more 
                                                                                          A of 100u and general category foreign source FBCSI sourced in 
than one country, check the box on line D, and attach a 
                                                                                          Country B of 50u and general category foreign source FBCSI 
statement to Schedules K-2 and K-3 to indicate that you have 
                                                                                          sourced in Country C of 30u. The country code for Country A is 
expanded Part VII to report these additional countries on both 
                                                                                          “AA,” the country code for Country B is “BB,” and the country 
Form 1120-S and Schedule K-3 (for shareholder’s share).
                                                                                          code for Country C is “CC.”
Example 13. Part VII. More than two source countries.                           In 
Year 1, USC, an S corporation, wholly owns foreign corporation 

Example 13 Table

USC completes Schedule K-2, Part VII, as follows.
A  Enter EIN or reference ID number of controlled foreign corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1234
B Separate category (enter code) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GEN
D Check the box and attach a statement if there is more than one source country for a line . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter amounts in functional currency of the foreign corporation (unless                           (i) Country code                          (ii) S corporation’s share of foreign 
otherwise noted).                                                                                                                               corporation’s net income 
                                                                                                                                                 (functional currency)
1   Subpart F income groups
  g Foreign base company sales income (total)       . . . . . . . . . .                                                                                    180u
    (1) Unit: CFC                                                                                         AA                                               100u
    (2) Unit: CFC                                                                                         BB                                               50u

Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)                                                                                                                          25

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Example 13. Attachment (Expansion)

USC attaches to Schedule K-2 the following schedule to expand 1g to include another line under 1g.
A   Enter EIN or reference ID number of controlled foreign corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .      1234
B  Separate category (enter code) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   GEN
D  Check the box and attach a statement if there is more than one source country for a line . . . . . . . . . . . . . . . .
                                                                                                                                   
                                                                                                        (i) Country code           (ii) S corporation’s share of foreign 
Enter amounts in functional currency of the foreign corporation (unless otherwise noted).                                               corporation’s net income 
                                                                                                                                        (functional currency)
1    Subpart F income groups
   g Foreign base company sales income (total) . . . . . . . . . . . . . . . . . . .                                                    180u
     (3) Unit: CFC                                                                                            CC                        30u

USC also completes Schedule K-3, Part VII, with each                                    Line F.     If the foreign corporation has foreign oil and gas 
shareholder's share of the S corporation's net income in the                            extraction income (FOGEI) or foreign oil-related income (FORI), 
subpart F income group. USC attaches to Schedule K-3 the                                the S corporation should check the box and complete a separate 
same schedule it attaches to Schedule K-2, with each                                    Part VII indicating the amount of FOGEI and FORI in each 
shareholder's share of the subpart F income groups by country.                          grouping. The S corporation should check box 2 in Part I and 
In Schedule K-3, Part VII, USC also includes the CFC’s total net                        complete Schedule I (Form 1118). See the instructions for Part I, 
income and the CFC’s current year foreign taxes for which credit                        box 2.
is allowed in each income group.
                                                                                        Line G.     Enter the functional currency of the foreign corporation 
Line E. The S corporation should check the box and complete a                           as reported on Form 5471, line 1h.
separate Part VII for U.S. source income in each separate 
category.

26                                                                                                Inst. for Schedules K-2 and K-3 (Form 1120-S) (2023)

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Index
 
                                      General filing instructions 9
C                                     Gross income  10                  R
Capital gains and losses  11                                            R&E expenses   12
Category of income codes   23         H                                 R&E expenses apportionment 
Charitable contributions 12           High-taxed income   5              factors 12
Codes for categories of income 18     How to complete Schedules K-2 and Rental income  11
Codes for classes of PFIC shares  20    K-3 3
Codes for types of tax 14                                               S
Collectibles (28%) gain 11            I                                 S corporation determination                       9
Collectibles loss 12                  Identifying information  4        S corporation election codes                      20
Computer-generated schedules K-2    3 Identifying information, S        S corporation’s interest in foreign 
Contested taxes   15                    corporation 4                    corporation   23
Country codes 10                      Identifying information,          Section 1291 and other 
Currency 3                              shareholder 4                    information   21
                                      Income resourced by treaty   10   Section 1291 information  21
D                                     Interest expense apportionment    Section 1296 MTM information                       21
                                        factors 13                      Section 267A disallowed deduction                     6
Deductions 12                         Interest expense specifically     Section 901(j) income 9
Distributions from foreign              allocable under Regulations     Section 951(a) inclusions 11
  corporations to S corporation  16     section 1.861-10 and -10T   12  Section 951(a)(1) and Section 951A 
Dividends, ordinary and qualified 11  Interest expense, other  12        Inclusions   17
Domestic filing exception  2          International transactions  7     Section 951A category income                       10
Downstream loan   7
                                                                        Section 951A(a) inclusions                       12
                                      L
E                                                                       Section 986(c) gain and loss                      11
                                      Loan, downstream    7             Section 987 gain and loss 11
EIN 4                                 Loan, upstream 7                  Section 988 gain and loss 11
Exception to filing Schedules K-2 and                                   Shareholder determination                        10
  K-3 2                               N                                 Splitter arrangements 5
F                                     Name of S corporation   4         Stewardship expenses   13
                                      Net long-term capital gain  11
FOGEI 26                              Net long-term capital loss  12    T
Foreign branch category income    9   Net section 1231 gain 11          Table 1. Information on personal 
Foreign oil and gas taxes 4                                              property sold  4
Foreign tax translation 5             O                                 Table 2. Downstream loans                        7
Foreign taxes 14                                                        Table 3. Upstream loans 7
Foreign taxes deductible but not      Other deductions   12
  creditable 12 15,                   Other forms 7                     Taxes assigned to section 951A 
                                                                         category    14
Foreign taxes paid or accrued to      Other income 12
                                                                        Total gross income 12
  sanctioned countries  14            Other international transactions 7
Foreign taxes related to PTEP                                           U
  resourced by treaty   14            P
                                                                        Unrecaptured section 1250 gain                      11
FORI 26                               Part applicability 4
                                                                        Upstream loan  7
Form 1116 exemption exception    8    Parts of Sch K-2, in general 3
Form 5471 information   7             Passive grouping codes   24
                                                                        W
Form 8621 information   19            PFIC, QEF general information  20
Form 8858 information   7                                               When to file 3
                                      Q                                 Where to file 3
G                                                                       Who must file 1
                                      QEF information 21
Gains on sale of certain personal 
  property 4

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