PDF document

- 1 -

                         Userid: CPM                      Schema: instrx Leadpct: 100%     Pt. size: 9       Draft             Ok to Print
AH XSL/XML               Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                (Init. & Date) _______

Page 1 of 45                                                                                           12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

                                                                                                       Department of the Treasury
                                                                                                       Internal Revenue Service
2023

Partnership Instructions for 

Schedules K-2 and K-3 (Form 

1065)

Partners’ Distributive Share Items—International Partner’s Share of Income, 
Deductions, Credits, etc.—International

Section references are to the Internal Revenue Code unless                 Part 1, box 11. Certain partnerships are now required to report 
otherwise noted.                                                           information concerning dual consolidated losses with Schedules 
Contents                                                            Page   K-2 and K-3.
General Instructions  . . . . . . . . . . . . . . . . . . . . . . . . . 1  Part I, box 13. The new qualified intermediary agreement in 
Purpose of Schedules K-2 and K-3                . . . . . . . . . . .   1  Rev. Proc. 2022-43 (the QIA), 2022-52 I.R.B. 570, applies 
Who Must File    . . . . . . . . . . . . . . . . . . . . . . . . . .    1  beginning January 1, 2023, including to qualified intermediaries 
                                                                           that are qualified derivatives dealers (QDDs) as defined under 
When and Where To File . . . . . . . . . . . . . . . . . . .            3  the QIA. For more information, see the note, later.
How To Complete Schedules K-2 and K-3                     . . . . . .   4  Part II. Amounts may now be entered in lines 41 through 43, 
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 4  columns (a) through (e), with respect to interest expense.
Schedule K-2, Identifying Information . . . . . . . . . .               5  Part VIII. Part VIII includes two new columns: (i) the foreign 
Schedule K-3, Identifying Information . . . . . . . . . .               5  corporation's total net income, and (ii) the foreign corporation's 
Part I. Partnership's Other Current Year                                   current year foreign taxes for which credit is allowed. Part VIII 
International Information           . . . . . . . . . . . . . . . . .   5  also requests the functional currency of the foreign corporation. 
Part II. Foreign Tax Credit Limitation . . . . . . . . . .              12 These additions will allow the preparer to include all information 
                                                                           necessary for the section 960 computation on Part VIII without 
Part III. Other Information for Preparation of                             attaching Schedule Q (Form 5471).
Form 1116 or 1118 . . . . . . . . . . . . . . . . . . . .               14
                                                                           Part XIII. New lines have been added to Part XIII to provide 
Part IV. Partners' Section 250 Deduction with                              additional information a nonresident alien, foreign trust, or 
Respect to FDII          . . . . . . . . . . . . . . . . . . . . . .    19 foreign estate needs to complete Schedule P (Form 1040-NR) to 
Part V. Distributions From Foreign                                         report information and calculate gain or loss on the transfer of an 
Corporations to Partnership . . . . . . . . . . . . . .                 23 interest in a partnership that directly or indirectly is engaged in 
Part VI. Information on Partners' Section                                  the conduct of a trade or business within the United States.
951(a)(1) and Section 951A Inclusions . . . . . .                       24 Domestic filing exception.  A domestic filing exception that 
Part VII. Information to Complete Form 8621 . . . .                     26 allows an exception for filing and furnishing Schedules K-2 and 
Part VIII. Partnership's Interest in Foreign                               K-3 applies for 2023. See Domestic Filing Exception, later.
Corporation Income (Section 960)                  . . . . . . . . .     30
Part IX. Partners' Information for Base Erosion                            General Instructions
and Anti-Abuse Tax (Section 59A)                  . . . . . . . . .     33 The Instructions for Form 1065 and Instructions for Schedule K-1 
Part X. Foreign Partners' Character and                                    (Form 1065) generally apply to Schedules K-2 and K-3. These 
Source of Income and Deductions . . . . . . . . .                       37 instructions provide additional information needed to complete 
Part XI. Section 871(m) Covered Partnerships                  . . .     41 Schedules K-2 and K-3 for tax years beginning in 2023.
Part XIII. Foreign Partner's Distributive Share 
                                                                           Purpose of Schedules K-2 and K-3
of Deemed Sale Items on Transfer of 
Partnership Interest        . . . . . . . . . . . . . . . . . . . .     41 Schedule K-2 is an extension of Form 1065, Schedule K, and is 
                                                                           used to report items of international tax relevance from the 
                                                                           operation of a partnership.
Future Developments                                                        Schedule K-3 is an extension of Schedule K-1 (Form 1065) 
For the latest information about developments related to                   and is generally used to report to partners their shares of the 
Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and                 items reported on Schedule K-2. Partners must include the 
their instructions, such as legislation enacted after they were            information reported on Schedule K-3 on their tax or information 
published, go to IRS.gov/Form1065.                                         returns, if applicable.

                                                                           Who Must File
What’s New
                                                                           Any partnership required to file Form 1065 that has items 
Part I, box 7, reserved. Box 7 requiring attachment of Form                relevant to the determination of the U.S. tax or certain 
8858 has been reserved. Instead, box 13 now requires, in certain           withholding tax or reporting obligations of its partners under the 
instances, information that a partner (whether direct or indirect)         international provisions of the Internal Revenue Code (the Code) 
needs to complete Form 8858 with respect to a foreign branch or            must complete the relevant parts of Schedules K-2 and K-3. See 
foreign disregarded entity owned by the partnership.                       each part and section for a more detailed description of who 

Jan 3, 2024                                                         Cat. No. 74375Q

- 2 -

Page 2 of 45          Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                     12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

must file each part and section. Penalties may apply for filing       exception. See Regulations section 1.59A-3(b)(3)(i). DC’s 
Form 1065 without all required information or for furnishing          distributive share of the $100 payment to the foreign subsidiary 
Schedules K-3 to partners without all required information. The       is $50.
penalties that apply with respect to Form 1065 and Schedule K-1       For purposes of determining whether a payment or accrual by 
apply with respect to Schedules K-2 and K-3, respectively. See        a partnership is a base erosion payment, any amount paid or 
Penalties in the Instructions for Form 1065.                          accrued by USP is treated as paid or accrued by each partner 
  Except as otherwise required by statute, regulations, or other      based on the partner’s distributive share of the item of deduction 
IRS guidance, a partnership isn't required to obtain information      with respect to that amount. See Regulations section 1.59A-7(d)
from its direct or indirect partners to determine if it needs to file (2). Therefore, DC is treated as having paid $50 to the foreign 
each of these parts.                                                  subsidiary.
                                                                      DC must complete Form 8991, Tax on Base Erosion 
  A partnership is only required to complete and file the             Payments of Taxpayers With Substantial Gross Receipts, to 
relevant portions of Schedules K-2 and K-3, as applicable. For        compute its base erosion minimum tax amount (if any); 
example, if the partnership doesn't own (within the meaning of        therefore, USP must complete the relevant portions of Schedules 
section 958) stock of a foreign corporation other than solely by      K-2 and K-3, Part IX.
reason of applying section 318(a)(3) (providing for downward 
attribution) as provided in section 958(b), it isn't required to 
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.           Domestic Filing Exception (Exception to Filing 
                                                                      Schedules K-2 and K-3)
  Schedules K-2 and K-3 consist of the most common 
international tax provisions of the Code. However, not all            A domestic partnership (as defined under sections 7701(a)(2) 
provisions are specifically identified on these schedules. To the     and (4)) doesn't need to (a) complete and file Schedules K-2 and 
extent that an international provision is impacted and isn't          K-3, or (b) furnish to a partner Schedule K-3 (except where 
otherwise specifically identified, the partnership should check       requested by a partner after the 1-month date (defined in criteria 
box 13 on Schedule K-2, Part I, and Schedule K-3, Part I, and         number 4, below)) if each of the following four criteria are met 
attach a statement to both Schedules K-2 and K-3 (for                 with respect to the partnership’s tax year 2023.
distributive share).
                                                                      1. No or limited foreign activity. During the domestic 
Note. A partnership that is, or has a branch that is, a QDD (a        partnership’s tax year 2023, the domestic partnership either has 
QDD partnership) must file Form 1065 even if it wouldn’t be           no foreign activity (as defined below), or, if it does have foreign 
required to file if it wasn’t a QDD partnership and must attach a     activity, such foreign activity is limited to (a) passive category 
statement to its Form 1065 with certain required information as       foreign income (determined without regard to the high-taxed 
provided in section 7.01(C) of the QIA. If the QDD partnership is     income exception under section 904(d)(2)(B)(iii)); (b) upon which 
filing Form 1065 solely because it’s a QDD partnership and            not more than $300 of foreign income taxes allowable as a credit 
wouldn’t otherwise be required to file Form 1065, then the QDD        under section 901 are treated as paid or accrued by the 
partnership isn’t required to complete Schedules K-2 and K-3.         partnership; and (c) such income and taxes are shown on a 
                                                                      payee statement (as defined in section 6724(d)(2)) that is 
  A partnership with no foreign source income, no assets              furnished or treated as furnished to the partnership.
generating foreign source income, no foreign partners, and no         Foreign activity.    For purposes of the domestic filing 
foreign taxes paid or accrued may still need to report information    exception, foreign activity means any of the following: (a) foreign 
on Schedules K-2 and K-3. For example, if the partner claims a        income taxes paid or accrued (as defined in section 901 and the 
credit for foreign taxes paid or accrued by the partner, the          regulations thereunder); (b) foreign source income or loss (as 
partner may need certain information from the partnership to          determined in sections 861 through 865, and section 904(h), and 
complete Form 1116, Foreign Tax Credit; or Form 1118, Foreign         the regulations thereunder); (c) ownership interest in a foreign 
Tax Credit—Corporations. Also, a partnership that has only            partnership (as defined in sections 7701(a)(2) and (5)); (d) 
domestic partners may still be required to complete Part IX when      ownership interest in a foreign corporation (as defined in 
the partnership makes certain deductible payments to foreign          sections 7701(a)(3) and (5)); (e) ownership of a foreign branch 
related parties of its domestic partners. The information reported    (as defined in Regulations section 1.904-4(f)(3)(vii)); or (f) 
in Part IX will assist any domestic corporate partner in              ownership interest in a foreign entity that is treated as 
determining the amount of base erosion payments made through          disregarded as an entity separate from its owner (as defined in 
the partnership, and in determining if the partners are subject to    Regulations section 301.7701-3).
the base erosion and anti-abuse tax (BEAT). Further, if the 
domestic partnership with no foreign activity or foreign partners     2. U.S. citizen/resident alien partners. During tax year 2023, 
has direct or indirect domestic corporate partners, Part IV           all the direct partners in the domestic partnership are (a) 
(concerning foreign-derived intangible income (FDII)) must be         individuals that are U.S. citizens; (b) individuals that are resident 
completed. A domestic or foreign publicly traded partnership          aliens (as defined in section 7701(b)(1)(A) and the regulations 
(PTP) as defined in section 7704(b) with no foreign activity or       thereunder); (c) domestic decedents’ estates (that is, decedents’ 
foreign partners may need to complete Part XI. See each part for      estates that aren't foreign estates as defined in section 7701(a)
applicability.                                                        (31)(A)), with solely U.S. citizen and/or resident alien individual 
                                                                      beneficiaries; (d) domestic grantor trusts (that is, trusts 
  Example 1—Part IX required to determine base erosion                described under sections 671 through 678) that aren't foreign 
payments. Foreign corporation wholly owns DC, a domestic              trusts as defined in section 7701(a)(31)(B)) and that have solely 
corporation, and foreign corporation (foreign subsidiary). DC         U.S. citizen and/or resident alien individual grantors and solely 
satisfies the gross receipts test. See Regulations section            U.S. citizen and/or resident alien individual beneficiaries; (e) 
1.59A-2(d). In Year 1, DC owns a 50% interest in a domestic           domestic non-grantor trusts (that is, trusts subject to tax under 
partnership, USP. An unrelated domestic corporation owns the          section 641 that aren't foreign trusts as defined in section 
remaining 50% interest in USP. DC’s investment in USP doesn't         7701(a)(31)(B)) with solely U.S. citizen and/or resident alien 
qualify for the small partner exception. See Regulations section      individual beneficiaries; (f) S corporations with a sole 
1.59A-7(d)(2).                                                        shareholder; or (g) single-member limited liability companies 
  In Year 1, USP pays the foreign subsidiary $100 for services.       (LLCs), where the LLC’s sole member is one of the persons in 
The services aren't eligible for the services cost method 

2                                                                     Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 3 -

Page 3 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

subparagraphs (a) through (f), and the LLC is disregarded as an receives the request from the partner. See Examples 3 and , 4
entity separate from its owner (as defined in Regulations section later.
301.7701-3). Example 2—domestic filing exception met; issuance of
3. Partner notification. With respect to a partnership that Schedule K-3 not required. A married couple, U.S. citizens,
satisfies criteria 1 and 2, partners receive a notification from the each own a 50% interest in USP, a domestic partnership. USP
partnership at the latest when the partnership furnishes the and the married couple have a tax year end of December 31.
Schedule K-1 to the partner. The notice can be provided as an USP invests in a regulated investment company (RIC). With
attachment to Schedule K-1. The notification must state that respect to tax year 2023, USP receives Form 1099 from the RIC
partners won't receive Schedule K-3 from the partnership unless reporting $100 of creditable foreign taxes paid or accrued on
the partners request the schedule. passive category foreign source income. USP doesn't have any
foreign activity other than that from the RIC. The married couple
4. No 2023 Schedule K-3 requests by the 1-month date. receive notification from USP on an attachment to Schedule K-1
The partnership doesn't receive a request from any partner for that they won't receive Schedule K-3 unless they request it. The
Schedule K-3 information on or before the 1-month date. The married couple don't request Schedule K-3 from USP for tax
1-month date is 1 month before the date the partnership files the year 2023. USP qualifies for the domestic filing exception, and,
Form 1065. For tax year 2023 calendar year partnerships, the as such, USP doesn’t need to complete Schedules K-2 and K-3.
latest 1-month date is August 15, 2024, if the partnership files an
extension. Any request from a partner for Schedule K-3 Example 3—domestic filing exception not met. The facts
information for a year prior to tax year 2023 will be considered a are the same as in Example 2, except that each spouse owns a
request for a tax year 2023 Schedule K-3 as well. 40% interest in USP, and A, a U.S. citizen, owns a 20% interest
in USP. A requests Schedule K-3 from USP for tax year 2023 and
Note. If a partnership receives a request from a partner for USP receives this request on February 1, 2024. After requesting
Schedule K-3 information after the 1-month date for tax year an extension, USP files Form 1065 on August 31, 2024. USP
2023 and hasn't received a request from any other partner for doesn't qualify for the domestic filing exception because A
Schedule K-3 information on or before the 1-month date, the requested the Schedule K-3 by the 1-month date (July 31,
domestic filing exception is met and the partnership isn't required 2024). As such, USP must complete and file the parts and
to file the tax year 2023 Schedules K-2 and K-3 or furnish the tax sections of Schedules K-2 and K-3 that are relevant to A. With
year 2023 Schedule K-3 to the non-requesting partners. respect to Schedules K-2 and K-3, USP doesn't need to
However, the partnership is required to provide the tax year 2023 complete, attach, or file any parts or sections relevant to the
Schedule K-3, completed with the requested information, to the married couple. USP must provide a copy of the filed
requesting partner on the later of the date on which the Schedule K-3 to A on the date that USP files its Form 1065. USP
partnership files Form 1065 or 1 month from the date on which doesn't need to furnish Schedule K-3 to the married couple.
the partnership receives the request from the partner. See Example 4—domestic filing exception met; Schedule K-3
Example 4, later. The partnership must complete and file tax issuance still required. The facts are the same as in
year 2024 Schedules K-2 and K-3 with respect to the requesting Example 3, except that USP receives the request from A on
partner by the tax year 2024 Form 1065 filing deadline if that August 20, 2024. USP qualifies for the domestic filing exception
partner is still a partner in tax year 2023. because A requested Schedule K-3 after the 1-month date. USP
isn't required to file the tax year 2023 Schedules K-2 and K-3 or
Note for partnerships that satisfy criteria 1 through 3, but furnish Schedule K-3 to the married couple. However, USP is
don't satisfy criterion 4. If the partnership received a request required to provide Schedule K-3, completed with the requested
from a partner for Schedule K-3 information on or before the information, to A on September 20, 2024, the later of the date on
1-month date and therefore the partnership doesn't satisfy which USP files Form 1065 or 1 month from August 20, 2024.
criterion 4, the partnership is required to file Schedules K-2 and Because A requested Schedule K-3 for tax year 2023, USP must
K-3 and furnish Schedule K-3 to the requesting partner. file tax year 2024 Schedules K-2 and K-3 with respect to the
Schedules K-2 and K-3 are required to be completed only with information requested by A to the extent that A is still a partner in
respect to the parts and sections relevant to the requesting tax year 2024.
partner. For example, if a partner requests the information
reported on Part III, Section 2, the partnership is required to Note. If a partnership doesn't meet the domestic filing
complete and file Schedule K-2, Part III, Section 2, with respect exception, it may meet the Form 1116 exemption exception to
to the partnership’s total assets and Schedule K-3, Part III, filing Schedules K-2 and K-3.
Section 2, with respect to the requesting partner’s distributive
share of the assets. On the date that the partnership files When and Where To File
Schedules K-2 and K-3, the partnership must provide a copy of Attach Schedules K-2 and K-3 to the partnership’s Form 1065
the filed Schedule K-3 to the requesting partner. The partnership and file both by the due date (including extensions) for that
doesn't need to complete, attach, file, or furnish any other parts return.
or sections of Schedules K-2 and K-3 to the IRS, the requesting
partner, or any other partner. The partnership should keep Provide Schedule K-3 to the partners of the partnership
records of the information requested by the partner. See according to the timeline for providing Schedule K-1. See the
Example 3, later. Instructions for Form 1065.
If a partnership receives requests from partners for Also, see the Instructions for Form 1065 for recordkeeping
Schedule K-3 information both on or before the 1-month date requirements and amendments or adjustments to Schedules K-2
and after the 1-month date, the partnership is required to file and K-3.
Schedules K-2 and K-3 as described in the prior paragraph only
with respect to the partner requests received on or before the Computer-Generated Schedules K-2 and K-3
1-month date. With respect to requests received after the
1-month date, the partnership is required to provide If a computer-generated Schedule K-2 or Schedule K-3
Schedule K-3, completed with that partner’s requested conforms to and doesn't deviate from the official form and
information, on the later of the date on which the partnership files schedules, it may be filed with the IRS.
Form 1065 or 1 month from the date on which the partnership Important. Be sure to attach the approval letter to a
computer-generated Schedule K-2 or K-3. However, if the
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 3

- 4 -

Page 4 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

computer-generated form is identical to the IRS prescribed form, information to figure and claim a foreign tax credit on Form 1116
it doesn't need to go through the approval process, and an or 1118.
attachment isn't necessary. Part VI of Schedule K-2 (and Part VI of Schedule K-3).
Used to provide information the partner needs to determine any
Every year, the IRS issues a revenue procedure to provide inclusions under sections 951(a)(1) and 951A. Partners will use
guidance for filers of computer-generated forms. In addition, the information to complete Form 8992, U.S. Shareholder
every year, the IRS issues Pub. 1167, General Rules and Calculation of Global Intangible Low-Taxed Income (GILTI), and
Specifications for Substitute Forms and Schedules, which Forms 1040 and 1120 with respect to subpart F income
reprints the most recent applicable revenue procedure. Pub. inclusions, section 951(a)(1)(B) inclusions, and section 951A
1167 is available at IRS.gov/pub/irs–pdf/p1167. For purposes of inclusions.
Schedules K-2 and K-3, the procedures relevant to Form 1065 Part VII of Schedule K-2 (and Part VII of Schedule K-3).
and Schedule K-1 (Form 1065) should be conformed with, to the Used to provide information needed by partners to complete
extent possible. Form 8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund, and to
How To Complete Schedules K-2 and K-3 provide partners with information to determine income inclusions
Reporting currency. Report all amounts in U.S. dollars except with respect to the passive foreign investment company (PFIC).
where specified otherwise. Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).
Used to provide the foreign corporation's net income in the
References to other forms. References in these instructions to income groups for purposes of the partner's deemed paid taxes
Form 1040, U.S. Individual Income Tax Return, are intended, if computation with respect to inclusions under sections 951A,
applicable, to include Form 1040-SR, U.S. Tax Return for 951(a)(1), and 1293(f). Partners will use the information to figure
Seniors, as well as other tax returns for noncorporate partners and claim a deemed paid foreign tax credit on Form 1118.
such as Form 1041, U.S. Income Tax Return for Estates and
Trusts. Similarly, references to Form 1120, U.S. Corporation Part IX of Schedule K-2 (and Part IX of Schedule K-3).
Income Tax Return, are intended, if applicable, to apply to other Used to provide information for the partner to figure its BEAT.
forms in the 1120 series. References to forms which have been Partners will use the information to complete Form 8991.
replaced are intended, if applicable, to include the replacement Part X of Schedule K-2 (and Part X of Schedule K-3).
forms. Used to provide information for the partner to figure its tax
liability with respect to income effectively connected with a U.S.
Uses of the parts of Schedules K-2 and K-3, in general. trade or business (ECI) or with respect to fixed, determinable,
Part I of Schedule K-2 (and Part I of Schedule K-3). Used annual, or periodical (FDAP) income. Partners will use the
to report international tax items not reported elsewhere on information to figure and report any U.S. tax liability on Form
Schedule K-2 or K-3. 1040-NR, U.S. Nonresident Alien Income Tax Return; and Form
Part II of Schedule K-2 (and Part II of Schedule K-3). 1120-F, U.S. Income Tax Return of a Foreign Corporation, or
Used to figure the partnership’s income or loss by source and other applicable forms.
separate category of income; and to report the partner’s Part XI of Schedule K-2 (and Part XI of Schedule K-3).
distributive share of such income or loss. Partners will use the Used to provide certain information to U.S. and foreign partners
information to figure and claim a foreign tax credit on Form 1116 with respect to section 871(m) by a PTP that satisfies certain
or 1118. other requirements. Certain partners will use the information to
Part III of Schedule K-2 (and Part III of Schedule K-3). determine their U.S. withholding tax obligations and to figure and
Used to report information necessary for the partner to report any U.S. tax liability on Form 1042, Annual Withholding
determine the allocation and apportionment of research and Tax Return for U.S. Source Income of Foreign Persons; and
experimental (R&E) expense, interest expense, and the FDII Form 1042-S, Foreign Person's U.S. Source Income Subject to
deduction for purposes of the foreign tax credit limitation. Also Withholding.
used to report foreign taxes paid or accrued by the partnership Part XII. Reserved for future use.
and the partner’s distributive share of such taxes. Additionally, it’s Part XIII of Schedule K-3. Used to provide information for a
used to report income adjustments under section 743(b) by foreign partner to figure its distributive share of deemed sale
source and separate category. Partners will use the information items on a transfer of an interest in a partnership that is engaged
to figure and claim a foreign tax credit on Form 1116 or 1118. in the conduct of a trade or business in the United States.
Part IV of Schedule K-2 (and Part IV of Schedule K-3). Partners will use this information as follows. A partner that:
Used to report the information necessary for the partner to • Is a nonresident alien individual, foreign trust, or foreign estate
determine its section 250 deduction with respect to FDII. completes Schedule P (Form 1040-NR), Foreign Partner’s
Partners will use the information to claim and figure a section Interests in Certain Partnerships Transferred During Tax Year;
250 deduction with respect to FDII on Form 8993, Section 250 • Is a foreign corporation completes Schedule P (Form 1120-F),
Deduction for Foreign-Derived Intangible Income (FDII) and List of Foreign Partner Interests in Partnerships, Parts IV and V;
Global Intangible Low-Taxed Income (GILTI). • Is a foreign partnership completes Form 4797, Sales of
Part V of Schedule K-2 (and Part V of Schedule K-3). Business Property; and Form 8949, Sales and Other
Used to report information the partner needs, in combination Dispositions of Capital Assets, as needed; or
with other information known to the partner, to determine the • Had an installment sale, see Form 6252, Installment Sale
amount of each distribution from a foreign corporation that’s Income.
treated as a dividend or excluded from gross income because
the distribution is attributable to previously taxed earnings and
profits (PTEP) in the partner’s annual PTEP accounts with Specific Instructions
respect to the foreign corporation, and the amount of foreign
If the information required in a given section exceeds the
currency gain or loss on the PTEP that the partner is required to
space provided within that section, don't enter “See
recognize under section 986(c). CAUTION!
attached” in the section or leave the section blank.
Partners will report the dividends and foreign currency gain or Instead, complete all entry spaces in the section and attach the
loss on Form 1040 or 1120. If eligible, partners will also use this remaining information on additional sheets. For all attachments,
information to figure and claim a dividends received deduction include the part, section, line number, and column of the relevant
under section 245A on Form 1120. Partners will also use the

4 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 5 -

Page 5 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

portions of Schedules K-2 and K-3. The additional sheets must taking into account that under section 267A they aren’t allowed
conform to the IRS version of that section. deductions for the amounts listed in the statement with respect
to box 6.
• Certain partners will use the information reported in
Schedule K-2, Identifying Information attachments with respect to boxes 8 and 9 to identify any
At the top of each new page, enter the name of the partnership international tax information reporting forms or other international
and the employer identification number (EIN) of the partnership tax forms that may impact the partners’ tax returns.
as they appear on Form 1065. • Certain partners may use the information reported in
attachments with respect to box 11 to determine any dual
Item A—Withholding foreign partnership. If the partnership consolidated losses which may not be deducted on Form 1120.
is a withholding foreign partnership under Rev. Proc. 2017-21, This part is used to report information for international tax
2017-6 I.R.B. 791, check the “Yes” box. Otherwise, check the items not reported elsewhere on Schedule K-2. Check the box to
“No” box. indicate whether any of the following international tax items are
If the “Yes” box is checked, provide the partnership's applicable in the tax year. If applicable, attach statements, as
withholding foreign partnership employer identification number described below, to Schedule K-2. If applicable, the partnership
(WP-EIN). Enter the partnership's WP-EIN regardless of whether must also complete Schedule K-3, Part I, and include with
the partnership filed this Form 1065 using its WP-EIN. Schedule K-3 the attachment(s) as described below with the
Item B—Qualified derivatives dealer (QDD). If the partner's distributive share of the amounts.
partnership (including the home office or any branch) is a QDD, Box 1. Gain on personal property sale. In general, income
check the “Yes” box. Otherwise, check the “No” box. from the sale of personal property is sourced according to the
If the “Yes” box is checked, provide the partnership's qualified residence of the seller; see section 865. For sourcing purposes,
intermediary employer identification number (QI-EIN). personal property sold by the partnership is treated as sold by
the partners; see section 865(i)(5). A U.S. citizen or resident
Item C—Part applicability. Check the “Yes” box to indicate the alien individual with a tax home (as defined in section 911(d)(3))
applicable parts of Schedules K-2 and K-3. Complete each in a foreign country is treated as a nonresident with respect to
applicable part. the sale of personal property only if an income tax of at least
Check the “No” box to indicate the inapplicable parts of 10% of the gain derived from the sale is actually paid to a foreign
Schedules K-2 and K-3. Don't complete, file, or attach to Form country with respect to that gain; see section 865(g). In addition,
1065 or Schedule K-3 the inapplicable parts. if a U.S. resident maintains an office or other fixed place of
business in a foreign country, income from the sale of personal
Schedule K-3, Identifying Information property attributable to such office or other fixed place of
business is foreign source only if an income tax of at least 10%
Items A and B. Items A and B should be the same as reported
of the income from the sale is actually paid to a foreign country
on Schedule K-1, Part I, items A and B.
with respect to such income; see section 865(e)(1).
Items C and D. Items C and D should be the same as reported If the partnership has income from the sale of personal
on Schedule K-1, Part II, items E and F. property (other than inventory, depreciable personal property,
Item E. Item E should correspond to Schedule K-2, item C. and certain intangible property excepted from the general rule of
section 865(a)), and the partnership pays income tax to a foreign
Schedule K-2, Part I (Partnership’s Other country with respect to income from the sale or the income is
Current Year International Information), and eligible for re-sourcing under an applicable treaty, it must check
box 1 and attach a statement to Schedules K-2 and K-3 (for
Schedule K-3, Part I (Partner’s Share of distributive share) reflecting all the information shown in Table 1.
Partnership’s Other Current Year International Each item of property sold must be listed separately with the
Information) information shown in Table 1. The partnership may combine
sales of stock property by country. Otherwise, don't combine
Notes. sales of property. If the gain is capital, enter “long-term” or
• Certain partners will use the information reported in the “short-term” in column (b). Enter the two-letter code from the list
attachments with respect to boxes 1 through 5 and 10 to claim at IRS.gov/CountryCodes in column (f). Don't enter "various" or
and figure a foreign tax credit on Form 1116 or 1118. "OC" for the country code. If the property sale is taxed by more
• Certain partners will also use the information reported in the than one country, complete a separate line for that country, but
attachments with respect to box 6 to prepare their tax returns indicate in some manner (for example, a footnote) that the
(Forms 1040, 1120, 1040-NR, and 1120-F, as applicable) by property entered on both lines is the same property.

Table 1. Information on Personal Property Sold (For use with Schedules K-2 and K-3 (Form 1065), Part I,
box 1)
(a) Property description (b) Long-term/ (c) Gains (d) Amount of tax paid (e) Amount of tax paid (f) Taxing country
short-term in local currency in U.S. dollars (enter two-letter
country code)

Box 2. Foreign oil and gas taxes. A separate foreign tax credit distributive share). The partnership doesn’t need to complete
limitation is applied with respect to foreign oil and gas taxes. See Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through
section 907(a) and Regulations section 1.907(a)-1 for details. If 4; or Part III, lines 1 and 3. The partnership must attach
the partnership has such taxes, it must check box 2 and attach a Schedule I (Form 1118) even if there are no corporate partners
completed Schedule I (Form 1118), Reduction of Foreign Oil and because the limitation applies to individuals eligible to claim a
Gas Taxes, to Schedules K-2 and K-3 (with the partner’s foreign tax credit.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 5

- 6 -

Page 6 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

The partnership attaches a partially completed Schedule I • The separate category and source of income to which the
(Form 1118) so that the partner has the information it needs to taxes are assigned if determinable by the partnership.
complete Schedule I (Form 1118) or Form 1116. The partnership Section 2 of attached statement—potentially
isn't attaching Schedule I (Form 1118) as a form required to be unsuspended taxes.
filed by the partnership for purposes of the partnership • Origin year of the splitter arrangement.
determining creditable taxes because a partnership can't claim a • Explanation of the splitter arrangement (for example, reverse
foreign tax credit. hybrid owned by the partnership).
Box 3. Splitter arrangements. Foreign taxes with respect to a • Amount of taxes paid or accrued by the partnership in
foreign tax credit splitting event are suspended until the related connection with the splitter arrangement in the origin year of the
income is taken into account by the taxpayer; see section 909. splitter arrangement.
There is a foreign tax credit splitting event with respect to foreign • Amount of related income on which such taxes were paid or
taxes of a payor if in connection with a splitter arrangement, as accrued in the origin year of the splitter arrangement.
defined in Regulations section 1.909-2(b), the related income • The two-letter code for the country to which the taxes were
was, is, or will be taken into account by a covered person; see paid or accrued from the list at IRS.gov/CountryCodes. Don't
Regulations section 1.909-2(a). A covered person, as defined in enter “various” or “OC” for the country code.
Regulations section 1.909-1(a)(4), includes, for example, any • The separate category and source of income to which the
entity in which the payor holds, directly or indirectly, at least a taxes are assigned if determinable by the partnership.
10% ownership interest (determined by vote or value). A payor, • Amount of related income taken into account in the current tax
as defined in Regulations section 1.909-1(a)(3), includes, for year and the amount of taxes originally paid that relate to that
example, a person that takes foreign income taxes paid or portion of the related income if determinable by the partnership.
accrued by a partnership into account pursuant to section 702(a) Box 4. Foreign tax translation. Check box 4 if the partnership
(6). reports any foreign taxes on Schedules K-2 and K-3, Part III,
The partnership must report foreign taxes that are potentially Section 4. Attach the statement described in the instructions for
suspended on Schedule K-2, Part III, Section 4, line 2E, and those sections to Schedules K-2 and K-3.
each partner's share of such taxes on Schedule K-3, Part III, Box 5. High-taxed income. Check box 5 if the partnership has
Section 4, line 2E. A partnership may not be able to determine passive income and attach a statement to Schedules K-2 and
whether taxes are suspended and whether related income is K-3 with Worksheet 1 or Worksheet 2, or both, completed. The
taken into account. However, where the partnership is able to partner will use this information to determine whether its passive
determine that taxes are potentially suspended, or potentially income is high-taxed passive income.
unsuspended, it must report such taxes and the information
requested in these instructions for box 3. For example, where a Income received or accrued by a U.S. person that would
partnership owns a reverse hybrid and the foreign country otherwise be passive income isn't treated as passive income if
assesses tax on the partnership for income earned by the the income is determined to be high-taxed income; see section
reverse hybrid, the partnership should report such taxes as 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
potentially suspended taxes. a partner must group its shares of items of passive income from
a partnership according to the rules in Regulations section
Check box 3 and attach a statement to Schedules K-2 and 1.904-4(c)(3), except that the portion, if any, of the share of
K-3 that includes the following for each splitter arrangement in income attributable to income earned by a domestic partnership
which the partnership participates that would qualify as a splitter through a foreign qualified business unit (QBU) is separately
arrangement under section 909 if one or more partners are grouped under the rules of Regulations section 1.904-4(c)(4);
covered persons with respect to an entity that took into account see also Regulations section 1.904-4(c)(5)(ii). For this purpose,
related income from the arrangement. a foreign QBU is a QBU (as defined in section 989(a)), other
Section 1 of attached statement—potentially suspended than a CFC or noncontrolled 10%-owned foreign corporation,
taxes. that has its principal place of business outside the United States;
• Explanation of the splitter arrangement (for example, reverse see Regulations section 1.904-4(c)(3).
hybrid owned by the partnership).
• Amount of taxes paid or accrued by the partnership in Note. Passive income isn't treated as subject to a withholding
connection with the splitter arrangement. tax or other foreign tax when a credit is disallowed in full for such
• Amount of related income on which such taxes were paid or foreign tax, for example, under section 901(k).
accrued.
• The two-letter code for the country to which the taxes were
paid or accrued from the list at IRS.gov/CountryCodes. Don't
enter “various” or “OC” for the country code.

Worksheet 1 for Schedule K-2, Part 1, Box 5
I. Passive Income Net of Allocable Expenses II. Taxes
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).

6 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 7 -

Page 7 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet 2 for Schedule K-2, Part 1, Box 5
Name of foreign QBU:
Complete a separate Worksheet 2 for each foreign QBU. I. Passive Income Net of Allocable Expenses II. Taxes
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).
Example 5—Part I, box 5; high-taxed income. In Year 1, dividend income subject to a 15% withholding tax. Finally, USP
USP, a domestic partnership, has two domestic corporate earns $400 of passive income with respect to its branch
partners with equal interests in the partnership. In Year 1, USP operation in Country X that is treated as a QBU under section
receives $100 of passive dividend income from a noncontrolled 989(a). Such income is subject to foreign tax (but not withholding
10%-owned foreign corporation subject to a 15% withholding tax) of $40. Expenses of $120 are allocable to the distributive
tax. USP also receives $150 of passive interest income from an share of branch income. No expenses are allocable to the
unrelated person subject to a 30% withholding tax. USP incurs dividend income.
$80 of expenses that are allocable to the interest income. USP For Year 1, USP checks box 5 on Schedule K-2 (Form 1065),
also receives $50 of passive dividend income from a CFC, which Part I, and attaches Worksheet 1 and Worksheet 2 to
isn't subject to foreign tax. No expenses are allocable to the Schedule K-2.
dividend income. USP’s branch operation in Country X is treated
as a QBU under section 989(a), receives $100 of passive

Example 5. Worksheet 1
I. Passive Income Net of Allocable Expenses II. Taxes
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 0 0
than zero
C Passive income not subject to any foreign tax 50 0
D Passive income subject to no withholding tax, but subject to other 0 0
foreign tax
Reference: Regulations section 1.904-4(c)(3).

Example 5. Worksheet 2
Name of foreign QBU: Country X QBU
Complete a separate Worksheet 2 for each foreign QBU. I. Passive Income Net of Allocable Expenses II. Taxes
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 0 0
than zero
C Passive income not subject to any foreign tax 0 0
D Passive income subject to no withholding tax, but subject to other 280 40
foreign tax
Reference: Regulations section 1.904-4(c)(4).
USP completes the same worksheets with the distributive titled “Section 267A Disallowed Deduction” that separately lists
shares and attaches those worksheets to each Schedule K-3 the following information.
provided to the partners. • The amount of interest paid or accrued by the partnership for
which the partner isn't allowed a deduction under section 267A.
Box 6. Section 267A disallowed deduction. Check box 6 if
the partnership paid or accrued any interest or royalty for which • The amount of royalty paid or accrued by the partnership for
which the partner isn't allowed a deduction under section 267A.
the partnership knows, or has reason to know, that one or more
of its partners aren't allowed a deduction under section 267A. • The extent to which information reported on other parts of
Schedule K-3 (for example, a line in Part II, Section 2; or Part IX,
See the instructions for Form 1065, Schedule B, line 22, and
Section 2) reflects interest or royalty for which the partner isn't
FAQs for section 267A at IRS.gov/businesses/partnerships/faqs-
allowed a deduction under section 267A.
for-Form-1065-Schedule-B-Other-Information-Question-22 for
additional information regarding section 267A. In addition, for
each partner that is disallowed a deduction under section 267A,
the partnership should check box 6 in Part I of the specific
partner’s Schedule K-3 and attach to Schedule K-3 a statement

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 7

- 8 -

Page 8 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

When completing other parts of Schedules K-2 and K-3 If the partnership attached any of the forms identified in
! (for example, a line in Part II, Section 2; or Part IX, TIP box 8 or box 9 to Form 1065, the partnership doesn’t
CAUTION Section 2), list an amount without regard to whether the need to attach them again to Schedule K-2.
partner is disallowed a deduction under section 267A for the
amount. Box 10. Partner loan transactions. Check box 10 and attach
a statement with the information in the applicable Table 2 or
Note for boxes 8 and 9. If the filer meets an exception, such as Table 3 if the partnership knows or has reason to know that it (a)
the multiple filer exception, to filing Form 5471, Information received a loan from its partner (or a member of the partner’s
Return of U.S. Persons With Respect to Certain Foreign affiliated group) (downstream loan), as described in Regulations
Corporations; or Form 8865, Return of U.S. Persons With section 1.861-9(e)(8); or (b) loaned an amount to its partner (or a
Respect to Certain Foreign Partnerships, the filer isn't required to member of the partner’s affiliated group) (upstream loan), as
complete and attach those forms. However, the filer must still described in Regulations section 1.861-9(e)(9).
attach to Form 1065 any required statements to qualify for the Downstream loans. On an attached statement, the
exception to filing Form 5471 or Form 8865. partnership will provide the details with respect to any
downstream loans from its partner or a member of the partner’s
Box 8. Form 5471 information. Check box 8 and attach affiliated group, including the amount of interest expense paid or
Form(s) 5471 to Form 1065 and Schedule K-1 (Form 1065) if accrued by the partnership. Report the information on separate
either of the following apply. lines for each separate loan. The reporting should be as follows
• The partnership filed one or more Forms 5471. in Table 2.
• The partnership received Form(s) 5471 as an attachment to a
Schedule K-3 issued to the partnership,
Table 2. Downstream Loans
Form 5471 doesn't need to be attached to Schedule K-1 or
K-3 if the partnership knows or has reason to know that its direct Name of Lender’s Date Amount Interest
partner (and any indirect partners) doesn't need the information
on Form 5471 to prepare its tax return. For example, the Lender TIN of of Expense
partnership wouldn't need to attach Form 5471 to Schedules K-3 Loan Loan for the
for certain tax-exempt partners. A pass-through entity partner Year
that receives Form 5471 with Schedule K-1 or Schedule K-3
must provide the relevant portions of Form 5471 to its partner
unless the pass-through entity knows or has reason to know that
its direct partner (and any indirect partners) doesn't need the
information on the Form 5471 to prepare its tax return. If there are any partners in the same affiliated group as the
lender, attach to each of the Schedules K-2 and K-3 a statement
If a partner only needs certain information from Form 5471, to expand the columns in the table to include the information
such as Schedule Q, the partnership needs only to attach that requested in the first two columns for each such partner.
portion to Schedule K-3 and not the complete Form 5471. Upstream loans. On an attached statement, the partnership
Box 9. Other forms. Check box 9 and attach any applicable will provide the details with respect to any upstream loans to its
forms to Form 1065 and Schedule K-1 if any of the following partner or a member of the partner’s affiliated group, including
apply. the amount of interest income received or accrued by the
• The partnership filed any other international tax forms. partnership. Report the information on separate lines for each
• Another person filed these forms on behalf of the partnership. separate loan. The reporting should be as follows in Table 3.
• The partnership received these forms as an attachment to
Schedule K-1 or Schedule K-3 issued to the partnership. Table 3. Upstream Loans
This includes, but isn't limited to, the following forms.
• Form 5713, International Boycott Report. Name of Borrower’s Date Amount Interest
• Form 8833, Treaty-Based Return Position Disclosure Under
Section 6114 or 7701(b). Borrower TIN of of Income
• Form 8621. Loan Loan for the
Exception for Form 8621. With respect to Schedule K-3, Year
the partnership should check box 9 if the partnership checked
box 9 on Schedule K-2. The partnership should indicate in an
attachment to Schedule K-3 that Form(s) 8621 is attached to
Schedule K-2. The partnership doesn’t need to attach Form If there are any partners in the same affiliated group as the
8621 to Schedule K-1 or K-3. borrower, attach to each of the Schedules K-2 and K-3 a
Form 8990. If the partnership has filed Form 8990, check statement to expand the columns in the table to include the
box 9 and provide on Schedule K-1 the information needed to information requested in the first two columns for each such
complete Form 8990, Schedule A, for foreign partners which are partner.
required to report their distributive share of excess business
interest expense, excess taxable income, and excess business Box 11. Dual consolidated loss. Check box 11 if either the
interest income, if any, that is attributable to income effectively reporting partnership (a) owns a foreign branch (as defined in
connected with a U.S. trade or business. See the instructions for Regulations section 1.367(a)-6T(g)) or an interest in a hybrid
Schedule K-1 (Form 1065), line 20, code AH. entity (as defined in Regulations section 1.1503(d)-1(b)(3)), or
Withholding tax returns. Don’t include any withholding tax (b) is a hybrid entity (as defined in Regulations section
returns required to be filed under chapters 3 and 4 (sections 1.1503(d)-1(b)(3)). However, box 11 should only be checked if
1441 through 1474). the reporting partnership knows that one or more of its direct or
indirect partners are domestic corporations (other than a RIC, a
See Other Forms, Returns, and Statements That May Be real estate investment trust (REIT), or an S corporation). A
Required in the Instructions for Form 1065. domestic corporate partner's interest in the reporting partnership
or its indirect interest in a foreign branch or hybrid entity may be
treated as a separate unit and subject to the dual consolidated

8 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 9 -

Page 9 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1 • Information that a partner (whether direct or indirect) needs to
through 1.1503(d)-8. complete Form 8858 with respect to a foreign branch or foreign
If box 11 is checked, a reporting partnership should include in disregarded entity owned by the partnership, if section 987 is
attachments to the Schedule K-2 and the Schedules K-3 of a applied to the activities of the foreign branch or foreign
partner that is either a domestic corporation or a partnership the disregarded entity using a method that requires the partner,
following. rather than the partnership, to recognize section 987 gain or
• The foreign country in which each foreign branch is located. loss.
• The foreign country in which each hybrid entity is subject to an
income tax either on their worldwide income or on a residence Schedule K-2, Parts II and III, and Schedule K-3,
basis. Parts II and III
• For each foreign branch and hybrid entity, including if the Certain partners will use the following information to claim and
reporting partnership owns an interest in a partnership that owns figure a foreign tax credit on Form 1116 or 1118. If the
a foreign branch or hybrid entity: partnership doesn't qualify for the domestic filing exception,
1. On Schedules K-2, separately state the net income or Schedules K-2 and K-3, Parts II and III, must be completed
loss attributable to each direct and indirect foreign branch or unless (a) the partnership doesn't have a direct or indirect
hybrid entity of the partnership, as determined under partner that is eligible to claim a foreign tax credit, or (b) no direct
Regulations section 1.1503(d)-5(c); and or indirect partner would have to file Form 1116 or 1118 to claim
2. On Schedule K-3, for each partner that is a domestic the foreign tax credit.
corporation or a partnership, separately state the partner's Partners eligible to claim credit. A partner that’s eligible to
distributive share of the net income or loss of each direct and claim a foreign tax credit includes a domestic corporation, a U.S.
indirect foreign branch or hybrid entity of the partnership. citizen or resident, U.S. citizen or resident beneficiaries of
• Whether a foreign use (as described in Regulations section domestic trusts and estates, certain foreign corporations, and
1.1503(d)-3 and determined as if a net loss attributable to a certain nonresident individuals. See sections 901 and 906. An
partnership separate unit were a dual consolidated loss) indirect partner includes a partner that owns the partnership
occurred during the tax year with respect to a net loss of a through a pass-through entity (for example, a partnership, an S
partnership separate unit. corporation, or a trust (see Regulations section 1.904-5(a)(4)(iv)
• Whether a transfer of assets (as described in Regulations for the definition of pass-through entity)). An indirect partner also
section 1.1503(d)-6(e)(1)(iv)) or a transfer of an interest in a includes a partner that owns the partnership through a foreign
separate unit (as described in Regulations section corporation. See sections 960 and 1293(f).
1.1503(d)-6(e)(1)(v)) occurred during the tax year with respect to
a foreign branch or hybrid entity. Form 1116 exemption exception. Under section 904(j),
• The organizational chart described in item 5 of Form 8858. certain partners aren't required to file Form 1116 (Form 1116
• If a foreign disregarded entity made its election to be treated exemption). See Foreign Tax Credit—How to Figure the Credit. A
as disregarded from its owner during the tax year, whether the domestic partnership isn't required to complete Schedules K-2
tax owner claimed a loss with respect to stock or debt of the and K-3 if all partners are eligible for the Form 1116 exemption
foreign disregarded entity as a result of the election. and the partnership receives notification of the partners’
eligibility for such exemption by the 1-month date (as defined
Box 12. Schedule K-2 (Reserved for future use). Sched- earlier). If a partnership receives notification from only some of
ule K-3, Form 8865 information. If the partnership transferred the partners that they're eligible for the Form 1116 exemption,
property to a foreign partnership that would subject one or more the partnership doesn’t need to complete Schedule K-3 for those
of its domestic partners to reporting under section 6038B and exempt partners but must complete Schedules K-2 and K-3 with
Regulations section 1.6038B-2(a)(2) but didn't file Schedule O respect to the other partners to the extent that the partnership
(Form 8865), Transfer of Property to a Foreign Partnership, doesn't qualify for the domestic filing exception.
containing all the information required under Regulations section A partnership that doesn't have or receive sufficient
1.6038B-2, with respect to the transfer, then the partnership information or notice regarding a direct or indirect partner must
must provide the necessary information for each partner to fulfill presume such partner is eligible to claim a foreign tax credit and
its reporting requirements under Regulations section 1.6038B-2. such partner would have to file Form 1116 to claim a credit. As
The partnership should check box 12 on Schedule(s) K-3 and such, the partnership must complete Schedules K-2 and K-3,
attach the relevant information, as applicable to each partner. including Parts II and III, accordingly.
Box 12 shouldn’t be checked on Schedule K-2.
Example 6—Form 1116 exemption. A married couple,
Box 13. Other international items. If the partnership has both U.S. citizens, each own a 50% interest in USP, a domestic
transactions, income, deductions, payments, or anything else partnership. The couple and USP each have a calendar tax year.
that is impacted by the international tax provisions of the Code USP invests in a RIC. USP receives Form 1099 from the RIC
and such events aren't otherwise reported on this part or other reporting $400 of creditable foreign taxes paid or accrued on
parts of Schedules K-2 and K-3, report that information on a passive category foreign source income. USP’s only foreign
statement that is attached to Schedules K-2 and K-3 and check activity is from the RIC. The married couple don't pay or accrue
box 13. any foreign taxes other than their distributive share of USP’s
Don't report with respect to box 13 any withholding tax returns foreign taxes. They also don't have any other foreign source
required to be filed under chapters 3 and 4 (sections 1441 income. They qualify for the Form 1116 exemption and notify
through 1474). These forms are separately filed with the IRS. USP by the 1-month date that they don't need Schedule K-3.
Do report with respect to box 13 the following. Even though USP doesn't qualify for the domestic filing
• Form 926, Return by a U.S. Transferor of Property to a Foreign exception because the creditable foreign taxes paid or accrued
Corporation. by USP are greater than $300, because the married couple
• Information a partner (whether direct or indirect) that is a U.S. notify USP by the 1-month date that they don't need
shareholder of a CFC needs to complete Form 5471. Schedule K-3 under the Form 1116 exemption, USP doesn’t
• Information a filer needs to complete Form 8865 to the extent need to complete Schedules K-2 and K-3.
that one of the partners (whether direct or indirect) is an entity for Partnerships with no foreign partners and limited or no for-
which there is a Form 8865 filing requirement. eign activity. In many instances, a partnership with no foreign

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 9

- 10 -

Page 10 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

partners, no foreign source income, no assets generating foreign partners, and these instructions take this into account by
source income, and no foreign taxes paid or accrued may still excepting the partnership from completing certain portions of
need to report information on Schedules K-2 and K-3. For Schedules K-2 and K-3 with respect to these partners.
example, if the partner claims the foreign tax credit, the partner Schedules K and K-1 contain net amounts but don't include
generally needs certain information from the partnership on separately stated reporting for the partnership’s interest expense
Schedule K-3, Parts II and III, to complete Form 1116 or 1118. for international tax reporting purposes, or the tax book value of
This information should have been reported in prior years, the assets; see Regulations section 1.861-9(e). See the
including before the Tax Cuts and Jobs Act, with Schedules K instructions for Part II, lines 39 through 43, and Part III, Section 2,
and K-1, and is information the partner needs to compute the for further guidance.
foreign tax credit limitation, which determines the amount of Example 7—Parts II and III required for partnership with
foreign tax credit available to the partner. no foreign activity. U.S. citizens A and B own equal interests in
Exception. See Domestic Filing Exception, earlier. USP, a domestic partnership. USP has no foreign activity. In Year
Section 904 generally limits the foreign tax credit to the 1, A pays $2,000 of foreign income taxes on passive category
portion of U.S. tax liability attributable to foreign source taxable income other than capital gains reported to A on a payee
income. Foreign source taxable income is foreign source gross statement. A has interest expense of $5,000 and USP doesn't
income less allocable expenses. In general, the partnership have interest expense. None of A’s interest expense is directly
must complete Schedules K-2 and K-3, Parts II and III, because allocable. A doesn't have an overall domestic loss in tax year
the partnership’s gross income, gross receipts, expenses, 2023.
assets, and foreign taxes paid may affect the foreign tax credit Because A must complete Form 1116 to claim a foreign tax
available to the partner. The source of certain gross income and credit, A requests a Schedule K-3 by the 1-month date, and
gross receipts is determined by the partner. In addition, some therefore the domestic filing exception doesn't apply to USP with
expenses of the partnership are allocated and apportioned by respect to A. USP must complete the relevant portions of Parts II
the partner. Because of this partner determination, it isn't and III of Schedules K-2 and K-3 (for A). The tax book value of
possible for the partner to assume that all income of the USP’s assets is $100,000 (reported on Schedule K-2, Part III,
partnership is U.S. source and all expenses of the partnership Section 2, column (a)) and A’s share of those assets is $50,000
reduce U.S. source income. Also, the allocation and (reported on Schedule K-3, Part III, Section 2, column (a)). Not
apportionment of certain partner expenses take into account including its distributive share of the assets of USP, the tax book
distributive shares of assets and income of the partnership that value of A’s assets is $50,000. Of A’s assets, $10,000 generate
aren't otherwise reported in the specified format on the passive category foreign source income and $40,000 generate
Schedule K-1. U.S. source income. A has passive category foreign source
For example, for sourcing purposes, personal property sold taxable income before interest expense of $8,000. A’s U.S. tax
by the partnership is treated as sold by the partners; see section rate is 25%. A’s interest expense and USP’s assets are
865(i)(5). Generally, income from the sale of certain personal characterized in the same category under sections 163 and 469
property (excluding inventory) is sourced according to the for purposes of Regulations section 1.861-9T(d). A uses the tax
residence of the seller. In cases in which the partner is a book value (as opposed to the alternative tax book value) to
pass-through entity, the partnership might not know the ultimate allocate and apportion interest expense.
residence of the first non-pass-through partner. The partnership A’s interest expense is apportioned between U.S. source and
isn't required to separately state gain from the sale of personal foreign source income ratably based on the tax book value of A’s
property on Schedules K and K-1 because it is generally U.S. source and foreign source assets. Without taking into
included in ordinary income. However, the gain is separately account the distributive share of USP’s assets, the amount of A’s
reported on Schedules K-2 and K-3, Part II. interest expense that would reduce passive category foreign
As another example, the partner’s R&E expense (which source income is $1,000 ($5,000 x ($10,000/$50,000)).
includes the distributive share of the partnership’s R&E expense) Therefore, A’s passive category foreign source taxable income
is allocated and apportioned by the partner; see Regulations would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A
section 1.861-17(f). R&E expense is allocated and apportioned may only use $1,750 (25% (0.25) x $7,000) of the $2,000 of
based on the gross receipts by Standard Industrial Classification foreign taxes. See section 904.
(SIC) code. R&E expense by SIC code isn't required reporting on Taking into account the distributive share of USP’s assets, the
Schedules K and K-1 but is reported on Schedules K-2 and K-3, amount of A’s interest expense that reduces passive category
Part II. The partner needs Schedule K-3, Part III, Section 1, for foreign source income is $500 ($5,000 x ($10,000/$100,000)).
the partner’s share of the partnership’s gross receipts by SIC Therefore, A’s passive category foreign source taxable income
code for purposes of allocating and apportioning R&E expense. would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, A may
In some cases, the partner will be able to use the information use $1,875 (25% (0.25) x $7,500) of the $2,000 of foreign
reported on Parts II and III to increase the foreign tax credit taxes—an additional foreign tax credit amount of $125 after
limitation, and the amount of available foreign tax credit to the taking into account A’s share of the tax book value of the
partner. For example, Part III, Section 2, provides the partner partnership assets. B doesn't request a Schedule K-3 from USP
with the tax book value of the assets of the partnership. In for tax year 2023. Under the domestic filing exception, USP
general, a partner apportions interest expense to reduce U.S. doesn't need to complete Schedule K-3 for B.
source income or foreign source income based on the tax book Example 8—Part II, not Part III, required for partnership
value of its assets, including its distributive share of the with no foreign activity. The facts are the same as in
partnership’s interest expense and assets; see section 864(e)(2) Example 7, except that A has $5,000 of deductions that aren't
and Regulations section 1.861-9(e). Taking into account the definitely related to any gross income as described in
assets of a domestic partnership generating solely U.S. source Regulations section 1.861-8(e)(9), and A and USP have no other
income would result in more expense allocated to reducing U.S. expenses. Further, A’s share of USP’s gross income is $50,000.
source income and less expense allocated to reduce foreign Not including its distributive share of the income of USP, A’s
source income. Additional foreign source income increases the gross income is $50,000. Of A’s gross income, $5,000 is passive
partner’s foreign tax credit limitation and the ability of the partner category foreign source gross income and $45,000 is U.S.
to claim foreign tax credits. The regulations provide exceptions to source gross income. USP doesn't have any gross income the
asset method apportionment for certain less-than-10% limited source of which is determined by the partner.

10 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 11 -

Page 11 of 45         Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                  12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

  A’s expenses must be ratably apportioned based on A’s gross         The partner's distributive share of the amounts determined by 
income (including its distributive share of the income of USP);     the partnership are reported in equivalent columns in 
see Regulations section 1.861-8(c)(3). Therefore, USP must          Schedule K-3, Parts II and III.
complete Schedule K-2, Part II, and Schedule K-3, Part II (for A).    Certain gross income, gross receipts, assets, COGS, 
Before taking into account the distributive share of USP’s gross    deductions, and taxes aren't assigned to a source or separate 
income, the amount of A’s expenses described in Regulations         category by the partnership. See Partner determination, later.
section 1.861-8(e)(9) that reduce foreign source income is $500       Schedule K-3. If the partnership knows that some of its 
($5,000 x ($5,000/$50,000)). Therefore, A’s foreign source          partners are limited partners that own less than 10% of the value 
taxable income would be $4,500 ($5,000 − $500). At a 25% U.S.       of the partnership and that don't hold their interest in the ordinary 
tax rate, A may only use $1,125 (25% (0.25) x $4,500) of the        course of the partner's active trade or business, when 
$2,000 of foreign taxes. See section 904.                           completing the Schedule K-3 for the less-than-10% limited 
  Taking into account the distributive share of USP’s gross         partners, the partner's distributive share of the partnership’s 
income, the amount of A’s expenses described in Regulations         foreign source gross income and gross receipts should be 
section 1.861-8(e)(9) that reduce foreign source income is $250     reported as passive category income and its deductions 
($5,000 x ($5,000/$100,000). Therefore, A’s foreign source          allocated and apportioned to foreign source income should be 
taxable income would be $4,750 ($5,000 − $250). At a 25% U.S.       reported as reducing passive category income; see Regulations 
tax rate, A may use $1,187.50 (25% (0.25) x $4,750) of the          section 1.904-4(n)(1)(ii)(A). See Schedule K-3:
$2,000 of foreign taxes in Year 1, which is an additional foreign   • Part II, column (c);
tax credit amount of $62.50 after taking into account A’s           • Part III, Section 1, column (c);
distributive share of the gross income of USP.                      • Part III, Section 3, column (b); and
  Because A and USP don't have R&E expense or interest              • Part III, Section 5, column (d).
expense, and because USP didn't pay or accrue any foreign             Report the foreign taxes paid or accrued on foreign source 
taxes, USP doesn't need to complete Schedules K-2 and K-3,          income as passive category income in Part III, Section 4, column 
Part III.                                                           (d).
                                                                      If the partnership knows that some of its partners are limited 
Note. A partner may need the distributive share of the 
                                                                    partners that own less than 10% of a capital and profits interest 
partnership’s gross income for purposes of allocating and 
                                                                    in the partnership, don't complete Schedule K-3, Part III, Section 
apportioning expenses other than those described in 
                                                                    2, for these partners. See Regulations section 1.861-9(e)(4)(i).
Regulations section 1.861-8(e)(9).
                                                                    Foreign branch category income.          A domestic partnership 
General filing instructions. On Schedule K-2, Parts II and III, 
                                                                    itself doesn't have foreign branch category income. However, 
the partnership reports its gross income, gross receipts, cost of 
                                                                    report all amounts that would be foreign branch category income 
goods sold (COGS), certain deductions, and taxes by source 
                                                                    of its partners as if all partners were U.S. persons that were not 
and separate category. The partnership also reports information 
                                                                    pass-through entities. See Schedule K-2:
that the partner needs to allocate and apportion expenses and 
determine the source of certain items of gross income and gross     • Part II, column (b);
receipts. Unless specifically noted below, the partnership reports  • Part III, Sections 1 and 2, column (b); and
on Schedule K-3, Parts II and III, the partner’s share of the       • Part III, Sections 4 and 5, column (c).
partnership’s gross receipts, gross income, COGS, certain             The partner's distributive share of the amounts determined by 
deductions, and taxes by source and separate category. The          the partnership are reported on equivalent columns in 
partner adds its share of the partnership’s foreign source gross    Schedule K-3, Parts II and III.
income, gross receipts, COGS, certain deductions, and taxes by        Schedule K-3. Any amounts reported on Schedule K-2 as 
separate category to its other foreign source gross income,         foreign branch category income should be reported as general 
gross receipts, COGS, certain deductions, and taxes in that         category income on the Schedule K-3, Parts II and III, provided 
separate category to figure its foreign tax credit. The partnership to foreign individuals and foreign corporations.
also reports on the Schedule K-3 the distributive share of          Section 901(j) income. Income derived from each sanctioned 
expenses and the allocation and apportionment factors so that       country is subject to a separate foreign tax credit limitation. If the 
the partner may determine expenses allocated and apportioned        partnership derives such income, enter code 901j on the line 
to foreign source income.                                           after category code. See Schedule K-2:
Partnership determination.   The source and separate                • Part II, Sections 1 and 2, column (e);
category of certain gross receipts, gross income, and COGS as       • Part III, Sections 1 and 2, column (e);
well as the allocation and apportionment of certain deductions      • Part III, Section 3, column (d); and
can be determined by the partnership. This includes deductions      • Part III, Sections 4 and 5, column (f).
that are definitely related to certain gross income of the            The partner's distributive share of the amounts determined by 
partnership; see Regulations section 1.861-8(b)(1). See             the partnership are reported in equivalent columns in 
Schedule K-2:                                                       Schedule K-3, Parts II and III. See the Instructions for Form 1118 
• Part II, columns (a) through (e);                                 for the potential countries to be listed with the section 901(j) 
• Part III, Section 1, columns (a) through (e);                     category of income.
• Part III, Section 3, columns (a) through (d); and
• Part III, Section 5, columns (a) through (f).                     Note. As of the date of these instructions, section 901(j) is the 
  In Part III, Section 2, columns (a) through (e), some             only category reported on Part II, Sections 1 and 2, column (e); 
partnership assets may be characterized by source and               Part III, Sections 1 and 2, column (e); Part III, Section 3, column 
separate category by the partnership. This includes certain         (d); and Part III, Section 5, column (f).
assets that attract directly allocated interest expense under       Section 951A category income.     Section 951A category 
Temporary Regulations section 1.861-10T(b) and (c); see             income is any amount of global intangible low-taxed income 
Temporary Regulations section 1.861-10T(d)(2).                      (GILTI) includible in gross income under section 951A (other 
  In Part III, Section 4, in the U.S. and Foreign columns, the      than passive category income). If the partnership pays or 
partnership assigns foreign taxes paid or accrued to a separate     accrues tax on the receipt of a distribution of PTEP assigned to 
category and source.                                                the reclassified section 951A PTEP group or section 951A PTEP 

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                            11

- 12 -

Page 12 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

group, the partnership must assign those taxes to section 951A Schedule K-2, Part II, and Schedule K-3, Part II
category income.
(Foreign Tax Credit Limitation)
The partnership will enter such taxes on Part III, Section 4,
column (b). This code isn't utilized in other portions of Parts II Section 1—Gross Income (Lines 1 Through 24)
and III.
Form 1118, Schedule A, requires a corporation to separately
Income re-sourced by treaty. If a sourcing rule in an
report certain types of gross income and gross receipts by
applicable income tax treaty treats any U.S. source income as
source and separate category. Separate reporting is required
foreign source, and there is an election to apply the treaty, the
because each type of gross income and gross receipts has a
income will be treated as foreign source. This category applies if
different sourcing rule. See sections 861 through 865 (and
the partnership pays or accrues foreign taxes on receipt of a
section 904(h) and, in some cases, U.S. income tax treaties).
distribution of PTEP that is sourced from an annual PTEP
Schedules K-2 and K-3, Part II, Section 1, generally follow the
account that corresponds to the separate category relating to
separately reported types of gross income and gross receipts on
U.S. source income included under section 951(a)(1) or 951A
Form 1118, Schedule A. Individuals must follow the same
and re-sourced as foreign source income under a treaty.
sourcing rules, but Form 1116 only requires reporting of total
The designations below are only relevant for Part III, Section gross income from foreign sources by separate category.
4, column (f). Therefore, those required to file Form 1116 will report
• Code RBT PAS. If an applicable income tax treaty treats any Schedule K-3, Section 1, line 24, by country on their Form 1116,
U.S. source passive category income as foreign source passive Part I, line 1a. Section 1 also generally follows the types of gross
category income, and there is an election to apply the treaty, income and gross receipts separately reported on Form 1065,
enter code RBT PAS. Schedule K.
• Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general For each line in Section 1, report the total for each country in
category income, and there is an election to apply the treaty, column (g).
enter code RBT GEN.
• Code RBT 951A. If an applicable income tax treaty treats any Country code. Forms 1116 and 1118 require the taxpayer to
U.S. source section 951A category income as foreign source report the foreign country or U.S. territory with respect to which
section 951A category income, and there is an election to apply the gross income and gross receipts are sourced. On lines 1
the treaty, enter code RBT 951A. through 24, for each gross income and gross receipts item, enter
on a separate line (A, B, or C) the two-letter code from the list at

IRS.gov/CountryCodes for the foreign country or U.S. territory

within which the gross income and gross receipts are sourced. If

a type of income is sourced from more than three countries,
Partner determination. Enter the gross income, income attach a schedule with the information required on Schedule K-2,
adjustments, and gross receipts of the partnership that are Part II, and Schedule K-3, Part II, for that type of income.
required to be sourced by the partner on Schedule K-2: If income is U.S. source, enter “US.” Don't enter “various” or
• Part II, Section 1, column (f); “OC” for the country code.
• Part III, Section 1, column (f);
• Part III, Section 3, lines 1 and 2, column (e); and Note. For Part II, column (f), enter the code XX if the partnership
• Part III, Section 5, column (g). can't determine the country or U.S. territory with respect to which
This includes income from the sale of most personal property the gross income and gross receipts are sourced because the
other than inventory, depreciable property, and certain intangible source is determined by the partner. However, don't enter the
property sourced under section 865. This also includes certain code XX for Part II, column (f), if an income tax of at least 10% of
foreign currency gain on section 988 transactions; see the the gain derived from the sale is actually paid to a foreign
instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax country with respect to that gain. See sections 865(e) and
Credit for Individuals, for additional details. Attach a statement to 865(g). Instead, enter for Part II, column (f), the foreign country
the Form 1065 to identify the separate category of income under to which the partnership paid the tax of at least 10% of the gain.
section 904(d) of the amounts listed in Part II, Section 1, column Each gross income and gross receipts item (for example,
(f). sales vs. interest income) may have different countries listed on
Include deductions that are allocated and apportioned by the lines A, B, C, etc., given that the partnership might not have
partner on Schedule K-2: sales income and interest income, for example, from the same
• Part II, Section 2, column (f); and country. Line 24 should sum each country’s total income
• Part III, Section 3, lines 3 and 4, column (e). reported on Part II, regardless of the line on which such income
This includes most interest expense and R&E expense. See is reported, whether A, B, C, etc.
Regulations sections 1.861-9(e) and 1.861-17(f). Exceptions. The instructions for Forms 1116 and 1118
Enter the assets that are assigned to a source and separate specify exceptions from the requirement to report gross income
category by the partner on Schedule K-2, Part III, Section 2, and gross receipts by foreign country or U.S. territory with
column (f). respect to RICs and section 863(b). See the instructions for
Enter the foreign taxes that are assigned to a source of Forms 1116 and 1118 for the exceptions that apply in completing
income by the partner on Schedule K-2, Part III, Section 4, in the Schedules K-2 and K-3, Parts II and III. Don't enter a foreign
Partner column. This includes taxes imposed on certain sales country or U.S. territory (to report on a country-by-country basis)
income. for lines 16 through 18.
The partner's distributive share of the amounts determined by Schedules K-2 and K-3 request that gross income and gross
the partnership are reported in equivalent columns on receipts be reported by country or U.S. territory because such
Schedule K-3, Parts II and III. information is requested on Forms 1116 and 1118. Income and
taxes are reported by country on Forms 1116 and 1118 so that,
for example, the IRS may initially evaluate whether taxpayers are
claiming credits for compulsory payments to foreign
governments.

12 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 13 -

Page 13 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 9—Part II: multiple country sources: gross Example 10. Schedule K-2, Part II, Section 1, Line
income. In Year 1, USP, a domestic partnership, has employees 11
who perform services in Country X and Country Y. USP earns
$25,000 of general category services income, $10,000 with Foreign Source
respect to Country X and $15,000 with respect to Country Y. The
two-letter code for Country X is AA and the two-letter country Description (a) U.S. source (c) Passive category
code for Country Y is YY. USP makes the following entries on the income
first two lines of Schedule K-2, Part II, line 2. 11 Net short-term capital
gains
Example 9 Table A US $1,000
B FR $400
Foreign Source
C CA ($300)
Description (d) General category
income D HA ($200)
2 Gross income from performance of services
Line 12. Net long-term capital gain. On line 12, report net
A AA $10,000 long-term capital gain, excluding amounts reported on lines 13,
B YY $15,000 14, and 15.
Line 13. Collectibles (28%) gain. Report collectibles gain on
Lines 3 and 4. Rental income. These lines are reported line 13 and not on line 12.
separately because they're reported separately on Form 1065,
Schedule K. The sourcing rule may be the same for both types of Line 14. Unrecaptured section 1250 gain. Report
rental income. unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
Lines 7 and 8. Ordinary dividends and qualified dividends. 1231 gain, report the gain on line 14 and not on line 15. Include
Enter only ordinary dividends on line 7 and only qualified an attachment indicating the amount of unrecaptured section
dividends on line 8. Don't include as ordinary dividends or 1250 gain that is also net section 1231 gain.
qualified dividends the amount of any distributions received to
the extent that they're attributable to PTEP in annual PTEP Line 15. Net section 1231 gain. Report net section 1231 gain
accounts of the partnership. See the instructions for line 19 for on line 15 and not on line 12 unless such amount is also
when a partnership might have an income inclusion with respect unrecaptured section 1250 gain. See the instructions for line 14.
to a foreign corporation. Line 28. Net long-term capital loss. Report net long-term
capital loss on line 28, excluding collectibles loss which is
Note. The amount of distributions which are attributable to reported on line 29.
PTEP in annual PTEP accounts of a direct or indirect partner
isn't determined by the partnership and therefore isn't taken into Line 29. Collectibles loss. Report collectibles loss on line 29
account for purposes of determining the ordinary dividends to be and not on line 28.
entered on line 7 or the qualified dividends to be entered on Lines 16 and 46. Section 986(c) gain and loss. Include the
line 8. partnership’s share of a lower-tier pass-through entity’s section
Lines 11 through 15 and 27 through 30. Capital gains and 986(c) gain or loss, and the amount of section 986(c) gain or
losses. These lines generally match the types of gains and loss on distributions of PTEP sourced from an annual PTEP
losses reported separately on Form 1065, Schedule K. Further, account of the partnership. This isn't reported as a net amount
section 904(b)(2)(B) contains rules regarding adjustments to but rather separate items. Total section 986(c) gains for the year
account for capital gain rate differentials (as defined in section are reported on line 16. Total section 986(c) losses for the year
904(b)(3)(D)) for any tax year. are reported on line 46.
Example 10—Parts II and III: capital gains and losses. Note. A partnership is only responsible for computing and
Partnership has the following amounts for tax year 2023. reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
Sources of Income for Example 10 account of the partnership. It isn't responsible for computing or
reporting foreign currency gain or loss under section 986(c) with
Short-term capital gains/losses respect to distributed PTEP sourced from an annual PTEP
Total $900 account of a direct or indirect partner.
U.S. source $1,000 Lines 17 and 47. Section 987 gain and loss. The source of
Passive category (France) $400 section 987 gain or loss is generally determined by reference to
the source of the income or asset giving rise to such gain or loss.
Passive category (Canada) ($300) A partnership may also obtain section 987 gain or loss
Passive category (Haiti) ($200) information from Form 8858. This isn't reported as a net amount
but rather separate items. Total section 987 gains for the year are
Partnership reports these amounts on Schedule K-2, Part II, reported on line 17. Total section 987 losses for the year are
Section 1, line 11, as follows. reported on line 47.
Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 13

- 14 -

Page 14 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

partner, the section 988 gain and loss would be reported in generated by such partnership property. See Temporary
column (f). Regulations section 1.861-9T(e)(1).
Line 19. Section 951(a) inclusions. Report section 951(a) Lines 41 through 43. Other interest expense. A partner’s
inclusions if the domestic partnership takes into account such distributive share of a partnership’s interest expense that isn't
income. A domestic partnership doesn't have a section 951(a) directly allocable to income from specific partnership property is
inclusion with respect to a foreign corporation for tax years of the generally allocated and apportioned by the partner, subject to
foreign corporation that begin on or after January 25, 2022. A certain exceptions, and included in column (f); see Temporary
domestic partnership may not have a section 951(a) inclusion Regulations section 1.861-9T(e)(1).
with respect to a foreign corporation for tax years of the foreign Interest expense incurred by certain individuals, estates, and
corporation that begin before January 25, 2022, if, pursuant to trusts is characterized based on the categories of interest
Regulations section 1.958-1(d)(4), it applies Regulations expense in sections 163 and 469: active trade or business
sections 1.958-1(d)(1) through (3) to be treated as not owning interest, investment interest, or passive activity interest, adjusted
stock of a foreign corporation within the meaning of section for any interest expense directly allocated under Temporary
958(a) for purposes of section 951, and for purposes of any Regulations section 1.861-10T; see Regulations section
other provision that applies by reference to section 951. 1.861-9T(d). The amounts in each category of interest expense
Line 20. Other income. Attach a statement to both Schedules are reported on lines 41 through 43; see Example 11, later. If the
K-2 and K-3 describing the amount and type of other income. partnership’s only partners are corporate partners, the
The statement must conform to the format of Part II. partnership doesn’t need to report its interest expense by the
categories of interest expense in sections 163 and 469. All such
Line 24. Total gross income. Enter the total gross income interest expense may be reported as business interest expense
received from all sources on line 24. Then, add the gross income on line 41.
on lines 1 through 23 by country or territory and enter the total by Exception. With respect to limited partners that each own
country in rows A, B, and C (and additional rows if more than less than 10% of the capital and profits interests of the
three countries). The sum of the amounts in rows A, B, C, etc., partnership, and such interests aren't owned in the ordinary
doesn't need to equal the amount on line 24, given that not every course of the partner’s active trade or business, the partnership
gross income amount is required to be reported by country. reports the partners’ distributive shares of interest expense as
reducing passive category foreign source income in column (c).
Section 2—Deductions (Lines 25 Through 54) However, if the partnership interest is held in the ordinary course
of the partner's active trade or business, a partner's share of the
Form 1118, Schedule A, requires a corporation to separately partnership’s interest expense (other than partnership interest
report certain types of deductions and losses by source and expense that is directly allocated to identified property under
separate category. Separate reporting is required because each Regulations section 1.861-10T) is apportioned in accordance
type of deduction may be allocated and apportioned according with the partner's relative distributive share of gross foreign
to a different methodology; see, for example, Regulations source income in each separate category and of gross domestic
sections 1.861-8 through -20 and Temporary Regulations source income from the partnership in columns (a) through (e)
sections 1.861-8T and -10T. For purposes of allocating and as applicable. See Regulations sections 1.861-9(e)(4)(i) and
apportioning expenses, in general, a partner adds the 1.904-4(n)(1)(ii) for more information.
distributive share of the partnership's deductions to its other Exception. See Regulations sections 1.861-9(e)(8) and (9)
deductions incurred directly by the partner; see Regulations for a special rule for partnership loans. See also Box 10. Partner
section 1.861-8(e)(15). Generally, Section 2 follows the loan transactions, earlier.
separately reported types of deductions and losses on Form Interest expense is always included on lines 39 through 43
1118, Schedule A. Individuals must generally follow the same and not on other lines.
expense allocation and apportionment rules, but Form 1116 only
requires separate reporting of certain deductions by separate Line 45. Foreign taxes not creditable but deductible. See
category; see Form 1116, Part I, lines 2 through 5. Section 2 also the instructions for Forms 1116 and 1118 for examples of foreign
generally corresponds to the deductions separately reported on taxes that are not creditable but deductible. Foreign taxes that
Form 1065, Schedule K. are creditable (even if a partner chooses to deduct such taxes)
aren't reported as expenses on Part II. Creditable taxes are
Line 32. R&E expenses. In general, R&E expenses are reported on Part III, Section 4.
allocated and apportioned by the partner and reported in column
(f); see Regulations section 1.861-17(f). R&E expenses, as Lines 49 and 50. Other deductions. Attach to Schedules K-2
described in section 174, are ordinarily definitely related to gross and K-3 a statement describing the amount and type of other
intangible income reasonably connected with relevant broad deductions. The statement must conform to the format of Part II.
product categories of the taxpayer and are allocable to gross
intangible income as a class related to such product categories. Schedule K-2, Part III, and Schedule K-3, Part III
The product categories are determined by reference to the (Other Information for Preparation of Form 1116
three-digit classification of the Standard Industrial Classification
Manual (SIC code); see osha.gov/data/sic-manual. or 1118)
Line 38. Charitable contributions. Charitable contribution Section 1—R&E Expenses Apportionment Factors
deductions are apportioned solely to U.S. source gross income;
see Regulations section 1.861-8(e)(12). Therefore, this This section requires the partnership to report information that a
deduction should be reported in column (a). partner will use to allocate and apportion its R&E expense for
foreign tax credit limitation purposes.
Lines 39 and 40. Interest expense specifically allocable un-
der Regulations section 1.861-10 and -10T. Apart from
interest expense entered on line 39, enter on line 40 interest A partnership isn't required to complete Section 1 of Part III
expense that is directly allocable under Temporary Regulations unless either (a) the partnership incurs R&E expense; or (b) the
section 1.861-10T to income from specific partnership property. partner is expected to license, sell, or transfer its intangible
Such interest expense is treated as directly allocable to income property to the partnership (as provided in Regulations section
1.861-17(f)(3)).

14 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 15 -

Page 15 of 45             Fileid: … 1065schk-2/2023/a/xml/cycle03/source                         12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Deductible R&E expenses, as described in section 174, are            partner's distributive share of partnership interest expense, is 
ordinarily definitely related to gross intangible income             apportioned by reference to the partner's assets, including the 
reasonably connected with relevant broad product categories of       partner’s pro rata share of partnership assets; see Regulations 
the taxpayer and are allocable to gross intangible income as a       section 1.861-9(e)(2). Interest expense is apportioned based on 
class related to such product categories. The product categories     the average value of assets; see Regulations section 1.861-9(g)
are determined by reference to the three-digit classification of     (2)(i)(A). A taxpayer can use either the tax book value or the 
the SIC code. In general, R&E expenses are apportioned based         alternative book value of its assets; see Regulations section 
on gross receipts. R&E expenses are allocated and apportioned        1.861-9(i). Under both methods, the partner uses the 
by the partner; see Regulations section 1.861-17(f)(1). This         partnership's inside basis in its assets, including adjustments 
requires that the partnership report to its partners the gross       required under sections 734(b) and 743(b); see Regulations 
receipts by SIC code according to source and separate category       sections 1.861-9(e)(2) and -9(e)(3). When reporting the basis in 
of income. This also requires that the partnership reports the       an asset which is stock in nonaffiliated 10%-owned corporations, 
amount of R&E expense performed in the United States and             adjust such amount for earnings and profits (E&P). See 
outside the United States to apply exclusive apportionment; see      Regulations section 1.861-12(c)(2)(i)(A).
Regulations section 1.861-17(f)(2).
                                                                     Note.    Attach to Form 1065 a second Part III, Section 2, if the 
Column (e). As of the date of these instructions, the only           partnership reports both the tax book value and the alternative 
separate category that could be included in column (e) is the        tax book value of its assets to the partners.
section 901(j) category of income. See the Instructions for Form 
1118 for the potential countries to be listed with the section       Column (b). The partnership characterizes its pro rata share of 
901(j) category of income.                                           the partnership assets that give rise to foreign branch category 
                                                                     income as assets in the foreign branch category. See 
Line 1. Enter the gross receipts by SIC code for each grouping.      Regulations section 1.861-9(e)(10).
Such gross receipts include both the partnership’s gross receipts 
and certain other parties' gross receipts; see Regulations           Line 1.  On Schedule K-2, report the average of the 
sections 1.861-17(d)(3) and (4). Sales of parties controlled by      beginning-of-year and end-of-year inside bases in the 
the partnership should be included on line 1 if such controlled      partnership’s total assets; see Regulations section 1.861-9(g)(2)
parties can reasonably be expected to benefit from the R&E           (i)(A). On Schedule K-3, report the partner’s distributive share of 
expense connected with the product categories. This includes         the assets reported on Schedule K-2. Include on line 1 assets 
sales that benefit from the partner’s R&E expenses if licensed       without directly identifiable yield referred to in Regulations 
through the partnership. Sales of uncontrolled parties are also      section 1.861-9T(g)(3)(iii).
taken into account if such sales involve intangible property that    Line 2.  On Schedule K-2, report the partnership’s average of 
was licensed or sold to the uncontrolled party if the uncontrolled   the beginning-of-year and end-of-year inside bases adjustments 
party can reasonably be expected to benefit from the R&E             under sections 734(b) and 743(b). On Schedule K-3, report the 
expense.                                                             partner’s distributive share of the adjustments reported on 
Line 2. Report the amount of R&E expense related to activity         Schedule K-2.
performed in the United States and the amount of R&E expense         Lines 3 and 4. On Schedule K-2, report reductions in the 
related to activity performed outside the United States by SIC       partnership's asset values to reflect the partnership's directly 
code. The total of the amounts on Schedule K-2, Part III, Section    allocable interest under Regulations section 1.861-10(e) and 
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the Temporary Regulations section 1.861-10T; see also Temporary 
total of the amounts on Schedule K-3, Part III, Section 1, line 2,   Regulations section 1.861-9T(e)(1). On Schedule K-3, report the 
must equal Schedule K-3, Part II, line 32.                           partner’s distributive share of the reductions in asset values 
                                                                     reported on Schedule K-2.
Note. Line 2 isn't reported according to source or separate 
category.                                                            Line 5.  On Schedule K-2, report the average value of 
                                                                     partnership assets excluded from the apportionment formula; 
Note. The SIC code for line 2B(i) doesn't need to be the same        see section 864(e)(3). On Schedule K-3, report the partner’s 
SIC code for line 2A(i).                                             distributive share of the excluded assets reported on 
                                                                     Schedule K-2. Include on line 5 assets without directly 
Section 2—Interest Expense Apportionment                             identifiable yield referred to in Regulations section 1.861-9T(g)
                                                                     (3)(iii).
Factors
                                                                     Line 6.  Individual partners who are general partners or who are 
This section requires the partnership to report information that a   limited partners with an interest in the partnership of 10% or 
partner will use to allocate and apportion its interest expense for  more follow the same rules as corporate partners whose interest 
foreign tax credit limitation purposes.                              in the partnership is 10% or more except that their interest 
                                                                     expense must be apportioned according to the interest expense 
Complete this Section 2 only if the partnership or the partners      classifications under sections 163 and 469; see Regulations 
have interest or stewardship expenses.                               section 1.861-9T(d). This includes reporting the assets 
Stewardship expenses.    In the case of the partner’s                according to such classifications. If the partnership has no such 
stewardship expenses incurred to oversee the partnership, the        partners, the partnership doesn’t need to complete 
partnership's value is determined and characterized under the        Schedule K-2, Part III, Section 2, lines 6b through 6d; or 
asset method in Regulations section 1.861-9 (taking into             Schedule K-3, Part III, Section 2, lines 6b through 6d. The 
account any adjustments under sections 734(b) and 743(b)); see       partnership includes the total amount on line 6a.
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the             Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4, 
instructions with respect to Part III, Section 2, for interest       and 5. Line 6a is divided into the types of assets on lines 6b, 6c, 
expense apportionment factors apply generally to the partner’s       and 6d if the partnership has individual, estate, and certain trust 
stewardship expense apportionment.                                   partners (whether direct or indirect through a pass-through 
                                                                     entity).
With respect to corporate partners with an interest in the 
partnership of 10% or more, interest expense, including the 
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                              15

- 16 -

Page 16 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 11—Parts II and III: asset method generate an inclusion under section 951(a)(1) or 951A(a)), if the
apportionment of interest expense. A, a U.S. citizen, has a partner meets the requirements for eligibility; see Regulations
10% interest in USP, a domestic partnership. USP is engaged in section 1.904(b)-3(c)(2). However, because the partnership may
the active conduct of a U.S. trade or business. USP’s business not have the information to determine if a partner is eligible for a
generates only domestic source income. USP also has an section 245A deduction (for example, due to tiered ownership),
investment portfolio consisting of several less-than-10% stock the partner must determine to what extent the stock is treated as
investments. USP has a bank loan. The proceeds of the bank an asset in a section 245A subgroup.
loan were divided equally between the business and the With respect to a partnership-owned specified 10% foreign
investment portfolio. A’s only business assets and investment corporation that isn't a CFC, the partnership will report on line 7,
assets are its distributive share of those owned by USP. A’s only columns (a) through (e), the total value of the stock in all such
interest expense is that from its distributive share of the USP foreign corporations. The value of the stock is the partnership's
loan. basis in the stock adjusted to take into account the E&P of the
A’s share of the interest expense with respect to the loan for foreign corporations as explained in Regulations section
USP’s business is $2,000. It is apportioned on the basis of 1.861-12(c)(2). The partnership must attach a statement to
business assets. Because all business income is domestic Schedules K-2 and K-3 with the following information for each
source, the business assets are domestic assets and reported foreign corporation for which adjusted basis is reported on line 7.
on Schedules K-2 and K-3, Part III, Section 2, line 6b, column • Name of foreign corporation.
(a). A’s $2,000 share of the interest expense is reported on • EIN or reference ID number. Don't enter “FOREIGNUS” or
Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S. “APPLIED FOR.”
source income by the partner. • Percentage of voting and value of stock owned by partnership
The interest expense for A’s share of the loan for USP’s in such foreign corporation.
investments is $2,000 and is reported on Schedule K-3, Part II, • Value of the stock in such corporation included in each of the
line 42, column (f). The investment interest must be apportioned groupings on lines 6b through 6d (identify separately each of
on the basis of investment assets. Applying the asset method, those groupings).
$80,000 of USP’s adjusted basis in its investment portfolio stock If the specified 10%-owned foreign corporation is a CFC, a
generates domestic source income and $120,000 of USP’s portion of the value of stock in each separate category and in the
adjusted basis in the stock generates foreign source passive residual grouping for U.S. source income is subdivided between
income. USP reports these amounts on Schedule K-2, Part III, a section 245A and a non-section 245A subgroup under the
Section 2, line 6c, columns (a) and (c), respectively. A’s rules described in Regulations section 1.861-13(a)(5).
distributive share of the adjusted basis in USP’s stock is $8,000
with respect to the stock generating domestic source income However, because the partnership will generally not have the
and $12,000 with respect to the stock generating foreign source information to apply the stock characterization rules described in
passive income. Such amounts are reported on Schedule K-3, Regulations section 1.861-13(a)(5), the partner must apply those
Part III, Section 2, line 6c, columns (a) and (c), respectively. With rules to characterize the stock.
respect to the interest expense on the loan for USP’s With respect to partnership-owned CFCs, the partnership will
investments, $800 (($8,000/$20,000) x $2,000) is apportioned to report on line 8, column (f), the total value of its stock in all such
domestic source income and $1,200 (($12,000/$20,000) x foreign corporations. The value of the stock is the partnership’s
$2,000) is apportioned to foreign source passive income. inside basis in the stock adjusted to take into account the E&P of
Schedule K-3. If the partnership's partners aren't limited to the foreign corporations as explained in Regulations section
corporate partners, when completing Schedule K-3, Part III, 1.861-12(c)(2). The partnership must attach a statement to
Section 2, for the corporate partners with an interest of 10% or Schedules K-2 and K-3 with the following information for each
more in the partnership, don't complete lines 6b through 6d. foreign corporation for which basis is reported on line 8.
Include the total distributive share on line 6a. • Name of foreign corporation.
• EIN or reference ID number. Don't enter “FOREIGNUS” or
Lines 7 and 8. The amounts reported on lines 7 and 8 are “APPLIED FOR.”
subsets of the amounts reported on line 6 representing the value • Percentage of voting and value of stock owned by the
of stock held by the partnership in certain foreign corporations. In partnership in such foreign corporation.
determining its foreign tax credit limitation, a partner should • Value of the stock in such corporation.
disregard interest expense that is “properly allocable'' to stock of
a 10%-owned foreign corporation that has been characterized as
a section 245A asset; see section 904(b)(4) and Regulations Section 3—Foreign-Derived Intangible Income
section 1.904(b)-3(a)(1)(ii). The amount of properly allocable (FDII) Deduction Apportionment Factors
deductions is determined by treating the section 245A subgroup
for each separate category as a statutory grouping for purposes Don't complete this Section 3 if the partnership knows that it has
of allocating and apportioning interest deductions on the basis of no domestic corporate partners (whether direct or indirect).
assets. Assets in a section 245A subgroup only include stock of
a specified 10%-owned foreign corporation that has been This section requires the partnership to report information that
characterized as a section 245A asset. a partner will use to allocate and apportion its FDII deduction
The stock is characterized as a section 245A asset to the under section 250(a)(1)(A) for foreign tax credit limitation
extent it generates income that would generate a dividends purposes. The deduction is definitely related and allocable to the
received deduction under section 245A if distributed. This class of gross income included in the partner’s foreign-derived
doesn't include income that is included as GILTI, subpart F deduction eligible income (FDDEI) (as defined in section 250(b)
income, or a section 951(a)(1)(B) inclusion or income described (4)) and is apportioned within the class, if necessary, ratably
in section 245(a)(5) (which gives rise to a dividends received between the statutory grouping (or among the statutory
deduction under section 245 instead of section 245A). groupings) of gross income and the residual grouping of gross
income based on the relative amounts of FDDEI in each
In the case of a specified 10%-owned foreign corporation that grouping; see Regulations section 1.861-8(e)(13). If the partner
isn't a CFC, all of the value of its stock is potentially in a section is a member of a consolidated group, see Regulations section
245A subgroup because the stock generally generates 1.861-14(e)(4). Accordingly, this section requires the partnership
dividends eligible for the section 245A deduction (and can't to report information that its partners will use to determine the

16 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 17 -

Page 17 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

source and separate category of its income so that the partners Example of Multiple Types of Income for the Same
may allocate and apportion the FDII deduction under section Country
250(a)(1)(A) for purposes of the foreign tax credit limitation.
Lines 1 and 2. Report the partnership’s foreign-derived gross Description (a) Type of tax
receipts and COGS, respectively, by source and separate 1 Direct (section 901 or 903) foreign taxes: Paid
category. Accrued
Lines 3 and 4. Report the partnership’s deductions allocable to A AA WHTD
foreign-derived gross receipts and other partnership deductions B AA OTH
apportioned to foreign-derived gross receipts, respectively; see
Part IV, Section 2, lines 11 and 12. Although these deduction
amounts are necessary to figure the partner’s FDII deduction, Column (b). Section 951A category income. Taxes assigned
once this amount is determined, the actual FDII deduction itself to section 951A category income are taxes paid or accrued on
is allocated and apportioned as described in Regulations section distributions of PTEP assigned to the reclassified section 951A
1.861-8(e)(13). PTEP and section 951A PTEP groups. A partnership might not
be able to complete this column due to lack of information
Column (d). As of the date of these instructions, the only regarding the treatment of the current year distributions.
separate category that could be included in column (d) is the
section 901(j) category of income. See the Instructions for Form Column (f). Other category.
1118 for the potential countries to be listed with the section Foreign taxes paid or accrued to sanctioned countries.
901(j) category of income. No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries.
Foreign taxes related to PTEP resourced by treaty. If the
Section 4—Foreign Taxes
partnership pays or accrues foreign taxes on receipt of a
Don't complete this Section 4 if the partnership doesn't pay or distribution of PTEP that is sourced from an annual PTEP
accrue foreign taxes. account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) and
In Part III, Section 4, the partnership assigns foreign taxes resourced as foreign source income under a treaty, such taxes
paid or accrued (including on U.S. source income) to a separate are included in column (f).
category and source. Include taxes paid or accrued to foreign On the line after category code, enter one of the following
countries or to U.S. territories. codes.
Attachment. As previously mentioned in the instructions for • Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for category income, and there is an election to apply the treaty,
distributive share), for each of the amounts listed in lines 1 enter code RBT PAS.
through 3, attach to the Schedules K-2 and K-3 a statement Code RBT GEN. If an applicable income tax treaty treats any
reporting the following information. •
U.S. source general category income as foreign source general
• The dates on which the taxes were paid or accrued. category income, and there is an election to apply the treaty,
• The exchange rates used. enter code RBT GEN.
• The amounts in both foreign currency and U.S. dollars. See Code RBT 951A. If an applicable income tax treaty treats any
section 986(a). •
U.S. source section 951A category income as foreign source
Column (a). Enter the code for the type of tax. section 951A category income, and there is an election to apply
the treaty, enter code RBT 951A.
Codes for Types of Tax Line 1. Enter in U.S. dollars the total foreign taxes (described in
section 901 or section 903) that were paid or accrued by the
Code Type of Tax partnership (according to its method of accounting for such
WHTD Withholding tax on dividends taxes). Don't reduce the amount that you report on line 1 by the
reductions reported on line 2. Don't report redetermined taxes on
WHTP Withholding tax on distributions of line 1. Report such taxes on line 3.
PTEP
WHTB Withholding tax on branch Note. Don't include on line 1 any foreign taxes not creditable but
remittances deductible as reported on Part II, Section 2, line 45.
WHTR Withholding tax on rents, royalties, If the partnership uses the cash method of accounting, check
and license fees the "Paid" box and enter foreign taxes paid during the tax year on
WHTI Withholding tax on interest line 1. Report each partner's share on Schedule K-3, Part III,
Section 4, line 1.
Taxes paid or accrued to foreign
ECI countries or territories on certain If the partnership uses the accrual method of accounting,
effectively connected income check the “Accrued” box and enter foreign taxes accrued on
line 1. Report each partner's share on Schedule K-3, Part III,
OTHS Other foreign taxes paid or accrued Section 4, line 1.
on sales income
OTHR Other foreign taxes paid or accrued Note. Check only one box “Paid” or “Accrued” depending on the
on services income method of accounting the partnership takes into account foreign
OTH Other foreign taxes paid or accrued taxes.
Enter on a separate line, indicated by the letters A through F,
If there are multiple types of tax for the same country, taxes paid or accrued to each country. Enter the two-letter code
generate multiple alpha rows for the same country, one row for from the list at IRS.gov/CountryCodes. Don't enter “various” or
each type of tax. For example, see below. “OC” for country code.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 17

- 18 -

Page 18 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Exceptions. The instructions for Forms 1116 and 1118 to which the tax relates. Report the date on which the tax was
specify exceptions from the requirement to report gross income paid. If there is more than one date tax is paid, enter one of the
and gross receipts by foreign country or U.S. territory with dates paid on the schedule itself and then attach to the
respect to RICs and section 863(b). These exceptions apply as Schedules K-2 and K-3 a statement including all of the
well to reporting of taxes in this section. information reported on the schedule with the other dates paid.
Example 12—Part III, Section 4: multiple country If there is more than one redetermination in a year with
sources: foreign taxes. The facts are the same as in respect to different countries, report such redeterminations on
Example 9, earlier. USP uses the cash method of accounting separate lines. Enter the two-letter code from the list at IRS.gov/
and pays taxes of $1,000 and $3,000 to Countries AA and YY, CountryCodes.
respectively. USP completes Part III, Section 4, line 1, as follows. Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
Example 12 Table and gross receipts by foreign country or U.S. territory with
respect to RICs and section 863(b). Don't enter “various” or “OC”
(e) General for the country code.
Description (a) Type of tax category income Similarly, if there is more than one redetermination in a year
Foreign with respect to the same country, but the redeterminations are
related to different years, report such redeterminations on
1 Direct (section 901 or 903) foreign separate lines.
taxes: Paid Accrued In addition, if the direct or indirect partners are corporations,
A AA OTHR $1,000 attach a statement that includes the information on Schedule L
B YY OTHR $3,000 (Form 1118), Parts I and II, as applicable, with respect to each
foreign tax redetermination. If the direct or indirect partners are
individuals, estates, or trusts, attach a statement that includes
Line 2. Enter on line 2, as negative number, the sum of the the information on Schedule C (Form 1116), Parts I and II, as
taxes in the following categories. applicable, with respect to each foreign tax redetermination. If
• Taxes on foreign mineral income (section 901(e)). the indirect partners are unknown, attach a statement that
• Taxes attributable to boycott operations (section 908). includes both the information on Schedule L (Form 1118), Parts I
• Reduction in taxes for failure to timely file (or furnish all of the and II, as applicable, and Schedule C (Form 1116), Parts I and II,
information required on) Forms 5471 and 8865 (section as applicable.
6038(c)).
• Foreign income taxes paid or accrued during the current tax Contested taxes. In general, a contested foreign income tax
year with respect to splitter arrangements under section 909. liability doesn't accrue until the contest is resolved and the
• Foreign taxes on foreign corporate distributions. For example, amount of the liability has been finally determined. In addition, a
report taxes on dividends eligible for a deduction under section contested foreign income tax liability isn't a reasonable
245A and ineligible for credit under section 245A(d). Also, approximation of the final foreign income tax liability and,
include taxes on a distribution of PTEP assigned to the following therefore, isn't considered an amount of tax paid for purposes of
PTEP groups: reclassified section 965(a) PTEP, reclassified section 901 until the contest is resolved. Thus, a partnership
section 965(b) PTEP, section 965(a), section 965(b) PTEP, a generally doesn't take into account a contested liability as a
portion of which isn’t creditable. The partnership may be unable creditable foreign tax expenditure until the contest is resolved
to determine the amount of a distribution that is attributable to and the liability has been paid; see Regulations section
non-previously taxed E&P or PTEP for which a foreign tax credit 1.905-1(f)(1). However, to the extent that a partnership has
may be partially or entirely disallowed. However, it is important to remitted a contested foreign income tax liability to a foreign
track this amount as a tax on a distribution. country, partners may elect to claim a provisional foreign tax
• Other. Attach a statement to Schedules K-2 and K-3 credit for their distributive share of such contested foreign
indicating the reason for the reduction. income tax liability; see Regulations section 1.905-1(f)(2).
There isn’t a need to report the amounts on line 2 by country. Partnerships that are contesting a foreign income tax liability
with a foreign country but that have remitted all or a portion of
Line 3. Enter in U.S. dollars the change in foreign tax as a result such contested liability should report information about the
of a foreign tax redetermination; see section 905(c) and contested tax on line 3, and check the “Contested tax” box. In
Regulations sections 1.905-3 through -5. If the amount is less addition, partnerships should attach a statement and include
than the original foreign tax, report the change as a negative information necessary for partners to complete Form 7204 and
amount. If the amount is more than the original foreign tax, report Schedule L (Form 1118) (for direct or indirect corporate
the change as a positive amount. partners), or Schedule C (Form 1116) (for direct or indirect
Exception. Partnerships subject to subchapter C of individual, trust, or estate partners), including a description of the
chapter 63 of the Code (BBA partnerships) are generally contest and a description of the contested foreign income tax. If
required to file an administrative adjustment request (AAR) it is unknown whether the partners are corporations, individuals,
under Regulations section 1.905-4(b)(2)(ii) to account for a estates, or trusts, provide the information necessary for the
foreign tax redetermination. If an AAR is filed with respect to a partners to complete both Schedule L (Form 1118), Parts I and II
foreign tax redetermination (or if an AAR will be timely filed), (as applicable), and Schedule C (Form 1116), Parts I and II (as
don't report the foreign tax redetermination on line 3. applicable).
Partnerships must also file a statement each year for which
Note. Payment of additional foreign taxes that relate to an there are one or more contested liabilities outstanding or in
earlier tax year by a partnership that uses the cash method of which a contested tax is resolved that includes information
accounting doesn't result in a foreign tax redetermination; see necessary for partners to complete both Schedule L (Form
Regulations section 1.905-3(a). Such amounts should be 1118), Part V, and Schedule C (Form 1116), Part V.
reported on line 1 as foreign taxes paid by the partnership in the
current year.
Report the U.S. tax year to which the foreign tax relates. This
is the U.S. tax year that includes the close of the foreign tax year

18 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 19 -

Page 19 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 5—Other Tax Information Schedule K-2, Part IV (Information on Partners’
Section 250 Deduction With Respect to
This section provides other tax information that a partner needs
to figure its foreign tax credit limitation. Foreign-Derived Intangible Income (FDII)), and
Schedule K-3, Part IV (Information on Partner’s
Column (b). Don't report any amounts in this column.
Section 250 Deduction With Respect to
Column (f). As of the date of these instructions, this column will Foreign-Derived Intangible Income (FDII))
only include the section 901(j) category and the countries
relevant to that category. See the Instructions for Form 1118 for Note. Certain partners will use the following information to claim
the potential countries to be listed with the section 901(j) and figure a section 250 deduction with respect to FDII on Form
category of income. No credit is allowed for taxes paid or 8993.
accrued to a country described in section 901(j). However, a
deduction is generally allowed with respect to a tax described in This part is used by the partnership to report information to a
section 901(j). direct domestic corporate partner (other than REITs, RICs, and S
corporations) or to a partner which is a partnership that has a
Line 1. For partnerships other than PTPs, report the total of all direct or indirect domestic corporate partner (other than REITs,
partners’ shares of the net positive income adjustments resulting RICs, and S corporations) needed to determine the domestic
from all section 743(b) basis adjustments. Net positive income corporate partner's FDII. A partnership that doesn't have or
adjustments from all section 743(b) basis adjustments means receive sufficient information or notice regarding a partner must
the excess of all section 743(b) adjustments allocated to the presume the partner is a domestic corporate partner or a
partner that increase the partner's taxable income over all partnership that has a direct or indirect domestic corporate
section 743(b) adjustments that decrease the partner's taxable partner, and the partnership must complete Schedules K-2 and
income. K-3, Part IV, accordingly. Any partnership with direct or indirect
Attach to Schedules K-2 and K-3 a statement showing each domestic corporate partners must complete this part, even if the
section 743(b) basis adjustment making up the total and identify partnership doesn't have foreign-derived gross receipts. Even if
the assets to which it relates and the separate category and a partnership has no foreign activities, and therefore has no
source of the income generated by the assets. Make sure to FDDEI as reported in Section 2 of this part, the partnership must
include the class of gross income or deduction, for example, still report the information required by Sections 1 and 3 of this
sales income, interest income, or depreciation deduction. The part so that any direct or indirect domestic corporate partner can
partnership may group these section 743(b) basis adjustments correctly determine its section 250 deduction. For example, a
by asset category or description in cases where multiple assets domestic corporate partner would still need information about
are affected if the assets generate the same separate category the partnership’s qualified business asset investment (QBAI)
and source of income. The section 743(b) positive income (see the instructions for line 8 of this part) in such a case to
adjustments should be included as relevant on other parts of determine its deemed tangible income return and deemed
Schedule K-2. For example, the section 743(b) income intangible income (DII); see section 250(b)(2).
adjustments should be reflected as part of the total depreciation
reported on Part II, Section 2. Section 250 allows a domestic corporation a deduction for its
FDII, and a direct or indirect domestic corporate partner must
Line 2. For partnerships other than PTPs, report the total of all take into account certain activities of a partnership in computing
partners' shares of the net negative income adjustment resulting the domestic corporation's FDII. For the treatment of a domestic
from all section 743(b) basis adjustments. Net negative income corporation that is a partner in a partnership, see Regulations
adjustments from all section 743(b) basis adjustments means sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These
the excess sum of all section 743(b) adjustments allocated to the instructions generally indicate how a partnership should
partner that decrease the partner’s taxable income over all complete Part IV (of both Schedules K-2 and K-3). However,
section 743(b) adjustments that increase the partner’s taxable Schedule K-2 includes the total of all partners’ amounts and
income. Attach to Schedules K-2 and K-3 a statement showing Schedule K-3 includes each partner’s share.
each section 743(b) basis adjustment making up the total and
identify the assets to which it relates and the separate category Enter each amount and total amounts in U.S. dollars. The
and source of the income generated by the assets. Make sure to partnership should determine and report the partner's share of
include the class of gross income or deduction, for example, each item of the partnership contained on this form in
sales income, interest income, or depreciation deduction. The accordance with the partner's distributive share of the underlying
partnership may group these section 743(b) basis adjustments item of income, gain, deduction, and loss of the partnership. The
by asset category or description in cases where multiple assets partnership should report these amounts based on the best
are affected if the assets generate the same separate category information available to it about how its partners might use this
and source of income. The section 743(b) negative income information to determine their FDII deduction. The partnership
adjustments should be included as relevant in other parts of may report certain information differently to each partner
Schedule K-2. For example, the section 743(b) income depending on federal income tax determinations that the partner
adjustments should be reflected as part of the total depreciation makes. Each partner must then figure its FDII deduction using
reported on Part II, Section 2. Form 8993 including the information reported to it on
Schedule K-3, Part IV, taking into account partner
determinations. A partner must obtain (and if requested by a
partner, the partnership must provide) any further necessary
information from the partnership to correctly determine its FDII
deduction.
Special rules for determining foreign use apply to transactions
that involve property or services provided to related parties; see
section 250(b)(5)(C) and Regulations section 1.250(b)-6.
For special substantiation requirements under the
regulations, see Regulations sections 1.250(b)-3(f),
1.250(b)-4(d)(3), and 1.250(b)-5(e)(4). In all other cases, a
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 19

- 20 -

Page 20 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

taxpayer claiming a deduction under section 250 will still be Line 2a. DEI gross receipts. Enter DEI gross receipts.
required to substantiate that it is entitled to the deduction even if
it isn't subject to the specific substantiation requirements Line 2b. DEI COGS. Enter the amount of COGS attributable to
contained in the regulations; see section 6001 and Regulations the amount on line 2a.
section 1.6001-1(a). Therefore, the partner must be able to Line 2c. DEI properly allocated and apportioned deduc-
satisfy the general or special substantiation requirements to be tions. Enter the amount of deductions (including taxes) properly
eligible for the deduction. To the extent the partner doesn't have allocable to gross DEI, without interest and R&E expense. See
the necessary information in its possession to substantiate the Regulations section 1.250(b)-1(d)(2) for more details. Enter the
deduction, the partnership must maintain the information. amounts of interest and R&E expenses on Section 3, lines 13
As described above, the partnership should determine the and 16, respectively. Deductions properly allocable to gross DEI
partner's share of each item below in accordance with the are determined without regard to sections 163(j), 170(b)(2), 172,
partner's distributive share of the underlying item of income, 246(b), and 250.
gain, deduction, and loss of the partnership. Lines 3 through 7 are exclusions from DEI used to determine
Example 13—partners’ reporting of DEI and QBAI. DC is the partner’s DEI.
a domestic corporation that owns a 50% interest in a domestic Line 3. Section 951(a) inclusions. Enter any amounts
partnership, USP. USP manufactures and sells Product A and included in the partnership’s gross income under section 951(a)
provides services, both solely to U.S. persons. The services give (1). Include the section 78 gross-up with respect to the inclusion
rise to domestic oil and gas extraction income (DOGEI) for under section 951(a)(1). A domestic partnership doesn't have a
purposes of section 250(b)(3)(A)(i)(V). USP has $200 in gross section 951(a) inclusion with respect to a foreign corporation for
receipts from sales of Product A, $100 in COGS, and $50 in tax years of the foreign corporation that begin on or after January
properly allocated and apportioned deductions (none of which 25, 2022. A domestic partnership may not have a section 951(a)
are interest or R&E expenses). USP reports these amounts on inclusion with respect to a foreign corporation for tax years of the
Schedule K-2, Part IV, Section 1, lines 2a through 2c, foreign corporation that begin before January 25, 2022, if,
respectively, and 50% of these amounts on the same section pursuant to Regulations section 1.958-1(d)(4)(i), it applies
and lines of the Schedule K-3 that USP issues to DC, because Regulations sections 1.958-1(d)(1) through (3) to such tax years,
this information is necessary for DC to compute its deduction which treats a domestic partnership as not owning stock of a
eligible income (DEI). The net amount increases DC’s DEI, foreign corporation within the meaning of section 958(a) for
which increases its DII and in turn increases its section 250 purposes of section 951, and for purposes of any other provision
deduction for FDII. DC uses these amounts to calculate its gross that applies by reference to section 951.
DEI on Form 8993, Part I, line 4.
USP has $100 in gross receipts from services, $50 in cost of Note. Partners will determine whether any amount included in
services, and $25 in properly allocated and apportioned the gross income of such corporate partner is GILTI under
deductions (none of which are interest or R&E expenses). section 951A (or the section 78 gross-up with respect to this
Because the performance of these services results in DOGEI, it inclusion under section 951A), which can only be determined by
doesn't give rise to DEI, but rather the net amount ($25) is the partner and therefore isn't reported on Schedules K-2 and
reported on Schedule K-2 Part IV, Section 1, line 6, and 50% of K-3, Part IV, Section 1.
the net amount is reported to DC on the same line and section of Line 4. Controlled foreign corporation (CFC) dividends.
Schedule K-3, so that DC can treat this amount as an exclusion Enter the amount of any dividend received from a CFC with
from its DEI. DC’s DEI is determined without this amount by respect to which the partner is a U.S. shareholder as defined
subtracting the amount from DEI on Form 8993, Part I, line 2e. under section 951(b). Don't include as a dividend any amount
USP owns two properties, Asset C which has an adjusted received from a CFC to the extent that such amount is
basis of $1,000, and Asset D which has an adjusted basis of attributable to PTEP in the annual PTEP accounts of the
$1,200. Asset C is used in the production of Product A and Asset partnership. See sections 959(a) and 959(d).
D is used in providing the DOGEI services. Because sales of
Product A give rise to DEI, USP should report the partnership’s Note. The amount by which distributions are attributable to
adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV, PTEP in annual PTEP accounts of a direct or indirect partner
Section 1, line 8 (and $500 is reported to DC on the same isn't taken into account for purposes of determining the CFC
section/line of Schedule K-3). This increases DC’s QBAI, and dividends to be entered on line 4.
thereby increases DC’s deemed tangible income return (DTIR). Line 5. Financial services income. Enter the amount of net
The increase to DTIR decreases DC’s DII which in turn financial services income (as defined in section 904(d)(2)(D))
decreases its section 250 deduction for FDII. DC uses the before interest and R&E deductions.
amount to determine its DTIR from partnerships on Form 8993,
Part I, line 7b. The services, however, don't give rise to DEI, so Line 6. Domestic oil and gas extraction income. Enter the
USP shouldn’t include the partnership’s adjusted basis in Asset amount of net DOGEI before interest and R&E deductions. The
D ($1,200) on Schedule K-2, Part IV, Section 1, line 8. term “domestic oil and gas extraction income” means income
described in section 907(c)(1) determined by substituting “within
USP has no sales or services provided to foreign persons and the United States” for “outside the United States.”
therefore no FDDEI to report on Part IV, Section 2. Even though
the partnership has no interest or R&E deductions, in many Line 7. Foreign branch income. Enter the amount of net
cases, the partnership would still have to complete Part IV, foreign branch income before interest and R&E deductions (as
Section 3. defined in section 904(d)(2)(J)). A partnership should report all
income that would be foreign branch income of its partners as if
Section 1—Information To Determine Deduction all partners were U.S. persons.
Eligible Income (DEI) and Qualified Business Line 8. Partnership QBAI. Enter the amount, if any, of the
partnership QBAI. A domestic corporation’s QBAI is its share of
Asset Investment (QBAI) on Form 8993 the average of the aggregate adjusted bases, determined as of
Line 1. Net income (loss). This amount may equal line 1 of the close of each quarter of the tax year, in certain specified
Analysis of Net Income (Loss) on Form 1065, page 5. tangible property. See Regulations section 1.250(b)-2(b).

20 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 21 -

Page 21 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

The adjusted basis is determined by using the alternative of income from B assets is non-DEI. Thus, the B assets are
depreciation system under section 168(g) and allocating partnership specified tangible property with respect to X only,
depreciation deductions with respect to such property ratably to and USP includes a proportionate amount of the adjusted bases
each day during the period in the tax year to which such of all B assets only in calculating X’s partnership QBAI. The C
depreciation relates. See Regulations section 1.250(b)-2(e). assets are dual-use property, because the production of only
The specified tangible property is that which is used in the part of the income from the C assets is DEI with respect to X and
trade or business of the corporation in the production of gross Y. Thus, the C assets are partnership specified tangible property
income included in the domestic corporation’s gross DEI and is with respect to both X and Y, but USP includes a proportionate
of a type with respect to which a deduction is allowable under amount of the adjusted bases of all C assets in calculating each
section 167. See Regulations section 1.250(b)-2(b). partner’s partnership QBAI only in the proportion that the amount
of the gross income included in DEI produced with respect to the
If a domestic corporation holds an interest in one or more C assets bears to the total amount of gross income produced
partnerships during a tax year (including indirectly through one with respect to the C assets.
or more partnerships that are partners in a lower-tier
partnership), the QBAI of the domestic corporation for the tax
year is increased by the sum of the domestic corporation’s Section 2—Information To Determine
partnership QBAI with respect to each partnership for the tax Foreign-Derived Deduction Eligible Income
year. See Regulations section 1.250(b)-2(g)(1). (FDDEI) on Form 8993
Partnership QBAI is the sum of the domestic corporation’s
proportionate share of the partnership’s adjusted basis in the Foreign-derived gross receipts means, with respect to a
property and the domestic corporation’s partner specific QBAI partnership, gross receipts of the partnership for the
basis in the property for the partnership tax year that ends with partnership's tax year that are used to figure the amount of gross
or within the tax year. See Regulations section 1.250(b)-2(g)(2). FDDEI as defined in Regulations section 1.250(b)-1.
Partnership specified tangible property means, with respect
to a domestic corporation, tangible property that is used in the Each place where general property is listed refers to amounts
trade or business of the partnership, of a type with respect to connected to the sale, lease, exchange, or other disposition of
which a deduction is allowable under section 167, and used in general property to a foreign person, and is for a foreign use as
the production of gross income included in the domestic defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d).
corporation’s gross DEI. See Regulations section 1.250(b)-2(g) The term “general property” means any property other than
(5). intangible property; a security (as defined in section 475(c)(2));
If a partnership can't determine the portion of partnership an interest in a partnership, trust, or estate; or a commodity
specified tangible property (for example, if the partnership described in section 475(e)(2)(A) that isn't a physical commodity
doesn't know if property gives rise to the production of gross or a commodity described in section 475(e)(2)(B) through (D).
income in one of the excluded categories from DEI that is
determined by the partner, which would cause such property to Each place where intangible property is listed refers to
not be classified as partnership specified tangible property), then amounts connected to the sale, license, exchange, or other
in reporting the amount of a partner's share of the partnership disposition of intangible property to a foreign person and, is for a
QBAI, the partnership must separately state any information so a foreign use as defined in Regulations sections 1.250(b)-3 and
direct or indirect domestic corporate partner can distinguish 1.250(b)-4(d)(2).
between the amount of the adjusted bases in a partnership's
tangible property that the domestic corporation would include in Each place where services are listed refers to amounts
its adjusted bases in the partnership specified tangible property connected to services that, as established to the satisfaction of
and the amount of the adjusted bases in the partnership's the Secretary, are provided to any person, or with respect to
tangible property that the domestic corporation wouldn't include property, located outside the United States as defined in
in its adjusted bases in the partnership specified tangible Regulations section 1.250(b)-5.
property.
If tangible property was used in the production of DEI and in If a transaction includes both a sales component and a
the production of income that is non-DEI, then it is considered service component, the transaction is classified as either a sale
dual-use property and treated as specified tangible property in or as a service according to the overall predominant character of
the same proportion that the amount of the gross income the transaction. See Regulations section 1.250(b)-3(d).
included in DEI produced with respect to the property bears to
the total amount of gross income produced with respect to the For purposes of determining a domestic corporation’s
property. See Regulations section 1.250(b)-2(g)(8), Example 2, deductions that are properly allocable to gross FDDEI, the
for guidance on how to figure the partner adjusted basis. If corporation’s deductions are allocated and apportioned to gross
specified tangible property is only partially depreciable, then only FDDEI under the rules of Regulations sections 1.861-8 through
the depreciable portion is QBAI. 1.861-14T and 1.861-17 by treating section 250(b) as an
Example 14—domestic corporate partner; specified operative section described in Regulations section 1.861-8(f).
tangible property. X and Y are both domestic corporations that See Regulations section 1.250(b)-1(d)(2).
are partners in USP, a partnership that holds three types of Line 9. Gross receipts. Enter the amount, if any, of the
assets: A, B, and C. All types of assets are tangible property partnership's foreign-derived gross receipts separately for
used in the trade or business of USP and with respect to which a aggregate sales of general property, aggregate sales of
deduction is allowable under section 167. The production of intangible property, and aggregate services. Foreign-derived
income from A assets is DEI with respect to X and Y. Thus, the A gross receipts means gross receipts that are used to figure gross
assets are partnership specified tangible property with respect to FDDEI as defined in Regulations section 1.250(b)-1(c)(16).
X and Y, and USP includes a proportionate amount of the
adjusted bases of all A assets in calculating each partner’s Line 10. COGS. Enter the amount of COGS attributable to the
partnership QBAI. The production of income from B assets is amount(s) on line 9.
DEI with respect to X. However, with respect to Y, the production For purposes of this form, when figuring FDDEI, COGS
includes the COGS to customers, and adjusted basis of
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 21

- 22 -

Page 22 of 45  Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                      12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

non-inventory property sold or otherwise disposed of in a trade       see Regulations section 1.861-9T(g)(1)(i). A taxpayer can use 
or business.                                                          either the tax book value or the alternative tax book value of its 
In making that determination, attribute costs of goods sold to        assets; see Regulations section 1.861-9(i). Under both methods, 
gross receipts using a reasonable method in accordance with           the partner whose interest in the partnership is 10% or more 
Regulations section 1.250(b)-1(d)(1).                                 uses the partnership's inside basis in its assets, including 
                                                                      adjustments required under sections 734(b) and 743(b); see 
COGS must be attributed to gross receipts with respect to             Regulations sections 1.861-9(e)(2) and -9(e)(3). When reporting 
gross DEI or gross FDDEI regardless of whether certain costs          the basis in an asset which is stock in nonaffiliated 10%-owned 
included in COGS can be associated with activities undertaken         corporations, adjust such amount for E&P; see Regulations 
in an earlier tax year (including a year before the effective date of section 1.861-12(c)(2)(i)(A).
section 250).
                                                                      The total interest expense deductions for the members of the 
Line 11. Allocable deductions.     Enter the amount of the            corporation's affiliated group are allocated and apportioned to 
allocable deductions. See Regulations section 1.250(b)-1(d)(2)        the statutory and residual groupings under proposed, final, and 
for more details. Enter the amounts of interest and R&E               Temporary Regulations sections 1.861-8 through 1.861-14.
expenses on Section 3, lines 13 and 16, respectively. 
                                                                      A corporate partner with a less than 10% interest in a 
Deductions are determined without regard to sections 
                                                                      partnership shall directly allocate its distributive share of the 
163(j),170(b)(2), 172, 246(b), and 250.
                                                                      partnership’s interest expense to its distributive share of 
Column (a). General property.      Enter the amount of the            partnership gross income. See Regulations section 1.861-9(e)
deductions that are allocated and apportioned to gross FDDEI          (4).
from all sales of general property.
                                                                      Note. The Total column isn't a sum of DEI and FDDEI but rather 
Column (b). Intangible property.      Enter the amount of the         refers to the partnership’s specific line totals (that is, that would 
deductions that are allocated and apportioned to gross FDDEI          also include non-DEI).
from all sales of intangible property.
                                                                      Line 14A. Total average value of assets. Enter the amount of 
Column (c). Services. Enter the amount of the deductions that         the average of the beginning-of-year and end-of-year inside 
are allocated and apportioned to gross FDDEI from all services.       bases in the partnership's total assets. See Regulations section 
Line 12. Other apportioned deductions. Enter all other                1.861-9(g)(2)(i)(A).
apportioned deductions that relate to gross FDDEI that aren't         Line 14B. Sections 734(b) and 743(b) adjustments to as-
otherwise included on lines 11, 13, and 16. If a deduction            sets. Enter the amount of the average of the beginning-of-year 
doesn't bear a definite relationship to a class of gross income       and end-of-year inside bases adjustments under sections 734(b) 
constituting less than all of gross income, it shall ordinarily be    and 743(b).
treated as definitely related and allocable to all of the taxpayer's 
gross income, including gross DEI and gross FDDEI, except             Lines 14C and 14D. Assets attracting directly allocable in-
where otherwise directed in the regulations.                          terest expense under Regulations sections 1.861-10(e) 
                                                                      and -10T. Enter the amount of the reductions in the 
Section 3—Other Information for Preparation of                        partnership's asset values to reflect the partnership's directly 
                                                                      allocable interest under Regulations section 1.861-10(e) and 
Form 8993                                                             Temporary Regulations section 1.861-10T. See also Temporary 
Line 13. Interest deductions. The term “interest” refers to the       Regulations section 1.861-9T(e)(1).
gross amount of interest expense incurred by a taxpayer in a          Line 14E. Assets excluded from apportionment factors. 
given year. Generally, interest expense includes any expense          Enter the amount of the average value of assets excluded from 
that is currently deductible under section 163 (including original    the apportionment formula. See section 864(e)(3).
issue discount (OID)), and interest equivalents. See Regulations 
section 1.861-9(b)(1) for the definition of interest equivalents and  Lines 15 and 16. R&E expenses apportionment factors. 
Temporary Regulations section 1.861-9T(c) for sections that           These lines require the partnership to report information that a 
disallow, suspend, or require the capitalization of interest          partner will use to allocate and apportion its R&E expense for 
deductions. Include excess business interest expense (EBIE)           FDII purposes. A partnership isn't required to complete lines 15 
determined under section 163(j)(4) on this line. Under                and 16 unless either (a) the partnership incurs R&E expense; or 
Regulations section 1.250(b)-1(d)(2)(ii), deductions are              (b) the partner is expected to license, sell, or transfer its 
determined without regard to section 163(j).                          intangible property to the partnership (as provided in 
                                                                      Regulations section 1.861-17(f)(3)). R&E expenses deducted, or 
Lines 13A and 13B. Interest expense specifically allocable            amortized and deducted, under section 174 are definitely related 
under Regulations sections 1.861-10(e) and -10T.         Apart        to all gross intangible income reasonably connected with 
from interest expense entered on line 13A, enter on line 13B          relevant broad product categories of the taxpayer and are 
interest expense that is directly allocable under Temporary           allocable to all items of gross intangible income as a class 
Regulations section 1.861-10T to income from specific                 related to such product categories. The product categories are 
partnership property. Such interest expense is treated as directly    generally determined by reference to the three-digit SIC code. 
allocable to income generated by such partnership property. See       R&E expenses are apportioned between the statutory and 
Temporary Regulations section 1.861-9T(e)(1).                         residual groupings based on an analysis of the taxpayer’s gross 
Line 13C. Other interest expense.     Enter all interest              receipts from certain sales, leases, licenses, and services; see 
deductions not otherwise included on lines 13A and 13B.               Regulations section 1.861-17. The exclusive apportionment rule 
                                                                      in Regulations section 1.861-17(c) doesn't apply for purposes of 
Line 14. Interest expense apportionment factors.         This line    apportioning R&E to gross DEI and gross FDDEI.
requires the partnership to report information that a partner will    R&E expenses are allocated and apportioned by the partner. 
use to allocate and apportion its interest expense for FDII           This requires that the partnership report to its partners the gross 
purposes.                                                             receipts related to certain income within the statutory and 
Interest deductions are apportioned to gross DEI and FDDEI            residual groupings within a SIC code and the partner’s 
ordinarily based on the tax book value of the taxpayer’s assets; 

22                                                                    Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 23 -

Page 23 of 45      Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                  12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

distributive share of the partnership’s R&E deductions, if any,        respect to its stock that the partnership (directly or through 
connected with the SIC codes.                                          pass-through entities) owns (within the meaning of section 958) 
                                                                       other than solely by reason of applying section 318(a)(3) 
Line 15. Gross receipts by SIC code.     Enter the gross receipts 
                                                                       (providing for downward attribution) as provided in section 
that resulted in gross income for each category, DEI, FDDEI, and 
                                                                       958(b). Each row should relate to the partnership’s direct 
then total gross receipts. Note that the Total column isn't a sum 
                                                                       ownership of stock in the foreign corporation or direct ownership 
of DEI and FDDEI but rather refers to all the partnership’s gross 
                                                                       of the ownership interests in a pass-through entity that (directly 
receipts. Such gross receipts include both the partnership's 
                                                                       or through other pass-through entities) owns (within the meaning 
sales and certain other parties' sales; see Regulations section 
                                                                       of section 958) stock in the foreign corporation other than solely 
1.861-17(d). Gross receipts from certain transactions of parties 
                                                                       by reason of applying section 318(a)(3) (providing for downward 
both controlled or uncontrolled by the partnership may be 
                                                                       attribution) as provided in section 958(b). For example, if a 
included on line 15; see generally Regulations section 
                                                                       partnership (upper-tier partnership) directly owns 50% of the 
1.861-17(d).
                                                                       foreign corporation's stock and owns 50% of the foreign 
Line 16. R&E expenses by SIC code.       Enter the amount of           corporation's stock through another partnership (lower-tier 
R&E expense by SIC code.                                               partnership), then distributions by the foreign corporation to both 
                                                                       the upper-tier partnership and the lower-tier partnership are to 
Schedule K-2, Part V, and Schedule K-3, Part V                         be reported on separate rows on the upper-tier partnership's 
(Distributions From Foreign Corporations to                            Schedules K-2 and K-3 (Form 1065), Part V. If the partnership 
                                                                       owns stock of a foreign corporation through another partnership 
Partnership)                                                           (lower-tier partnership) from which it receives Schedule K-3 
Note. Certain partners will use the following information, in          (Form 1065 or 8865), Part V, the partnership must replicate each 
combination with other information known to the partners,              line of Schedule K-3 (Form 1065 or 8865), Part V, on its 
including Schedule P (Form 5471), to exclude from gross income         Schedules K-2 and K-3 (Form 1065), Part V. Rows for 
distributions to the extent that they're attributable to PTEP in their distributions with respect to a partnership's direct ownership of 
annual PTEP accounts and report foreign currency gain or loss          foreign corporation stock should be listed before rows for 
with respect to the PTEP on Forms 1040 and 1120. If eligible,          distributions with respect to a partnership’s ownership of foreign 
partners will also use this information to figure and claim a          corporation stock through a pass-through entity.
dividends received deduction under section 245A on Form 1120.          If the partnership is a domestic partnership, the partnership 
Use Schedule K-2, Part V, to report the distributions made by          may have annual PTEP accounts with respect to the foreign 
foreign corporations to the partnership.                               corporation, or the foreign corporation may have E&P that, when 
                                                                       distributed, are excludable from the partnership’s gross income 
Use Schedule K-3, Part V, to report the partner's share of the         under section 1293(c). Don't report distributions to the extent 
amounts reported on Schedule K-2, Part V.                              that they're attributable to PTEP in annual PTEP accounts of the 
Exception.  Schedule K-2, Part V, isn't required to be                 partnership or to E&P that are excludable from the partnership’s 
completed with respect to distributions by a foreign corporation if    gross income under section 1293(c). Distributions by the foreign 
the partnership knows that (a) none of the distributions by the        corporation to the partnership that are attributable to PTEP in 
foreign corporation are attributable to PTEP in annual PTEP            annual PTEP accounts of the partnership should be properly 
accounts of any direct or indirect partner, and (b) none of the        reflected on the Schedules J (Form 5471) for the foreign 
partnership’s direct or indirect partners are eligible to claim a      corporation. The partnership should provide this information to 
deduction under section 245A with respect to any distribution by       its partners as appropriate.
the foreign corporation. Nevertheless, the partnership may be          However, to the extent a distribution is attributable to PTEP in 
required to append Worksheet 3 to Schedule K-2 (discussed              an annual PTEP account of the partnership with respect to a 
below).                                                                foreign corporation, or attributable to E&P that are excludable 
Exception.  Schedule K-3, Part V, for a partner doesn't need           from the partnership’s gross income under section 1293(c), that 
to be completed with respect to distributions by a foreign             corresponds to a tax year of the foreign corporation that ended 
corporation if the partnership knows that (a) none of the              with or within a tax year of the partnership (a) that began after 
distributions by the foreign corporation are attributable to PTEP      December 31, 2012; and (b) for which an election under 
in annual PTEP accounts of the partner or any U.S. person that         Regulations section 1.1411-10(g) wasn't made by the 
is treated as indirectly owning stock of the foreign corporation       partnership (such PTEP, NII PTEP), append Worksheet 3 to 
through the partner (relevant indirect partners), and (b) the          Schedule K-2 and Worksheet 4 to each K-3 in the format shown, 
partner and relevant indirect partners aren't eligible to claim a      adding additional rows as necessary for each distribution by a 
deduction under section 245A with respect to any distributions         foreign corporation. For more information about net investment 
by the foreign corporation. Nevertheless, the partnership may be       income (NII) and net investment income tax (NIIT) relating to 
required to append Worksheet 4 to Schedule K-3 for the partner         CFCs and qualified electing funds (QEFs), see Regulations 
(discussed below). If this exception is applicable with respect to     section 1.1411-10.
a foreign corporation, the sum of the amounts reported on 
Schedules K-3, Part V, with respect to the foreign corporation         Note. If additional rows are required, attach statements to 
may not equal the amounts reported on Schedule K-2, Part V,            Schedules K-2 and K-3 that look like the current versions of 
with respect to the foreign corporation.                               Schedule K-2, Part V, and Schedule K-3, Part V, respectively.
Rows A through O. Use rows A through O to report information 
with respect to each distribution by a foreign corporation with 

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                                23

- 24 -

Page 24 of 45         Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                   12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet 3
                                                         Worksheet 3 (Schedule K-2)
(a) Name of distributing foreign (b) EIN or reference ID (c) Date of  (d) Functional (e) Amount of NII (f) Spot rate             (g) Amount of NII 
corporation                      number                  distribution currency of    PTEP in functional  (functional             PTEP in U.S. 
                                                                      distributing foreign  currency   currency to U.S.          dollars
                                                                      corporation                      dollars)

Worksheet 4
                                                         Worksheet 4 (Schedule K-3)
(a) Name of distributing foreign (b) EIN or reference ID (c) Date of  (d) Functional (e) Partner’s share  (f) Spot rate          (g) Partner’s share 
corporation                      number                  distribution currency of    of NII PTEP in    (functional               of NII PTEP in U.S. 
                                                                      distributing foreign  functional currency currency to U.S. dollars
                                                                      corporation                      dollars)

Column (b). Enter the EIN or reference ID number of the               Column (j).    If the distributing foreign corporation is a qualified 
distributing foreign corporation. Don't enter "FOREIGNUS" or          foreign corporation, determined without regard to section 1(h)
"APPLIED FOR." For basic information about reference ID               (11)(C)(iii)(I), check the box. See section 1(h)(11)(C).
numbers (including the requirements as to the characters 
permitted), see the Instructions for Form 1118.                       Schedule K-2, Part VI (Information on Partners’ 
Column (c). Enter the year, month, and day in which the               Section 951(a)(1) and Section 951A Inclusions), 
distribution was made using the format YYYYMMDD.                      and Schedule K-3, Part VI (Information on 
Column (d). Enter the applicable three-character alphabet             Partner’s Section 951(a)(1) and Section 951A 
code for the foreign corporation’s functional currency using the      Inclusions)
ISO 4217 standard. These codes are available at ISO.org/
ISO-4217-currency-codes.html.                                         Note. Certain partners will use the following information to 
                                                                      complete Form 8992 and Forms 1040 and 1120 with respect to 
Note. Columns (e) and (f) are reported in functional currency.        income inclusions under section 951(a) (subpart F income 
Column (e). This represents the partnership’s share of the            inclusions), section 951(a)(1)(B) inclusions, and section 951A 
amount distributed in functional currency. See Schedule R (Form       inclusions.
5471), column (c).                                                    Schedules K-2 and K-3, Part VI, must be completed with 
Column (f). This represents the partnership's share of the            respect to a CFC if the partnership owns (within the meaning of 
amount of E&P distributed in functional currency. See                 section 958) stock of the CFC, unless the partnership owns 
Schedule R (Form 5471), column (d). The total of the amounts          stock of the CFC solely by reason of applying section 318(a)(3) 
reported in column (f) with respect to a distributing foreign         (providing for downward attribution) as provided in section 
corporation should equal the partnership's share of the total         958(b).
reported on line 9 of all Schedules J on a separate category of       Generally, a foreign corporation is a CFC if more than 50% of 
income basis as reported in Schedule J (Form 5471) TOTAL filed        either the total combined voting power of all classes of stock 
with respect to the distributing foreign corporation.                 entitled to vote or the total value of the stock of the corporation is 
If a Schedule J (Form 5471) with code TOTAL entered on line           owned (within the meaning of section 958(a)) or is considered as 
a isn’t filed with respect to the distributing foreign corporation,   owned by applying the rules of section 958(b) by U.S. 
then the total of the amounts reported in column (f) with respect     shareholders. For this purpose, a U.S. shareholder is a U.S. 
to a distributing foreign corporation should equal the                person (as defined in section 957(c)) who owns (within the 
partnership's share of the amount reported in Schedule J (Form        meaning of section 958(a)), or is considered as owning by 
5471), line 9, column (f), filed with respect to the distributing     applying the rules of ownership of section 958(b), 10% or more 
foreign corporation.                                                  of the total combined voting power of all classes of stock entitled 
Column (g). Enter the exchange rate on the date of distribution       to vote, or 10% or more of the total value of shares of all classes 
used to translate the amount of the distribution in functional        of stock of such foreign corporation.
currency to U.S. dollars; see section 989(b)(1). Report the           If the partnership is a domestic partnership, then the domestic 
exchange rate using the "divide-by convention" specified under        partnership doesn't have subpart F income inclusions or section 
Reporting exchange rates on Form 5471 in the Instructions for         951(a)(1)(B) inclusions with respect to a foreign corporation for 
Form 5471.                                                            tax years of the foreign corporation that begin on or after January 
Column (h). Enter the amount of the distribution in U.S. dollars.     25, 2022, under Regulations section 1.958-1(d)(1). A domestic 
Translate column (e) using the spot rate reported in column (g).      partnership may not have subpart F income inclusions or section 
                                                                      951(a)(1)(B) inclusions with respect to a foreign corporation for a 
Column (i). Enter the amount of E&P distributed in U.S. dollars.      tax year of the foreign corporation that begins before January 25, 
Translate column (f) using the spot rate reported in column (g).      2022, if, pursuant to Regulations section 1.958-1(d)(4)(i), the 
                                                                      partnership applies Regulations sections 1.958-1(d)(1) through 
                                                                      (3) to such tax year and, thus, is treated as not owning stock of a 
                                                                      foreign corporation within the meaning of section 958(a) for 

24                                                                    Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 25 -

Page 25 of 45  Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                           12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

purposes of section 951, or the partnership isn't a U.S.             A partner's GILTI is figured based on its share of the following 
shareholder of the foreign corporation during such tax year. If the  amounts for each CFC with respect to which it is a U.S. 
partnership doesn't have subpart F income inclusions or section      shareholder: tested income, tested loss, QBAI, tested loss QBAI 
951(a)(1)(B) inclusions with respect to a foreign corporation for a  amount, tested interest income, and tested interest expense 
tax year of the foreign corporation, the subpart F income            (collectively, GILTI items) (a CFC's subpart F income and GILTI 
inclusions and section 951(a)(1)(B) inclusions with respect to the   items, CFC items).
foreign corporation for such tax year that are reported in 
Schedule K-2, Part VI, columns (e) and (f), aren't inclusions of     A partner's share of a CFC's subpart F income, amounts used 
the partnership. Schedule K-3, Part VI, columns (e) and (f),         to determine its section 956 amount with respect to a CFC, and a 
report the information partners will need to figure and report their CFC's GILTI items may not be limited to the partner's share of 
subpart F income inclusions and section 951(a)(1)(B) inclusions      such income, amounts, or items through its ownership in the 
with respect to the CFC.                                             partnership. However, for purposes of completing Schedules K-2 
                                                                     and K-3, Part VI, use only the partner's share of a CFC's subpart 
Note.  If the partnership is a domestic partnership that is treated  F income, amounts used to determine its section 956 amount 
as owning stock of a foreign corporation within the meaning of       with respect to a CFC, and a CFC's GILTI items through the 
section 958(a) for purposes of section 951 for a tax year that       partner's ownership in the partnership.
begins before January 25, 2022, because it doesn't apply 
                                                                     A partner's share through its ownership in the partnership of 
Regulations sections 1.958-1(d)(1) through (3) to such tax year, 
                                                                     subpart F income and GILTI items is generally anticipated to be 
and is a U.S. shareholder of the foreign corporation during such 
                                                                     figured by multiplying the percentage in column (d) by the 
tax year, then any subpart F income inclusions and section 
                                                                     amount of subpart F income or GILTI items, respectively. For 
951(a)(1)(B) inclusions with respect to the foreign corporation for 
                                                                     example, in general, a partner's share through its ownership 
such tax year are inclusions of the partnership, which are 
                                                                     interest in the partnership of tested income in column (i) is 
therefore not reported in Schedules K-2 and K-3, Part VI, 
                                                                     anticipated to be figured by multiplying the percentage in column 
columns (e) and (f), and are instead reported on Schedules K 
                                                                     (d) by the amount of tested income in column (g). If the partner's 
and K-1, line 11, Other income (loss).
                                                                     share through its ownership in the partnership of subpart F 
Exception.   Schedule K-2, Part VI, doesn't need to be               income or GILTI items isn't figured by multiplying the percentage 
completed with respect to a CFC if the partnership knows that it     in column (d) by the amount of subpart F income or GILTI items, 
doesn't have a direct or indirect partner (through pass-through      respectively (for example, because of special allocations), then, 
entities only) that is a U.S. shareholder of the CFC required to     instead of entering a percentage in column (d) for that CFC, 
include in gross income a subpart F income inclusion and/or          attach a statement to Schedules K-2 and K-3 explaining the 
section 951(a)(1)(B) inclusion with respect to the CFC, or figure    partner's share through its ownership in the partnership of the 
section 951A inclusions by taking into account GILTI items           CFC's subpart F income and GILTI items.
(defined below) of the CFC.
Exception.   Schedule K-3, Part VI, for a partner doesn't need       Line a. Complete a separate Part VI for each applicable 
to be completed with respect to a CFC if the partnership knows       separate category of income. However, all GILTI items must be 
that (a) the partner isn't a U.S. shareholder of the CFC required    reported on only one Part VI. If GILTI items include passive 
to include in gross income a subpart F income inclusion and/or       category income, report all GILTI items on the Part VI completed 
section 951(a)(1)(B) inclusion with respect to the CFC, or figure    for passive category income; otherwise, report all GILTI items on 
section 951A inclusions by taking into account GILTI items           the Part VI completed for general category income. Enter the 
(defined below) of the CFC; and (b) no U.S. person that indirectly   appropriate code on line a.
owns (through pass-through entities only) an interest in the CFC 
through the partner is a U.S. shareholder of the CFC required to     Note. The other reporting requirements of a partnership with 
include in gross income a subpart F income inclusion and/or          respect to reporting income by separate category don't change 
section 951(a)(1)(B) inclusion with respect to the CFC, or figure    by reason of the partnership reporting GILTI items that include 
section 951A inclusions by taking into account GILTI items           general category income on a Part VI completed for passive 
(defined below) of the CFC. If the partnership doesn't complete      category income.
Schedule K-3, Part VI, for a partner with respect to a CFC, the 
sum of each partner’s share of the CFC’s subpart F income,           Codes for Categories of Income
section 951(a)(1)(B) inclusion with respect to the CFC, and 
share of the CFC’s GILTI items (defined below) reported on all               Code                           Category of Income
Schedules K-3 may not equal the aggregate share of subpart F 
income of the CFC, the aggregate section 951(a)(1)(B) inclusion              PAS                        Passive Category Income
with respect to the CFC (defined below), and the aggregate                   901j                           Section 901(j) Income
share of the CFC’s GILTI items (defined below), respectively,                GEN                        General Category Income
reported on Schedule K-2.
Use Schedule K-3, Part VI, to report the partner's share of the      Line b. If any portion of a CFC item is U.S. source, complete a 
amounts needed to figure its subpart F income inclusions, its        separate Part VI for U.S.-source CFC items, and check the box 
section 951(a)(1)(B) inclusions, and its share of items of CFCs      on line b on such separate Part VI.
needed to determine the partner's GILTI inclusion, with respect 
to CFCs owned (within the meaning of section 958) by the             Line 1. Use lines A through K to report information with respect 
partnership.                                                         to CFCs owned (within the meaning of section 958) by the 
                                                                     partnership, and for which Schedules K-2 and K-3, Part VI, must 
If the partnership must complete Schedules K-2 and K-3, Part         be completed. If the partnership owns a CFC through another 
VI, with respect to a CFC, then the partnership must complete        partnership (lower-tier partnership) from which it receives a 
Schedules K-2 and K-3, Part VI, by assuming that each partner        Schedule K-3 (Form 1065 or 8865), Part VI, the partnership must 
in the partnership is a U.S. shareholder of the CFC and is           replicate each line of Schedule K-3 (Form 1065 or 8865), Part VI, 
required to include in gross income its share of the CFC's           that is related to the CFC on its Schedule K-2 (Form 1065), Part 
subpart F income, an amount determined under section 956 with        VI. For example, if a partnership directly owns 50% of the CFC's 
respect to the CFC (section 951(a)(1)(B) inclusion), and its         stock and owns 50% of the CFC's stock through a lower-tier 
GILTI.                                                               partnership, the CFC should be listed on two lines with one line 
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                            25

- 26 -

Page 26 of 45        Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                   12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

related to the partnership's direct ownership and the other line    Column (l). If the CFC has tested income in column (g), enter 
related to the partnership's ownership through the lower-tier       zero. If the CFC has a tested loss in column (h), enter as a 
partnership. Lines related to a partnership's direct ownership of   negative number the aggregate share of the CFC's tested loss 
CFCs should be listed before lines related to a partnership's       QBAI amount; see Regulations section 1.951A-4(b)(1)(iv). A 
non-direct ownership of CFCs. If additional lines are required,     CFC's tested loss QBAI amount is reported on Schedule I-1 
attach a statement to Schedules K-2 and K-3 that looks like the     (Form 5471), line 9c, which must be translated to U.S. dollars.
current version of Part VI.
                                                                    Column (m). Enter the aggregate share of the CFC’s tested 
Column (a). Enter the name of each CFC for which Part VI            interest income. A CFC’s tested interest income is reported on 
must be completed.                                                  Schedule I-1 (Form 5471), line 10c.
Column (b). Enter the EIN or reference ID number of the CFC.        Column (n). Enter the aggregate share of the CFC’s tested 
Don't enter "FOREIGNUS" or "APPLIED FOR." For basic                 interest expense. A CFC’s tested interest expense is reported on 
information about reference ID numbers (including the               Schedule I-1 (Form 5471), line 9d.
requirements as to the characters permitted), see the 
Instructions for Form 1118.                                         Schedule K-2, Part VII, and Schedule K-3, Part 
Column (c). Enter the end of the CFC’s tax year using the           VII (Information Regarding Passive Foreign 
format YYYYMMDD.                                                    Investment Companies (PFICs))
Column (d). Enter the partners' shares of CFC items through 
the partners' ownership in the partnership (aggregate share).       Note. Partners will use the following information to complete 
See Regulations sections 1.951-1(b), 1.951-1(e), and                Form 8621 and/or determine income inclusions with respect to 
1.951A-1(d)(1) for rules on determining the partners' shares.       the PFICs reported on Schedules K-2 and K-3, Part VII.
                                                                      Except as otherwise provided, Schedules K-2 and K-3, Part 
Note. A domestic partnership that is treated as owning stock of     VII, must be filed by every partnership that owns PFIC stock, 
a CFC within the meaning of section 958(a) for a tax year of the    directly or indirectly. However, the following exceptions apply.
CFC that begins before January 25, 2022, because it doesn't,        • A partnership that knows it has no direct or indirect partners 
pursuant to Regulations section 1.958-1(d)(4)(i), apply             that are U.S. persons, including U.S persons that own an indirect 
Regulations sections 1.958-1(d)(1) through (3) to such tax year,    interest in the partnership through one or more foreign entities, 
and is a U.S. shareholder of the CFC listed in column (a), doesn't  isn't required to complete Schedules K-2 and K-3, Part VII.
report amounts with respect to that CFC for that tax year in        • A domestic partnership that has elected to treat a PFIC as a 
column (e) or (f).                                                  pedigreed QEF or made a market-to-market (MTM) election 
Column (e). Enter the aggregate share of the amount of the          under section 1296 with respect to a PFIC applicable to the 
CFC's subpart F income, if any. Note that an amount determined      partnership’s tax year (other than a domestic partnership making 
under section 956(a) isn't considered subpart F income. For         an MTM election under section 1296 with respect to PFIC stock 
guidance on computing a CFC's subpart F income and the              in the current tax year if the current tax year isn't the first year of 
partners' shares of a CFC's subpart F income, see Worksheet A       the partnership’s holding period in the stock (non-initial section 
in the Instructions for Form 5471.                                  1296 MTM election)) isn't required to complete Schedules K-2 
                                                                    and K-3, Part VII, with information regarding that PFIC if the 
Column (f). Enter the amount determined under section 956           partnership files Form 8621 for that PFIC. The term “pedigreed 
with respect to the partners that relate to the partners’ ownership QEF” is defined in Regulations section 1.1291-1(b)(2)(ii).
in the partnership, as described in these instructions for column   • A partnership that owns stock of a foreign corporation that is 
(f) (aggregate section 951(a)(1)(B) inclusion). In determining the  treated as a qualifying insurance corporation (QIC) (as defined in 
section 956 amount, use only the partners’ shares through their     section 1297(f)(1)) and which isn't treated as a PFIC by reason 
ownership in the partnership of:                                    of section 1298(b)(1), or a domestic partnership that satisfies the 
• The average of the amounts of U.S. property held (directly or     deemed election requirements of Regulations section 
indirectly) by the CFC as of the close of each quarter of the       1.1297-4(d)(5)(iv) with respect to a foreign corporation eligible to 
CFC’s tax year, and                                                 be treated as a QIC (and that isn't treated as a PFIC by reason of 
• The applicable earnings of the CFC.                               section 1298(b)(1)), isn't required to complete Schedules K-2 
Don't reduce the amount reported in column (f) for any reduction    and K-3, Part VII, with respect to that foreign corporation.
to the partners’ section 956 amount under Regulations section       • A partnership that knows that all of its direct and indirect 
1.956-1(a)(2). For guidance on computing the partners’ shares       partners that are U.S. persons are either (a) not subject to the 
of a CFC’s earnings invested in U.S. property, see Worksheet B      PFIC rules with respect to the corporation under section 1297(d) 
in the Instructions for Form 5471.                                  because they're subject to the subpart F rules with respect to the 
Column (g). Enter the CFC’s tested income, if any, from             corporation, (b) tax-exempt entities that aren't subject to the 
Schedule I-1 (Form 5471), line 6, for each CFC.                     PFIC rules with respect to the corporation under Regulations 
                                                                    section 1.1291-1(e), or (c) pass-through entities with no direct or 
Column (h). Enter the CFC’s tested loss, if any, from               indirect U.S. taxable owners isn't required to complete 
Schedule I-1 (Form 5471), line 6, for each CFC. The loss            Schedules K-2 and K-3, Part VII, with respect to the corporation.
amounts should be shown as negative numbers.                        • A partnership 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) doesn't need to 
listed in column (g) for each CFC with tested income.               report information about the PFIC on Schedules K-2 and K-3, 
                                                                    Part VII. The partnership should report its MTM gain or loss on 
Column (j). Enter the aggregate share of the tested loss listed     Form 1065, Schedule K, and report the partners’ shares of those 
in column (h) for each CFC with tested loss. The loss amounts       amounts on Schedule K-1 (Form 1065), Part III. Note, however, 
should be shown as negative numbers.                                there may be instances in which the partnership will need to 
Column (k). If the CFC has a tested loss in column (h), enter       provide its partners with additional information to meet their tax 
zero. If the CFC has tested income in column (g), enter the         obligations with respect to a PFIC the stock of which the 
aggregate share of QBAI. A CFC’s QBAI is reported on                partnership has marked to market as described in Regulations 
Schedule I-1 (Form 5471), line 8.                                   section 1.1291-1(c)(4), such as when section 1291 rules apply 
                                                                    because the stock wasn't marked in the first year of the 

26                                                                    Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 27 -

Page 27 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

partnership’s holding period. In such instances, the partnership Part VII, and its corresponding Schedules K-3, Part VII, with the
may use Part VII to provide the needed information. information contained in Table 4 and/or Table 5.
Use Schedule K-2, Part VII, to report certain information with If the partnership has additional PFICs for which to report
respect to any PFIC owned, directly or indirectly, by the information that don't fit on single Schedules K-2 and K-3, Part
partnership for which reporting is required, including PFICs with VII, it can attach additional Parts VII of Schedules K-2 and K-3,
respect to which no QEF or section 1296 MTM election has as needed.
been made, and unpedigreed QEFs (section 1291 funds), and
PFICs with respect to which pedigreed QEF, section 1296 MTM,
or other elections have been, or may be, made, and for which the Section 1—General Information
partnership isn't filing a Form 8621. Columns (a) through (c). Enter the name, U.S. EIN or
Domestic partnerships must also use Schedule K-2, Part VII, reference ID number, and address of each PFIC held directly or
to report information for any PFIC with respect to which the indirectly by the partnership during its tax year. Don't enter
partnership is making a non-initial section 1296 MTM election, “FOREIGNUS” or “APPLIED FOR.”
and for any foreign corporation eligible to be treated as a QIC For basic information about reference ID numbers (including
that is treated as a PFIC by reason of section 1298(b)(1), the requirements as to the characters permitted), see the
regardless of whether it files Form 8621 for that PFIC. See Instructions for Form 8621.
section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for
more information related to non-initial section 1296 MTM Columns (d) and (e). Enter the beginning and end of the
elections. PFIC's tax year using the format YYYYMMDD.
Use Schedule K-3, Part VII, to report the partner's share, Column (f). Enter each class of shares in the PFIC owned by
through its ownership in the partnership, of the amounts reported the partnership using the following codes.
on Schedule K-2, Part VII.
Codes for Classes of PFIC Shares
Complete only one line on both Sections 1 and 2 for each
PFIC for which reporting on Schedule K-2, Part VII, and Code Class of PFIC Shares
Schedule K-3, Part VII, is required. Each line completed for a COM Common or Ordinary Shares
PFIC in Section 1 should correspond to the same line on Section PRE Preferred Shares
2. If there is no information to report with respect to a PFIC in OTH Other Equity Interest
Section 2, columns (c) through (o), only complete the name and
EIN of the PFIC in Section 2, columns (a) and (b), and leave VAR Multiple Classes of Shares or Equity
Interests
columns (c) through (o) blank for that PFIC. For additional
information on determining indirect ownership of PFICs, see
Regulations section 1.1291-1(b)(8). Column (g). If the partnership acquired any PFIC shares during
its tax year, provide the date(s) of acquisition of those shares
The partnership may have additional required information with using the format YYYYMMDD. If the partnership acquired no
respect to a PFIC for certain columns (for example, scenarios shares in a particular PFIC during its tax year, leave this column
where the partnership may have multiple different events with blank with respect to that PFIC.
respect to the PFIC in the same tax year, such as multiple dates
of acquisitions of, or distributions with respect to, the PFIC Note. If the partnership acquired shares in a PFIC on multiple
stock). In that case, complete Schedules K-2 and K-3, Part VII, dates during the tax year, attach a statement with the information
with the first of those entries for a PFIC and attach a statement contained in Table 4 to Schedule K-2, Part VII, and its
including the remaining entries for that PFIC to Schedule K-2, corresponding Schedules K-3, Part VII, providing those dates.

Table 4
Additional Information for Part VII, Section 1
General Information Annual Information
(a) Name of PFIC (b) EIN or reference ID number (g) Dates PFIC shares acquired during tax
year (if applicable)

Column (h). Enter the total number of all classes of shares of value and the information provides a more reasonable estimate
the PFIC the partnership owned at the end of its tax year. of the PFIC’s value.
Column (i). Enter the total value of all shares in the PFIC held Note. A partner may need additional information not required to
by the partnership at the end of the tax year. If the PFIC shares be reported on this Schedule K-2, Part VII, (or the partner’s
aren't publicly traded, the partnership may rely upon periodic Schedule K-3, Part VII) from the partnership with respect to the
account statements provided at least annually to determine the value of the PFIC shares as of a particular date to aid the partner
value of a PFIC unless the partnership has actual knowledge or in making certain elections under Regulations section
reason to know based on readily accessible information that the 1.1291-10, 1.1297-3, or 1.1298-3.
statements don't reflect a reasonable estimate of the PFIC’s

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 27

- 28 -

Page 28 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Column (j). If the partnership is a domestic partnership and has Completing Part VII, Section 1, Column (n)
made either of the following elections with respect to the PFIC, IF... THEN...
indicate which election was made using the following codes. If
the partnership hasn't made an election with respect to the PFIC, • this is the first year of the check the box.
leave this column blank with respect to that PFIC. partnership's holding period in stock
of the foreign corporation, and
• the partnership has determined
Partnership Election Codes (directly or otherwise) that the foreign
corporation is a PFIC under the
Code Partnership Election Type income test or asset test of section
1297(a)
QEF Qualified Electing Fund Election
• the foreign corporation was a PFIC check the box.
MTM Section 1296 Mark-to-Market Election in a prior tax year of the partnership's
holding period, and
Reminder. If the partnership is a domestic partnership and has • the partnership hasn't determined
made a pedigreed QEF election or section 1296 MTM election (directly or otherwise) the foreign
(other than a non-initial section 1296 MTM election) with respect corporation is a former PFIC within
the meaning of Regulations section
to a PFIC, and the partnership files Form 8621 for that PFIC, it 1.1291-9(j)(2)(iv)
isn't required to report information regarding that PFIC on
Schedule K-2 or K-3, Part VII. If the partnership has marked • the foreign corporation was a PFIC don't check the box.
stock in a PFIC to market as described in Regulations section in a prior tax year of the partnership's
1.1291-1(c)(4), it isn't required to report information regarding holding period, and
that PFIC on Schedule K-2 or K-3, Part VII. • the partnership has determined
(directly or otherwise) the foreign
Column (k). Check the box if the foreign corporation has corporation is a former PFIC within
indicated that it has documented eligibility to be treated as a the meaning of Regulations section
QIC. See section 1297(f) and Regulations section 1.1297-4 for 1.1291-9(j)(2)(iv)
additional information on QICs.
Column (l). Check the box if the PFIC has indicated that its
shares are “marketable stock” as defined in section 1296(e) and Note. If the foreign corporation is a former PFIC within the
Regulations section 1.1296-2. meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may
need additional information not required to be reported on this
Column (m). Check the box if the PFIC also constitutes a CFC Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)
within the meaning of section 957 (PFIC/CFC). from the partnership with respect to the PFIC to aid the partner in
Reminder. A partnership that knows that all of its direct and making certain elections under Regulations section 1.1298-3.
indirect partners that are U.S. persons aren't subject to the PFIC
rules with respect to a PFIC/CFC under section 1297(d) because Section 2—Additional Information on PFIC or
they're subject to the subpart F rules with respect to the
PFIC/CFC isn't required to complete Schedules K-2 and K-3, Qualified Electing Fund (QEF)
Part VII, with respect to the PFIC/CFC. General Information
Note. If the PFIC is a PFIC/CFC, a partner may need certain Columns (a) and (b). Enter the name and U.S. EIN (or
additional information with respect to the PFIC/CFC’s E&P not reference ID number) of each PFIC held directly or indirectly by
required to be reported on this Schedule K-2, Part VII, (or the the partnership during its tax year. Don't enter "FOREIGNUS" or
partner’s Schedule K-3, Part VII) from the partnership to aid the "APPLIED FOR."
partner in making certain elections under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3. QEF Information
Column (n). Complete column (n) in the following manner. Columns (c) and (d). Enter the partnership's share of the total
ordinary earnings and net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year
in which or with which the tax year of the PFIC ends in columns
(c) and (d), respectively. The PFIC should provide the
partnership with a statement that provides information to assist
the partnership in determining these amounts. See Regulations
section 1.1295-1(g) for additional information on annual PFIC
statements.
A domestic partnership must provide this information for any
PFIC with respect to which it has made a pedigreed QEF
election but for which it doesn't file Form 8621, and for any PFIC
it has elected to treat as an unpedigreed QEF. A foreign
partnership must provide this information if it has received an
annual information statement with respect to the PFIC, unless
the partnership knows that no direct or indirect partner has
made, or intends to make, a QEF election with respect to the
PFIC; the partnership may obtain this knowledge in any
reasonable manner, provided it retains a written record in its
books and records.

28 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 29 -

Page 29 of 45           Fileid: … 1065schk-2/2023/a/xml/cycle03/source                    12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Reminder. If the partnership is a domestic partnership and has     section 1296(a) MTM gain or loss on Form 1065, Schedule K, 
made a pedigreed QEF election with respect to a PFIC, and if       and report the partners’ shares of those amounts on 
the partnership files Form 8621 for that PFIC, the partnership     Schedule K-1, Part III.
isn't required to report information regarding that PFIC on        If the partnership has marked stock in a PFIC to market as 
Schedule K-2 or K-3, Part VII. The partnership should report its   described in Regulations section 1.1291-1(c)(4), it isn't required 
inclusion of its share of the QEF’s ordinary earnings and net      to report information regarding that PFIC on Schedule K-2 or 
capital gain on Form 1065, Schedule K, and report the partners’    K-3, Part VII, though it may use Part VII to provide its partners 
shares of those amounts on Schedules K-1, Part III. However,       with additional information to meet their tax obligations with 
certain partners which receive a distributive share of the         respect to the PFIC in certain instances, such as when the 
partnership’s QEF inclusions may be entitled to claim foreign tax  section 1291 rules apply because the partnership didn't mark the 
credits under section 960 with respect to those inclusions. See    stock to market in the first year of its holding period.
the instructions for Schedules K-2 and K-3, Part VIII, regarding 
deemed paid foreign tax credits under section 960, including for   Note. If the partnership is a domestic partnership that has made 
inclusions with respect to a QEF under section 1293(f).            an MTM election under section 1296 with respect to a PFIC but 
                                                                   doesn't file Form 8621 for that PFIC, a partner may need 
Note. Certain partners may need additional information not         additional information not required to be reported on this 
required to be reported on this Schedule K-2, Part VII, (or the    Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII) 
partner’s Schedule K-3, Part VII) from the QEF with respect to its regarding its share of the partnership’s adjusted tax basis in the 
computation of its net capital gain (as defined in Regulations     partnership’s MTM PFIC stock in order to complete Form 8621.
section 1.1293-1(a)(2)) to perform certain computations under 
section 1061 or the regulations thereunder. The partnership may 
aid the partner in obtaining this information from the QEF, though Section 1291 and Other Information
the QEF isn't required to provide it. See section 1061 and 
Regulations sections 1.1061-4 and 1.1061-6 for more                Generally, the information in columns (g) through (o) is to assist 
information.                                                       shareholders of section 1291 funds in satisfying any information 
                                                                   reporting obligations and in computing income inclusions with 
Section 1296 Mark-to-Market Information                            respect to section 1291 funds. However, this information may be 
                                                                   relevant to PFICs with respect to which a QEF election 
Columns (e) and (f).   Enter the fair market value (FMV) of the    (pedigreed or unpedigreed), section 1296 MTM election 
PFIC stock at the beginning and end of the partnership’s tax year  (including a non-initial section 1296 MTM election), or other 
in columns (e) and (f), respectively. If any shares of the PFIC    election has been made by the partnership, partner, or other 
were acquired during the tax year for which the Form 1065 is       indirect PFIC shareholder. Accordingly, the partnership must 
being filed, the FMV in column (e) should reflect the FMV of       complete columns (g) through (o) with respect to each PFIC for 
those shares as of the date of acquisition. A domestic             which reporting on Schedules K-2 and K-3, Part VII, is required. 
partnership must provide this information for any PFIC with        However, note the instructions for column (k) regarding reporting 
respect to which it has made an MTM election under section         distributions from PFICs with respect to which the partnership 
1296 but for which it doesn't file Form 8621 and for any PFIC      has made a pedigreed QEF election or section 1296 MTM 
with respect to which it is making a non-initial section 1296 MTM  election (other than a non-initial section 1296 MTM election) and 
election. A foreign partnership must provide this information      for which the partnership doesn't file Form 8621.
unless it knows that no direct or indirect partner has made, or    Reminder. If the partnership has additional required information 
intends to make, an MTM election under section 1296 with           with respect to a PFIC for any of columns (g) through (j) or (l) 
respect to the PFIC; the partnership may obtain this knowledge     through (m) (for example, if the partnership received multiple 
in any reasonable manner, provided it retains a written record in  distributions with respect to stock in a PFIC), it must complete 
its books and records.                                             that column with the first of those entries and attach a statement 
                                                                   including the remaining entries to Schedule K-2, Part VII, and its 
Reminder. If the partnership is a domestic partnership and has     corresponding Schedules K-3, Part VII, with the information 
made an MTM election under section 1296 with respect to a          contained in Table 5.
PFIC (other than a non-initial section 1296 MTM election), and if 
the partnership files Form 8621 for that PFIC, the partnership     Column (g). Enter the date(s) on which the partnership initially 
isn't required to report information regarding that PFIC on        acquired each block of stock in the PFIC using the format 
Schedule K-2 or K-3, Part VII. The partnership should report its   YYYYMMDD.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                            29

- 30 -

Page 30 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Table 5
Additional Information for Part VII, Section 2
General Information Section 1291 and Other Information
(a) Name of PFIC (b) EIN or (g) Dates (h) Amount of (i) Dates of (j) Total (l) Dates (m) Amount (n) Tax basis (o) Gain or
reference ID PFIC shares cash and distribution creditable PFIC shares realized on of PFIC (loss) on
number were acquired FMV of foreign taxes disposed of disposition of shares on disposition of
property attributable to during tax PFIC shares date of PFIC shares
distributed by distribution year (if disposition
PFIC during by PFIC applicable)
the current
tax year (if
applicable)

Column (h). Enter the amount of each distribution of cash Column (n). If the partnership disposed of any block of stock in
and/or the FMV of any other property distributed to the the PFIC during the partnership's tax year, enter the
partnership by the PFIC during the tax year, if any. partnership's tax basis in the shares of the PFIC on the date of
disposition.
Note. Deemed distributions by QEFs don't need to be reported Schedule K-3. Enter the partner's share, through its
on this Schedule K-2, Part VII (or the partner’s Schedule K-3, ownership in the partnership, of the partnership's tax basis in the
Part VII). However, partners which have made, or intend to make, PFIC shares. The partner's share of the basis in the PFIC shares
an election under section 1294, and which are deemed to have should include any applicable adjustments specific to the
received a distribution from the QEF, may require this information partner, such as section 743(b) adjustments or adjustments
to complete any computations under section 1294 (including for made under the PFIC regime. See sections 1293(d) and
Form 8621, if required). See section 1294(f) and Regulations 1296(b), and Regulations sections 1.1291-9, 1.1291-10,
section 1.1294-1T for additional information. 1.1297-3, and 1.1298-3 for adjustments made under the PFIC
Column (i). Enter the date(s) of distribution of the amounts regime.
entered in column (h) using the format YYYYMMDD. Column (o). Enter the partnership's gain or loss on the
Column (j). Enter the total creditable foreign taxes attributable disposition of PFIC shares. This equals column (m) minus
to a distribution from the PFIC. See section 1291(g) and the column (n).
instructions for Form 8621, Part V, line 16d, for additional
information on creditable foreign taxes attributable to PFIC Schedule K-2, Part VIII (Partnership’s Interest in
distributions, including apportioning creditable foreign taxes to Foreign Corporation Income (Section 960)), and
the portion of a distribution which constitutes an excess Schedule K-3, Part VIII (Partner’s Interest in
distribution and certain rules related to creditable foreign taxes
on a disposition of PFIC stock. Foreign Corporation Income (Section 960))
Note. Creditable foreign taxes entered in column (j) don't Note. Certain partners will use the following information to figure
include taxes attributable to QEF inclusions under section a deemed paid foreign tax credit on Form 1118.
1293(f). Enter only creditable foreign taxes within the meaning of Reporting currency. Report all amounts on Part VIII in
section 1291(g) in column (j). See the instructions for Schedules functional currency.
K-2 and K-3, Part VIII, regarding deemed paid foreign tax credits
under section 960, including for inclusions with respect to a QEF The partnership must complete a separate Schedule K-2,
under section 1293(f). Part VIII, for each CFC with respect to which it has a direct or
Column (k). Enter the total amount of distributions the indirect interest, unless the partnership doesn't have a direct or
partnership received from the PFIC in the 3 preceding tax years, indirect partner that is a domestic corporation that is a U.S.
or, if shorter, the total amount of distributions the partnership shareholder or that is eligible to make a section 962 election to
received during its holding period of the PFIC stock. However, claim a deemed paid foreign tax credit with respect to such CFC.
don't enter any amount in this column with respect to a PFIC for An indirect interest is one that the partnership owns through
which the partnership has made a pedigreed QEF election or other pass-through entities. Indirect partners are partners who
section 1296 MTM election (other than a non-initial section 1296 own the partnership through a foreign corporation or through a
MTM election) and for which the partnership doesn't file Form pass-through entity.
8621. Schedule K-3, Part VIII, must be completed and provided to
Column (l). Enter the date(s) on which the partnership (a) direct partners that are domestic corporation U.S.
disposed of any block of stock in the PFIC during the shareholders or that may be eligible to make a section 962
partnership's tax year, if any, using the format YYYYMMDD. election to claim a deemed paid foreign tax credit, and (b) direct
partners who may have direct or indirect partners who may be
Column (m). If the partnership disposed of any block of stock in eligible to claim the indirect credit.
the PFIC during the partnership's tax year, enter the amount
realized by the partnership on each disposition. A partnership that doesn't have or receive sufficient
information or notice regarding a direct or indirect partner must

30 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 31 -

Page 31 of 45          Fileid: … 1065schk-2/2023/a/xml/cycle03/source                            12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

presume the partner is eligible to claim the indirect credit and     On Schedule K-2, Part VIII, the partnership reports in column 
must complete Schedules K-2 and K-3 accordingly.                     (ii) its share of the CFC's net income by income groups and by 
Exception. Part VIII isn't required to be completed with             units. In column (iii), the partnership reports the CFC’s total net 
respect to dormant foreign corporations (as defined in section 3     income by income groups and units as reported in Schedule Q 
of Rev. Proc. 92-70).                                                (Form 5471), column (xvi). In column (iv), the partnership reports 
                                                                     the CFC’s current year foreign taxes for which credit is allowed 
In general, a domestic corporate U.S. shareholder of a CFC is 
                                                                     by income groups and units as reported in Schedule Q (Form 
deemed to pay all or a portion of the foreign income taxes paid or 
                                                                     5471), column (xii). In column (i), consistent with the reporting 
accrued by the CFC that are properly attributable to subpart F 
                                                                     requirement on Form 1118, enter the two-letter code (from the 
income or tested income of the CFC that the U.S. shareholder 
                                                                     list at IRS.gov/CountryCodes) of each foreign country and U.S. 
includes in its gross income; see sections 960(a) and (d). See 
                                                                     territory within which income is sourced and/or to which taxes 
also section 1293(f) with respect to QEF inclusions from a PFIC. 
                                                                     were paid or accrued. Enter "US" for income sourced in the 
The domestic corporate U.S. shareholder may claim a credit for 
                                                                     United States. Don't enter “various” or “OC” for the country code. 
such foreign taxes, subject to certain limitations. Individuals, 
                                                                     Don't enter a country in column (i) of line 5, later. See the 
estates, and trusts may also claim a foreign tax credit for foreign 
                                                                     instructions for line D for further information.
income taxes deemed paid with respect to a CFC if they make 
an election under section 962.                                       On Schedule K-3, Part VIII, the partnership reports each 
                                                                     partner's share of the net income in the income group by unit and 
To figure the foreign taxes deemed paid by a corporate U.S.          country.
shareholder, the income, deductions, and taxes of the CFC must 
be assigned to separate categories of income and then included       Enter "US" for income sourced in the United States.
in income groups within those separate categories; see               Line A. On line A, enter the EIN or reference ID number of the 
Regulations section 1.960-1(c)(1). The applicable separate           CFC as listed on Form 5471. Don't enter "FOREIGNUS" or 
categories of income are general category income, passive            "APPLIED FOR."
category income, and section 901(j) income. The income groups 
include the subpart F income groups, the tested income group,        Line B. The partnership must file separate Schedules K-2 and 
and the residual income group. Each single item of foreign base      K-3, Part VIII, to report the net income or loss of the CFC in each 
company income (as defined in Regulations section 1.954-1(c)         separate category. Use the applicable code from the table below.
(1)(iii)) is a separate subpart F income group; see Regulations 
section 1.960-1(d)(2)(ii)(B).                                        Category of Income Codes
Line 1f allows the partnership to report foreign personal 
holding company income under section 954(c)(1)(F) (income            Code                        Category of Income
from notional principal contracts), section 954(c)(1)(G)             PAS                         Passive Category Income
(payments in lieu of dividends), and section 954(c)(1)(H) 
(personal service contracts). A partnership must report a            901j                         Section 901(j) Income
separate line 1f for income in each of sections 954(c)(1)(F), (G),   GEN                         General Category Income
and (H). Income within one of these income groups may need to 
be further subdivided on separate lines to the extent it is          Line C. With respect to passive category income, separate 
attributable to more than one country, source of income, passive     Schedules K-2 and K-3, Part VIII, must be completed for each 
grouping, etc. See the instructions for Schedule Q (Form 5471).      applicable grouping under Regulations section 1.904-4(c). This 
The tested income group consists of tested income within a           includes the groups in Regulations section 1.904-4(c)(3) 
section 904 category; see Regulations section 1.960-1(d)(2)(ii)      reported on Schedule Q (Form 5471).
(C). The residual income group consists of any income not in the     The partnership should use the following codes to report 
other income groups or in a PTEP group; see Regulations              each of these groupings for each unit.
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)
(2) with respect to the PTEP groups. The PTEP groups aren't          Passive Group Codes
reported on this Part VIII.
Lines 1 through 4. The partnership's share of the CFC's net          Code                        Passive Group
income in each of the subpart F income groups, tested income          i      All passive income received during the tax year that is subject to a 
group, and residual income group by unit is reported on lines 1              withholding tax of 15% or greater must be treated as one item of 
through 4. The CFC’s net income and taxes in each of these                   income. See Regulations section 1.904-4(c)(3)(i).
groups are figured on Schedule Q (Form 5471), and then 
included in columns (iii) and (iv), respectively. See the            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 
instructions for Schedule Q (Form 5471) for the meaning of unit.             treated as one item of income. See Regulations section 1.904-4(c)(3)
However, don't include on line 1 (including lines 1a through 1j              (ii).
and any subset lines (1), (2), etc., under line 1) any amounts       iii     All passive income received during the tax year that is subject to no 
excluded from subpart F income under the high-tax exception in               withholding tax or other foreign tax must be treated as one item of 
section 954(b)(4) (subpart F high-tax exception); these amounts              income. See Regulations section 1.904-4(c)(3)(iii).
are reported on line 4 (and on lines (1), (2), etc., under line 4).
                                                                     iv      All passive income received during the tax year that is subject to no 
Also, don't include on line 3 (or lines (1), (2), etc., under                withholding tax but is subject to foreign tax other than a withholding 
line 3) any amounts excluded under the GILTI high-tax exclusion              tax must be treated as one item of income. See Regulations section 
in Regulations section 1.951A-2(c)(7); these amounts are                     1.904-4(c)(3)(iv).
reported on line 4 (including any subset lines (1), (2), etc., under 
line 4).                                                             Example 15—Part VIII: subpart F income group 
The PTEP groups aren't reported on this Part VIII. Don't report      reporting by unit. In Year 1, USP, a domestic partnership, 
by unit with respect to the following subpart F income groups: (a)   wholly owns foreign corporation CFC, with reference ID number 
international boycott income; (b) bribes, kickbacks, and other       1234, and the CFC owns a foreign disregarded entity organized 
payments; and (c) section 901(j) income. Also don't report by        in Country X. CFC has two separate units, the foreign 
unit with respect to the recaptured subpart F income group.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                                           31

- 32 -

Page 32 of 45               Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                                              12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

disregarded entity and the CFC itself. See the tables for 
Example 15.

Example 15. Foreign Source Income

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

Example 15. Partnership USP’s First Schedule K-2, Part VIII

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

Example 15. Partnership USP’s Second Schedule K-2, Part VIII

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

Example 15. Partnership USP’s Third Schedule K-2, Part VIII

USP completes another Schedule K-2, Part VIII, as shown below.
A  Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1234
B  Separate category (enter code—see instructions)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   GEN
                                                                                (ii) Partnership’s share of 
   Enter amounts in functional currency of the        (i) Country code            foreign corporation’s net       (iii) Foreign corporation’s (iv) Foreign corporation’s 
   foreign corporation (unless otherwise noted).                                    income (functional                 total net income       current year foreign taxes 
                                                                                          currency)                 (functional currency)        for which credit allowed 
                                                                                                                                                  (U.S. dollars)
3    Tested income group (total) . . . . . .
     (1)   Unit: CFC                                          ZZ                            300u                              300u                    $0

  USP also completes Schedule K-3, Part VIII, with each                               Line D.     If net income in an income group is sourced from more 
partner's share of the partnership's net income in each income                        than one country, check the box on line D, and attach a 
group. On Schedule K-3, Part VIII, USP also includes the CFC's                        statement to indicate that you have expanded Part VIII to report 
total net income and the CFC's current year foreign taxes for                         these additional countries on both Schedules K-2 and K-3.
which credit is allowed in each income group.

32                                                                                        Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 33 -

Page 33 of 45      Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                                                       12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 16—Part VIII: more than two source countries.                                 code for Country A is AA, the country code for Country B is BB, 
In Year 1, USP, a domestic partnership, wholly owns foreign                           and the country code for Country C is CC. See the tables for 
corporation CFC, with reference ID number 1234. USP has two                           Example 16.
domestic corporate partners. CFC has only one unit, the CFC                               Example 16 Attachment (Expansion).                          USP also completes 
itself, and no other separate units. CFC has general category                         Schedule K-3, Part VIII, with each partner's share of the 
foreign source foreign base company sales income (FBCSI)                              partnership's net income in each subpart F income group. USP 
sourced in Country A of 100u and general category foreign                             attaches to Schedule K-3 the same schedule it attaches to 
source FBCSI sourced in Country B of 50u and general category                         Schedule K-2, however, with each partner’s share of the income 
foreign source FBCSI sourced in Country C of 30u. The country                         in each subpart F income group, by country.

Example 16. Schedule K-2, Part VIII

USP completes Schedule K-2, Part VIII, as shown below.
A Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1234
B Separate category (enter code—see instructions)       . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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                           (i) Country code                        (ii) Partnership’s share of foreign corporation’s net 
  corporation (unless otherwise noted).                                                                                             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

Example 16. Attachment (Expansion)

USP attaches to Schedule K-2 the following schedule to expand line 1g to include another line.
A Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1234
B Separate category (enter code—see instructions)       . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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                           (i) Country code                        (ii) Partnership’s share of foreign corporation’s net 
  corporation (unless otherwise noted).                                                                                             income (functional currency)
1       Subpart F income groups
  g     Foreign base company sales income (total)     . . .                                                                                       180u
        (3) Unit: CFC                                                                   CC                                                        30u
Line E. The partnership should check the box and complete a                               The BEAT is generally levied on certain large corporations 
separate Part VIII for U.S. source income in each separate                            that have deductions and certain other items paid or accrued to 
category.                                                                             foreign related parties (a base erosion payment) that are 3% of 
                                                                                      their total deductions or higher (2% in the case of certain banks 
Line F. If the foreign corporation has FOGEI or foreign oil related                   or registered securities dealers), a determination referred to as 
income (FORI), the partnership should check the box and                               the “base erosion percentage test.” Partnerships aren't subject to 
complete a separate Part VIII indicating the amount of FOGEI                          the BEAT; however, corporate partners of a partnership that are 
and FORI in each grouping. The partnership should check box 2                         applicable taxpayers under Regulations section 1.59A-2 may be 
on Part I and complete Schedule I (Form 1118). See the                                subject to the BEAT. Except for purposes of determining a 
instructions for Part I, box 2.                                                       partner's base erosion tax benefits under Regulations section 
Line G. Enter the functional currency of the foreign corporation                      1.59A-7(d)(1), and whether a taxpayer is a registered securities 
as reported on Form 5471, line 1h.                                                    dealer, BEAT determinations are made by the partner. See 
                                                                                      Regulations section 1.59A-7 for further information regarding the 
Schedule K-2, Part IX (Partners' Information for                                      application of section 59A to partnerships, and the Instructions 
                                                                                      for Form 8991 for additional information on whether a corporate 
Base Erosion and Anti-Abuse Tax (Section                                              partner is an applicable taxpayer subject to the BEAT.
59A)), and Schedule K-3, Part IX (Partner’s 
                                                                                          For the partnership to complete Schedules K-2 and K-3, Part 
Information for Base Erosion and Anti-Abuse                                           IX, the foreign related parties of each partner must be identified, 
Tax (Section 59A))                                                                    subject to the exception for small partners. It is expected that the 
Certain partners will use the following information to complete                       partnership will collaborate with its partners to identify the foreign 
Form 8991. This Part IX of Schedules K-2 and K-3 must be                              related parties of each partner. A foreign related party with 
completed by a partnership to assist its corporate partners in                        respect to the partner is a foreign person that is:
determining if they're subject to the BEAT, and to figure their                       •   Any 25% owner of the applicable taxpayer (as defined in 
BEAT, if any. This information includes the partner's share of the                    Regulations section 1.59A-1(b)(17)(ii)(A)),
partnership's gross receipts, the partner's amount of base                            •   Any person who is related (within the meaning of section 
erosion payments made through the partnership, and the                                267(b) or 707(b)(1)) to the applicable taxpayer or any 25% 
partner's base erosion tax benefits.                                                  owner of the applicable taxpayer, or

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                                                         33

- 34 -

Page 34 of 45           Fileid: … 1065schk-2/2023/a/xml/cycle03/source                              12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• Any other person who is related to the applicable taxpayer        base erosion payment, any amount paid or accrued by the 
within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).     partnership is treated as paid or accrued by each partner based 
  Exception for small partners. Part IX of Schedule K-3 isn't       on the partner's distributive share of the item of deduction with 
required to be prepared by the partnership for small partners       respect to that amount. A partner that is an applicable taxpayer 
meeting the following three requirements.                           has a base erosion payment for any amount paid or accrued by 
• The partner's interest in the partnership represents less than    the partnership to a foreign person (as defined in Regulations 
10% of the capital and profits of the partnership at all times      section 1.59A-1(b)(10)) that is a related party to the partner (as 
during the tax year.                                                defined in Regulations section 1.59A-1(b)(12)) with respect to 
• The partner is allocated less than 10% of each partnership        which a deduction is allowable under chapter 1 and for certain 
item of income, gain, loss, deduction, and credit for the tax year. other items on lines 13 and 15. See Regulations section 1.59A-3 
• The partner's interest in the partnership has an FMV of less      and the Instructions for Form 8991 for more information on the 
than $25 million on the last day of the partner's tax year,         definition of a base erosion payment.
determined using a reasonable method.                               Column (c). Total base erosion tax benefits. A partner's 
See Regulations section 1.59A-7(d)(2) for further information       distributive share of any deduction or reduction in gross receipts 
regarding the application of the exception for small partners       attributable to a base erosion payment is the partner's base 
  Exception for certain other partners.   The partnership           erosion tax benefit. A partner's base erosion tax benefits are 
doesn't need to complete Schedule K-3, Part IX, for a partner       determined separately for each asset, payment, or accrual, as 
that is an individual.                                              applicable, and aren't netted with other items. A partner's base 
  The partnership doesn't need to complete Schedule K-3, Part       erosion tax benefit may be more than the partner's base erosion 
IX, for a corporate partner that is an S corporation.               payment (for example, in the case of special allocations made by 
  The partnership should complete Schedule K-3, Part IX,            the partnership). See the Instructions for Form 8991 and 
Section 1, lines 1 through 4, for partners that are RICs and REITs  Regulations section 1.59A-7(d) for further information 
but doesn't need to complete Section 2 for these partners.          concerning a partner's base erosion tax benefits.
                                                                    General. Don’t include amounts that a partner doesn't take into 
Section 1—Applicable Taxpayer                                       account pursuant to the exception for certain small partners for:
                                                                    • Line 8, columns (b) and (c);
Lines 1 through 4, column (a). Enter the partnership's total        • Line 9, columns (b) and (c);
gross receipts for the current year and each of the 3 preceding     • Line 10a, columns (b) and (c);
tax years. The determination of the partnership's gross receipts    • Line 11, columns (b) and (c);
is made in accordance with Regulations section 1.448-1T(f)(2)       • Line 12, columns (b) and (c);
(iv).                                                               • Line 13, columns (b) and (c);
Lines 1 through 4, column (b). Complete lines 1 through 4,          • Line 14a, columns (b) and (c);
column (b), if the partnership has a foreign partner or has reason  • Line 15, columns (b) and (c); and
to know it has a foreign partner through a partner that is a        • Line 16, columns (b) and (c).
pass-through entity. Enter the partnership’s total gross ECI        See Regulations section 1.59A-7(d)(2) and Exception for small 
receipts for the current year and each of the 3 preceding tax       partners, earlier. For Schedule K-2, Part IX, report the total 
years which the foreign partner(s) would take into account as       allocated to all partners, and for Schedule K-3, Part IX, report the 
ECI. If the foreign partner(s) is subject to tax on a net basis     amount allocated to each individual partner.
pursuant to an applicable income tax treaty of the United States,     Don't complete section 2 if the partnership has determined 
enter the gross receipts that would be attributable to transactions that no amounts were paid or accrued by the partnership to a 
taken into account in determining its net taxable income.           foreign person (as defined in Regulations section 1.59A-1(b)
                                                                    (10)) that is a related party to any partner with respect to which a 
Lines 1 through 4, column (c). Complete lines 1 through 4,          deduction is allowable under chapter 1 and for certain other 
column (c), if the partnership has a foreign partner or has reason  items on lines 13 and 15. The partnership’s determination that it 
to know it has a foreign partner through a partner that is a        hasn't made any base erosion payment should be based on its 
pass-through entity. Enter the total non-ECI gross receipts as the  collaboration with its partners to identify any foreign related 
difference between column (a) and column (b).                       parties.
  Schedule K-3. For purposes of section 59A, each partner in 
a partnership includes on its Schedule K-3, Part IX, the share of   Line 8. Purchase or creation of property rights for intangi-
partnership gross receipts in proportion to the partner's           bles (patents, trademarks, etc.). 
distributive share (as determined under sections 704(b) and (c))      Column (a). Enter the amount paid or accrued by the 
of items of gross income that were taken into account by the        partnership in connection with the acquisition or creation of 
partnership under section 703 or 704(c) (such as remedial or        intangible property rights (patents, copyrights, trademarks, trade 
curative items under Regulations section 1.704-3(c) or (d)).        secrets, etc.) that is subject to the allowance for depreciation (or 
                                                                    amortization in lieu of depreciation) for the tax year.
Line 5, column (a). Amounts included in the denominator 
of the base erosion percentage as described in Regula-                Column (b). Enter the amount paid or accrued to all foreign 
tions section 1.59A-2(e)(3). Enter the amount of deductions         persons that are a related party of any of the partners in 
and other items allocated to the partners from the partnership      connection with the acquisition or creation of intangible property 
that will be included in the denominator of the partners' base      rights (patents, copyrights, trademarks, trade secrets, etc.) that 
erosion percentage. For a description of deductions that aren't     is subject to the allowance for depreciation (or amortization in 
included in the denominator, see Regulations section 1.59-2(e)      lieu of depreciation).
(3)(ii).                                                              Column (c). Enter the amount of the partners' base erosion 
                                                                    tax benefits attributable to deductions allowed under chapter 1 
                                                                    for the tax year for depreciation (or amortization in lieu of 
Section 2—Base Erosion Payments and Base                            depreciation) with respect to intangible property rights acquired 
Erosion Tax Benefits                                                in the current year or prior years from all foreign persons that are 
                                                                    related parties of any of the partners.
Column (b). Total base erosion payments.  For purposes of 
determining whether a payment or accrual by a partnership is a      Line 9. Rents, royalties, and license fees. 

34                                                                    Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 35 -

Page 35 of 45       Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                                12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Column (a). Enter the amount paid or accrued by the                    Column (a).  Enter the amounts paid or accrued by the 
partnership for the tax year for the use or right to use tangible or   partnership to any foreign person that is a related party of any of 
intangible property resulting in rents, royalties, and/or license      the partners for services qualifying for the services cost method 
fees.                                                                  exception in section 59A(d)(5).
Column (b). Enter the amount paid or accrued to all foreign            Line 11. Interest expense. 
persons that are related parties of any of the partners for the use 
                                                                       Column (a).  Enter the amount of interest paid or accrued by 
or right to use tangible or intangible property resulting in rents, 
                                                                       the partnership for the tax year (excluding interest paid or 
royalties, and/or license fees.
                                                                       accrued in a prior year treated as paid or accrued in the current 
Column (c). Enter the amount of the partners’ base erosion             year under section 163(j) or similar provisions).
tax benefits attributable to amounts paid or accrued to all foreign 
                                                                       Column (b).  Enter the amount of interest expense paid or 
persons that are related parties of any of the partners for the use 
                                                                       accrued to all foreign persons that are related parties of any of 
or right to use tangible or intangible property that results in rents, 
                                                                       the partners (excluding interest paid or accrued in a prior year 
royalties, and/or license fees.
                                                                       treated as paid or accrued in the current year under section 
Line 10a. Compensation/consideration paid for services                 163(j) or similar provisions).
not excepted by section 59A(d)(5).                                     Column (c).  Enter the amount of the partners’ base erosion 
Column (a). Enter the amount paid or accrued by the                    tax benefits attributable to interest expense paid or accrued by 
partnership for the tax year as compensation or consideration for      the partnership that is allowed as a deduction in the current tax 
services, excluding any amount that qualifies for the services         year. If the partner is a foreign person, include the individual lines 
cost method exception in section 59A(d)(5).                            from column (c) of Worksheet A on the applicable Schedule K-3.
Column (b). Enter the amount paid or accrued to all foreign            Schedule K-3. When completing Schedule K-3, line 11, if the 
persons that are related parties of any of the partners as             partner is a foreign person, enter the total from Worksheet A, 
compensation or consideration for services, excluding any              column (a), on the partner’s Schedule K-3, line 11, column (a); 
amount that qualifies for the services cost method exception in        enter the total from Worksheet A, column (b), on Schedule K-3, 
section 59A(d)(5).                                                     line 11, column (b); and enter the total from Worksheet A, 
Column (c). Enter the amount of the partners’ base erosion             column (c), on Schedule K-3, line 11, column (c).
tax benefits attributable to amounts paid or accrued to all foreign    The partnership is required to complete Worksheet A for all 
persons that are related parties of any of the partners                partnership-related items and complete Worksheet A for each 
representing compensation or consideration paid for services,          foreign partner’s share of the amounts reported on the 
excluding amounts qualifying for the services cost method              partnership Worksheet A and attach a statement containing the 
exception in section 59A(d)(5).                                        partner’s share of the information in Worksheet A to the partner’s 
Line 10b. Compensation/consideration paid for services                 Schedule K-3.
excepted by section 59A(d)(5). 

Worksheet A

Interest Paid or Accrued by the Partnership
                                                        (a)                         (b)                                 (c)
                                                   Total Interest Paid or Accrued in  Interest Paid or Accrued to Interest Expense Paid or Accrued 
                                                   the Current Year    Foreign Related Parties of the             to Foreign Related Parties of the 
                                                                       Foreign Partner in the Current             Foreign Partner That Is Allowed 
                                                                       Year                                       as a Deduction in the Current 
                                                                                                                  Year
(1) Interest expense on liabilities described in 
Regulations section 1.882-5(a)(1)(ii)(A) or (B)
(2) Interest paid on U.S. booked liabilities under 
Regulations section 1.882-5(d)(2)(vii)
(3) Interest paid on all other liabilities of the 
partnership
Totals. Combine line (1) through line (3)
Line 12. Payments for the purchase of tangible personal                Column (a).  Enter the amount paid or accrued by the 
property.                                                              partnership for the tax year for reinsurance.
Column (a). Enter the amount paid or accrued by the                    Column (b).  Enter the amount of any premiums or other 
partnership for the tax year for the purchase of tangible personal     consideration paid or accrued to all foreign persons that are 
property.                                                              related parties of any of the partners for reinsurance taken into 
Column (b). Enter the amount paid or accrued to all foreign            account under section 803(a)(1)(B) (relating to return premiums 
persons that are related parties of any of the partners for the        and premiums or other consideration arising out of indemnity 
purchase of tangible personal property.                                reinsurance that reduces life insurance gross income) or section 
Column (c). Enter the amount of base erosion tax benefits              832(b)(4)(A) (relating to amounts deducted from gross premiums 
attributable to amounts paid or accrued to any foreign persons         written on insurance contracts for return premiums and 
that are related parties of any of the partners for the purchase of    premiums paid for reinsurance).
tangible property.                                                     Column (c).  Enter the amount of the partners’ base erosion 
                                                                       tax benefits attributable to premiums or other consideration as 
Line 13. Premiums and/or other considerations paid or ac-              described in section 59A(c)(2)(A)(iii) paid or accrued to any 
crued for reinsurance as covered by section 59A(d)(3) and              foreign person that is a related party of any of the partners for 
section 59A(c)(2)(A)(iii).                                             reinsurance.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)                                                                                         35

- 36 -

Page 36 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Line 14a. Nonqualified derivative payments. Line 16. Other payments—specify.
Column (a). Enter the amount paid or accrued by the Column (a). Enter the amount paid or accrued for the tax
partnership for the tax year attributable to derivative contracts as year by the partnership that hasn't been included on lines 8
defined in section 59A(h)(4). through 15.
Column (b). Enter the amount paid or accrued to all foreign Column (b). Enter the amount paid or accrued to any foreign
persons that are related parties of any of the partners with person that is a related party of any of the partners that is a base
respect to derivative contracts that aren't eligible for the qualified erosion payment that hasn't otherwise been included on lines 8
derivative payment exception under section 59A(h) and through 15.
Regulations section 1.59A-6. Don't include any amount paid that Column (c). Enter the amount of the partners’ base erosion
is a qualified derivative payment on line 14a, column (b). tax benefits related to other specified base erosion payments not
Column (c). Enter the amount of base erosion tax benefits listed in any of the categories on lines 8 through 15.
attributable to nonqualified derivative payments paid or accrued Attachment. For amounts reported on line 16, attach a
to any foreign person that is a related party of any of the statement to both Schedules K-2 and K-3 (for distributive share)
partners. describing the type and amount of other payments, using the
Line 14b. Qualified derivative payments excepted by sec- same column headings as specified in this schedule: Total base
tion 59A(h). Enter the total amount of qualified derivative erosion payment and Total base erosion tax benefits. For each
payments paid or accrued by the partnership. Generally, a type of payment, the attachment must identify the relationship of
qualified derivative payment is any payment made by the a partner to the foreign related party consistent with the
taxpayer pursuant to a derivative contract, provided that the categories and instructions for columns (b) and (c) of this
taxpayer recognizes gain or loss on the derivative contract as if it schedule.
were sold for its FMV on the last business day of the tax year; Line 17, column (c)—Base erosion tax benefits related to
treats the gain or loss as ordinary; and treats the character of all payments reported on lines 6 through 16, on which tax is
other items of income, deduction, gain, or loss with respect to a imposed by section 871 or 881, with respect to which tax
payment pursuant to the derivative as ordinary. A payment isn't a has been withheld under section 1441 or 1442 at 30%
qualified derivative payment if the payment would be treated as a (0.30) statutory withholding tax rate. Enter the aggregate
base erosion payment if it were not made pursuant to a amount of the partners’ base erosion tax benefits, reported on
derivative (such as interest, royalty, or services income). With lines 8 through 16, on which tax is imposed under section 871 or
respect to a contract with both derivative and nonderivative 881 and with respect to which tax has been deducted and
components, a payment isn't a qualified derivative payment if it is withheld under section 1441 or 1442 at a 30% statutory
properly allocable to the nonderivative component. withholding tax rate.
Line 15. Payments reducing gross receipts made to surro- Line 18, column (c)—Portion of base erosion tax benefits
gate foreign corporation. reported on lines 8 through 16, on which tax is imposed by
Column (a). Enter the amount paid or accrued by the section 871 or 881, with respect to which tax has been
partnership for the tax year to certain expatriated entities withheld under section 1441 or 1442 at a reduced with-
described in section 59A(d)(4)(C)(i). holding rate pursuant to an income tax treaty. Multiply ratio
Column (b). Enter the amount paid or accrued to certain of percentage withheld divided by 30% (0.30) times base
expatriated entities that results in a reduction of the gross erosion tax benefit. The partnership is required to provide the
receipts of the partnership. This amount includes payments to a information in Worksheet B for all partnership-related items and
surrogate foreign corporation that is a related party to the attach a statement containing the information in Worksheet B to
partner, but only if the entity first became a surrogate foreign Schedule K-3 for each partner’s share of the amounts reported
corporation after November 9, 2017. The amount also includes on the partnership Worksheet B.
payments to a foreign person that is a member of the same Complete Worksheet B to determine the portion of the base
expanded affiliated group, as defined in section 7874(c)(1), as erosion tax benefits, reported on lines 8 through 16, on which tax
the surrogate foreign corporation. A surrogate foreign is imposed under section 871 or 881 and with respect to which
corporation is defined in section 7874(a)(2)(B) but doesn't tax has been deducted and withheld at a reduced withholding
include a foreign corporation that is treated as a domestic tax rate (but not exempt from tax) pursuant to a U.S. income tax
corporation under section 7874(b). treaty. Keep a copy of the completed Worksheet B for the
Column (c). Enter the base erosion tax benefits attributable partnership’s records.
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross receipts
of the partnership.

Worksheet B

Part IX, Section 2, Line 18, Column (c)
A B C D E
Type of base erosion Amount of base erosion tax Treaty—reduced Divide column C by 30% (0.30) Multiply column B by
payment benefit withholding rate (round to 4 decimal places) column D
%
%
%
%
%
Add the amounts in column E and enter the total on line 18, column (c)

36 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 37 -

Page 37 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Schedule K-2, Part X (Foreign Partners' report to its partners, as needed, on Schedule K-3, Part X, their
distributive shares of any U.S. or foreign source partnership
Character and Source of Income and
effectively connected items, any U.S. source FDAP income, and
Deductions), and Schedule K-3, Part X (Foreign any income that isn't effectively connected or FDAP of the
Partner’s Character and Source of Income and partnership but that may be effectively connected to the foreign
Deductions) person's conduct of a U.S. trade or business.
Certain partners will use the following information to figure and In addition, unless otherwise noted, the partnership must
report their U.S. tax liability on Forms 1040-NR and 1120-F, or complete Schedule K-3, Part X, to report each partner's
other applicable forms. distributive share of the amounts reported on Schedule K-2, Part
X.
In general, Schedules K-2 and K-3, Part X, must be filed by
every partnership that has a foreign partner, or if a foreign person Note. Schedule K-3, Part X, doesn’t need to be completed and
has a U.S. income tax reporting obligation with respect to any provided to partners who are U.S. persons (as defined in section
item of partnership income, deduction, gain, or loss. 7701(a)(30)) and not pass-through partners. A pass-through
Exception. A domestic partnership that is required to file a partner is a partnership required to file a return under section
partnership return isn't required to complete Schedules K-2 and 6031(a), an S corporation, a trust (other than a wholly owned
K-3, Part X, if it doesn't have any ECI and the partnership (or trust disregarded as separate from its owner for federal income
another withholding agent) has met its withholding and reporting tax purposes), and a decedent’s estate. See Regulations section
obligations under chapters 3 and 4 with respect to its income. 301.6241-1(a)(5). Therefore, a partnership with one partner that
A foreign partnership that doesn't have ECI and files a is a nonresident alien (as defined in section 7701(b)(1)(B)) and
partnership return under the modified filing obligations under another partner that is a U.S. citizen need only provide
Regulations section 1.6031(a)-1(b)(3)(iii) is only required to Schedule K-3 to the nonresident alien partner. However, a
complete Schedules K-2 and K-3, Part X, if (a) it has a domestic partnership must complete Schedule K-2 with all of the
pass-through partner that has a direct or indirect foreign owner, partnership’s information and not just the total of the information
beneficiary, or partner; or (b) it knows or has reason to know that reported to the foreign partners on Schedule K-3.
another withholding agent failed to meet its withholding and
reporting obligations under chapters 3 and 4 with respect to the Section 1—Gross Income
income. An indirect owner, beneficiary, or partner is one that
owns an interest in the domestic pass-through partner through a The partnership uses Schedule K-2, Part X, Section 1, to report
pass-through entity. The foreign partnership should presume that each item of the partnership's gross income as one of the
a domestic pass-through partner has a foreign owner, partner, or following.
beneficiary if it doesn't have sufficient information or notice to • ECI derived from U.S. sources.
make this determination. • Foreign source ECI.
• Income from U.S. sources that is FDAP and isn't income
Note. A foreign partner doesn't include an individual who is effectively connected with the partnership’s conduct of a U.S.
treated as a U.S. resident under section 7701(b)(3). trade or business (non-ECI).
A partnership may rely on Form W-8, Certificate of Foreign • Other U.S. source non-ECI.
Status, and Form W-9, Request for Taxpayer Identification • Foreign source non-ECI.
Number and Certificate, from its partners to determine whether it The partnership must generally report items of gross income as
has a foreign partner. If a partner is a flow-through entity, the either:
partner, or its authorized representative, may notify the • U.S. source ECI in column (c),
partnership as to whether or not there is a foreign person with a • Foreign source ECI in column (d),
U.S. income tax reporting obligation with respect to a partnership • U.S. source non-ECI (FDAP) in column (e),
item. • U.S. source (Other) in column (f), or
• Foreign source non-ECI in column (g).
A partnership that doesn't have or receive sufficient Each line in this section of the schedule corresponds to a line on
information or notice regarding a partner should presume the Form 1065, Schedule K, lines 1 through 11. For a more detailed
partner is foreign or that a foreign person has a U.S. income tax description of the types of income listed on each line, see the
reporting obligation with respect to a partnership item and instructions for Form 1065, Schedule K.
complete Schedules K-2 and K-3, Part X, accordingly.
Column (a). Total. For each line in Section 1, enter in column
Example 17—pass-through partner; need to complete (a) the total amount of the applicable gross income. For
Part X. A partnership doesn't receive notice from a instance, if the partnership had $100 of Other income (loss) on
pass-through partner regarding whether or not the pass-through Form 1065, Schedule K, line 11, enter $100 in line 20, column
partner has any partners or owners that are foreign persons and (a).
doesn't otherwise have the information necessary to make this
determination. Because the partnership can't determine whether Column (b). Partner determination. For each line, enter in
a foreign person has a U.S. income tax reporting obligation with column (b) the amount of the applicable gross income the
respect to a partnership item, it must complete Schedules K-2 source of which must be determined by each partner individually.
and K-3, Part X, for the flow-through partner. This includes income from the sale of most personal property
Any foreign person that earns ECI from U.S. or foreign other than inventory, depreciable property, and certain intangible
sources or U.S. source FDAP income may have a U.S. tax property.
obligation for its applicable tax year. Furthermore, the applicable The source of income is important in determining how to
tax rates and reporting requirements are different for ECI and report income on Part X of Schedules K-2 and K-3. Each type of
U.S. source FDAP income. The partnership's reporting on income has its own sourcing rules. For more information on
Schedules K-2 and K-3, Part X, is necessary for a foreign person sourcing rules for particular items of income, see Pub. 514 and
with a direct or indirect interest in the partnership to properly section 865.
report and figure its U.S. income tax liability on any required U.S. Schedule K-3. For each line in Section 1, enter in column (b)
income tax returns (for example, Form 1120-F, Form 1040-NR, the partner's distributive share of the applicable gross income
and other applicable forms). Therefore, a partnership must the source of which needs to be determined by the partner. For
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 37

- 38 -

Page 38 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

each item of income in column (b), attach a statement identifying Don't include gross rental real estate income in
the column [(c), (e), or (f)] in which the income would be reported ! Schedule K-2, Part X, column (c), that isn't ECI to the
by the partnership if it were U.S. source and the column [(d) or CAUTION partnership. Even if a foreign partner elects to treat the
(g)] in which the income would be reported by the partnership if it income as ECI, report these amounts in Schedule K-2, Part X,
were foreign source. For example, if you have income from the column (e). However, the partnership should report the income
sale of personal property the source of which is based on the tax as ECI in Schedule K-3, Part X, column (c).
home of the partner under section 865, the statement should
indicate both how the income should be characterized (as ECI, Schedule K-3. In addition to the partner’s distributive share of
FDAP, or other) if it were U.S. source, and how it should be the amounts reported in Schedule K-2, Part X, column (c), report
characterized (as ECI or non-ECI) if it were foreign source. in Schedule K-3, Part X, column (c), any U.S. source income that
is subject to withholding under section 1446 based on a
Column (c). U.S. source ECI. For each line in Section 1, enter partner’s Form W-8ECI, Certificate of Foreign Person's Claim
the amounts of the applicable U.S. source gross income, as That Income Is Effectively Connected With the Conduct of a
determined by the partnership, that are, or are treated as, Trade or Business in the United States, including U.S. source
effectively connected with the partnership's conduct of a U.S. gross rental real estate income that the foreign partner elected to
trade or business. treat as ECI.
If the partnership conducts a U.S. trade or business, report in Column (d). Foreign source ECI. Enter in this column the
column (c) any U.S. source income other than FDAP or capital amounts of the applicable gross income that are foreign source
gains. ECI. Foreign source income is ECI only in limited circumstances.
Report U.S. source items of FDAP income or capital gains as If the partnership has an office or other fixed place of business in
ECI in column (c) only if the asset-use test, the the United States, the following types of foreign source income it
business-activities test, or both tests (explained below) are met. receives from that U.S. office are ECI.
If neither test is met, such items are generally not ECI. For more • Rents or royalties received for the use outside the United
information, see section 864(c)(2) and Regulations section States of intangible personal property described in section
1.864-4(c). 862(a)(4) if derived from the active conduct of a U.S. trade or
business.
Note. See Regulations section 1.864-4(c)(5) for special rules • Gains or losses on the sale or exchange of intangible personal
relating to banking, financing, or similar business activities. Such property located outside the United States or from any interest in
rules apply to certain stocks and securities of a banking, such property if such gains or losses are derived in the active
financing, or similar business in lieu of the asset-use and conduct of the trade or business in the United States.
business-activities tests. • Dividends, interest, or amounts received for the provision of a
guarantee of indebtedness, issued after September 27, 2010, if
Asset-use test. FDAP income and capital gains are ECI if such derived from the active conduct of a U.S. banking, financing, or
items are derived from assets used in, or held for use in, the similar business or if the principal business of the partnership is
conduct of a U.S. trade or business. For example, the following trading in stocks or securities for its own account.
items are ECI. • Income from the sale or exchange of inventory outside the
• Income earned on a trade or note receivable acquired in the United States through the U.S. office, unless the property is sold
conduct of the U.S. trade or business. or exchanged for use, consumption, or disposition outside the
• Interest income earned from the temporary investment of United States and an office of the partnership in a foreign
funds needed in the U.S. trade or business. country materially participated in the sale. See section 865 for
additional information regarding the source of this income.
Business-activities test. FDAP income and capital gains are • Any income or gain that is equivalent to any item of income or
ECI if the activities of the U.S. trade or business were a material gain listed above must be treated in the same manner as such
factor in the realization of the passive income items. item for purposes of determining whether that income is foreign
source ECI. See section 864(c)(5)(A) and Regulations section
Other income treated as U.S. source ECI. If a partnership 1.864-7 for the definition of office or other fixed place of business
isn't engaged in a U.S. trade or business during the tax year, it in the United States. See sections 864(c)(5)(B) and (C) and
will report amounts in column (c) if the partnership: Regulations section 1.864-6 for special rules for determining
• Had current year income or gain from a sale or exchange of when foreign source income is from an office or other fixed place
property or from performing services (or any other transaction) in of business in the United States.
any other tax year that would have been ECI if received by a If income is reported in column (d), see the Instructions for Form
foreign person in that other tax year (see section 864(c)(6)), 8804 for any Form 8804 filing obligation.
• Had current year income or gain from a disposition of property
that is no longer used or held for use in conducting a U.S. trade Column (e). U.S. source non-ECI (FDAP). For each line, enter
or business within the 10-year period before the disposition that in column (e) amounts of the applicable gross income if all of the
would have been ECI immediately before such cessation (see following apply.
section 864(c)(7)), or • The amount is FDAP (described below).
• Had gain or loss from disposing of a U.S. real property interest • The amount is includible in gross income. Therefore, receipts
as defined in section 897(c). that are excluded from income (for example, interest income
received on state and local bonds that is excluded under section
Note. Such amounts are always U.S. source ECI and should 103) wouldn't be reported.
never be reported in any other column. • The amount is received from U.S. sources.
If income is reported in column (c), see the Instructions for • The amount received is non-ECI. Amounts that are ECI
Form 8804, Annual Return for Partnership Withholding Tax, for should be reported in column (c) or column (d).
any Form 8804, filing obligations. • The amount received isn't exempt (by the Code) from taxation.
For example, interest on deposits that are exempted by section
881(d) wouldn't be included as income by a foreign partner. In
addition, certain portfolio interest isn't taxable for obligations
issued after July 18, 1984. See section 881(c) for more details.
Amounts that are FDAP include the following.

38 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 39 -

Page 39 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• Interest (other than OID as defined in section 1273), OID instrument or gain on the sale or exchange of the OID
dividends, rents, royalties, salaries, wages, premiums, annuities, instrument that are taxable on a gross basis to foreign partners
compensation, and other passive gains, profits, and income. under section 881(a)(3)(8) or section 871(a)(1)(C)(ii) (as
• Gains described in section 631(b) or (c), relating to disposal applicable), these amounts should be reported in Schedule K-2,
of timber, coal, or domestic iron ore with a retained economic Part X, column (e), as interest income or gain, as appropriate.
interest. These amounts should also be entered as a negative adjustment
• Gains on a sale or exchange of an OID obligation, the amount in column (f) to ensure that the total OID reported on Part X
of the OID accruing while the obligation was held unless this reconciles with OID reported on Form 1065, Schedule K. Attach
amount was taken into account on a payment. a statement explaining that the negative adjustment in column (f)
• On a payment received on an OID obligation, the amount of is for reconciliation purposes only and isn't relevant to the foreign
the OID accruing while the obligation was held, if such OID partner’s tax liability and therefore doesn’t need to be reported
wasn't previously taken into account and if the tax imposed on on the foreign partner’s tax return. The partnership should take a
the OID doesn't exceed the payment received less the tax similar approach for reporting distributive share amounts to a
imposed on any interest included in the payment received. This foreign partner on Schedule K-3.
rule applies to payments received for OID obligations issued Example 18—Part X; OID. In addition to other income and
after March 31, 1972. Certain OID isn't taxable for OID expense items, a partnership accrues $100 OID in Year 1
obligations issued after July 18, 1984. See section 881(c) for reported on Form 1065, Schedule K. On Schedule K-2, Part X,
more details. For rules that apply to other OID obligations, see for Year 1, the partnership should report this amount as interest
Pub. 515. in column (f) (such amount is also included in column (a) for the
• Gains from the sale or exchange of patents, copyrights, and total). In Year 2, the partnership receives a payment of $50 on
other intangible property if the gains are from payments that are the same instrument taxable to its foreign partners under section
contingent on the productivity, use, or disposition of the property 881(a)(3)(B) or section 871(a)(1)(C)(ii) (as applicable). On its
or interest sold or exchanged. Schedule K-2, Part X, for Year 2, the partnership should report
For more information, see section 881(a) and Regulations $50 as interest in column (e) and ($50) as a reconciliation
section 1.881-2. adjustment in column (f). The partnership should take the same
If the partnership had U.S. source rental real estate approach for reporting a foreign partner’s distributive share of
OID amounts on Schedule K-3 in both Years 1 and 2.
! income that wasn't ECI to the partnership, include such
CAUTION amounts in Schedule K-2, Part X, column (e). Foreign
Column (g). Foreign source non-ECI. For each line, enter
partners that have elected to treat any such amounts as ECI are amounts of gross income which are neither U.S. source nor ECI.
required to report and figure their U.S. income tax liabilities in
accordance with their ECI elections. This income is reported in Line 8. Dividend equivalents. Except as provided in the next
Schedule K-3, Part X, column (c), for such partners. sentence, the partnership must report its dividend equivalents in
columns (a) and (e). The partnership shouldn’t report dividend
If income is reported in column (e), see the instructions for equivalents with respect to any partnership interest that the
Forms 1042 and 1042-S for any filing obligation. partnership knows is held directly and indirectly (including
Schedule K-3. For each line in Section 1, enter in column (e) through one or more pass-through entities) by a partner that isn’t
the partner's distributive share of the applicable income that is subject to section 871(m). In such a case, the partnership should
U.S source FDAP and not ECI. Don't include income subject to report dividend equivalents in columns (a) and (e) only with
withholding under section 1446 based on a partner’s Form respect to its other partnership interests.
W-8ECI or rental real estate income which a foreign partner has Schedule K-3. Except as provided in the next sentence, the
elected to treat as ECI. That income should instead be reported partnership must report its dividend equivalents in Schedule K-3,
in column (c). Part X, Section 1, line 8, columns (a) and (e), with respect to its
Column (f). U.S. source non-ECI (other). Include in this partnership interests. To the extent the partnership knows a
column U.S. source gross income amounts that aren't ECI and partnership interest is held directly and indirectly (including
wouldn't be subject to tax in the hands of a foreign corporation through one or more pass-through entities) by a partner that isn’t
under section 881 or in the hands of a nonresident alien under subject to section 871(m), it doesn’t have to report allocations
section 871(a). Such amounts include, for example, tax-exempt with respect to that partnership interest in columns (a) and (e).
portfolio interest or municipal bond interest, U.S. source capital Line 11. Net long-term capital gain. Don't include gains
gains, and transportation income subject to tax under section reported on lines 12, 13, and 14 on line 11.
887.
Schedule K-3. Report the partner’s distributive share of the Line 12. Collectibles (28%) gain. Report collectibles gain on
amounts in Schedule K-2, Part X, column (f). For any amount line 12 and not line 11.
that is transportation income subject to tax under section 887, Line 13. Unrecaptured section 1250 gain. Report
also provide the partner the statement described in the unrecaptured section 1250 gain on line 13 and not on line 11. If
instructions for Form 1040-NR, line 23c. If you owe this tax, you gain is both unrecaptured section 1250 gain and net section
must attach a statement to your return that includes the 1231 gain, report the gain on line 13 and not on line 14, but
information described in chapter 4 of Pub. 519. include an attachment indicating the amount of unrecaptured
Accrued OID reported on Form 1065. The amount of accrued section 1250 gain that is also net section 1231 gain.
OID reported on Form 1065, Schedule K, that isn't taxable to Line 14. Net section 1231 gain. Report net section 1231 gain
foreign partners should be reported as interest income in on line 14 and not on line 11 unless such amount is also
Schedule K-2, Part X, column (f). Attach a statement to Form unrecaptured section 1250 gain. See the instructions for line 13.
1065 with respect to Part X clarifying that these amounts aren't
taxable to foreign partners and doesn’t need to be reported on Line 20. Other income (loss) not included on lines 1
the foreign partner’s tax return. The partnership should take a through 19. Determine other income (loss) without regard to
similar approach for reporting a foreign partner’s distributive any amount reported on line 8.
share of OID amounts on Schedule K-3.
OID payments or gains taxable on a gross basis to a for-
eign partner. When the partnership receives payments on the

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 39

- 40 -

Page 40 of 45            Fileid: … 1065schk-2/2023/a/xml/cycle03/source                                12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 2—Deductions, Losses, and Net Income                         Charitable contribution deductions are apportioned solely to U.S. 
                                                                     source gross income; see Regulations section 1.861-8(e)(12). 
In computing a foreign corporation's or nonresident alien's ECI,     Include amounts reported on line 16 in column (c).
deductions are allowed only if they're allocated and apportioned     Lines 17 and 18. Other deductions. Enter other types of 
to income that is effectively connected with a U.S. trade or         deductions not described in the prior line items. If the partnership 
business; see sections 861(b), 873, and 882(c). To determine         has more than one other type of deduction, separately identify 
ECI, a foreign corporation and nonresident alien individual must     each type of deduction on lines 17 and 18. If there are more than 
allocate and apportion deductions and losses to gross income in      two types of other deductions, attach a statement to both 
the ECI statutory grouping and to gross income in the non-ECI        Schedules K-2 and K-3 to expand the schedules to include 
residual grouping; see Regulations section 1.861-8(f)(1)(iv). For    information on Section 2 identifying the amount and type of 
additional guidance for foreign corporations, see Schedule H         deduction.
(Form 1120-F) and Schedule I (Form 1120-F). For additional 
guidance for nonresident aliens, see the Instructions for Form 
1040-NR.                                                             Section 3—Allocation and Apportionment 
                                                                     Methods for Deductions
Use Section 2 to report the partnership's deductions and 
losses that will be utilized to determine the foreign partner's ECI. Section 3 provides information a partner may use to apportion 
The line items on Section 2 generally correspond to the              deductions to ECI or non-ECI. See Regulations sections 1.861-8 
deductions separately reported on Form 1065, Schedule K. On          through 1.861-20 and Temporary Regulations sections 1.861-8T 
Schedule K-3, Part X, report the partner's share of the amounts      through -9T for more detailed information. The ratios listed below 
reported by the partnership on Schedule K-2, Part X.                 generally correspond to the ratios on Schedule H (Form 1120-F), 
                                                                     Part III.
Column (b). Partner determination.   Certain deductions and 
losses must be allocated and apportioned by the partner, for         On Schedule K-3, Part X, report the partner’s share of the 
example, R&E expenses and interest expense.                          amounts reported by the partnership on Schedule K-2, Part X.
Columns (c) and (d). Partnership determination—ECI.                  Line 1a. Gross ECI. Enter the partnership’s gross ECI from 
Enter deductions definitely related and allocated to ECI under,      Section 1, line 21, sum of columns (c) and (d).
for example, Regulations sections 1.861-8 through 1.861-20 and 
Temporary Regulations sections 1.861-8T and -9T.                     Line 1b. Worldwide gross income.  Enter the partnership’s 
                                                                     worldwide gross income from Section 1, line 21, column (a).
        Don't include deductions attributable to gross rental real 
                                                                     Line 2a. Average U.S. assets (inside basis).   Report the 
CAUTION isn't ECI to the partnership. Even if a foreign partner 
!       estate income in Schedule K-2, Part X, column (c), that      partnership’s basis in its average U.S. assets for purposes of 
elects to treat the income as ECI, report these deductions in        applying the asset method as defined in Regulations section 
Schedule K-2, Part X, column (e). However, the partnership           1.884-1(d)(3)(ii) to calculate interest expense under Regulations 
should report the deductions in Schedule K-3, Part X, column         section 1.882-5(b).
(c).                                                                 Line 2b. Worldwide assets. Report the partnership’s basis in 
                                                                     its average worldwide assets for purposes of Regulations section 
Columns (e) through (g). Partnership determina-                      1.882-5(b) and the asset method as defined in Regulations 
tion—non-ECI. Enter deductions definitely related and                section 1.884-1(d)(3)(ii). If the partnership doesn't report an 
allocated to non-ECI under, for example, Regulations sections        amount on line 2a because there aren’t any U.S. assets, then the 
1.861-8 through 1.861-20 and Temporary Regulations sections          partnership doesn’t need to report an amount on line 2b.
1.861-8T and -9T.
                                                                     Line 3a. U.S.-booked liabilities of the partnership.     Enter the 
Line 2. R&E expenses.   In general, R&E expenses are                 partnership's average U.S.-booked liabilities as defined in 
allocated and apportioned by the partner and reported in column      Regulations section 1.882-5(d)(2) using the average defined in 
(b).                                                                 Regulations section 1.882-5(d)(3).
Line 7. Interest expense on U.S.-booked liabilities. The             Line 3b. Directly allocated partnership indebtedness.       Enter 
partnership reports its interest expense on U.S.-booked liabilities  the portion of the principal amount of the partnership’s 
as described in Regulations section 1.882-5(d)(2)(vii). This is      indebtedness outstanding at year end that meets the 
relevant for determining the foreign corporation’s interest          requirements of Regulations section 1.861-10T(b) or (c), as 
expense allocable to ECI.                                            limited by Regulations section 1.861-10T(d)(1), as described in 
Line 10. Section 59(e)(2) expenditures. Don't include R&E            Regulations section 1.882-5(a)(1)(ii)(B). See Regulations 
expenses on this line. Instead, include R&E expenses that are        section 1.861-10T(d)(2).
also section 59(e)(2) expenditures on line 2.                        Line 4a. Personnel of U.S. trade or business.  Enter on 
Line 12. Net long-term capital loss. Don't include losses            line 4a the number of personnel who worked in the partnership's 
reported on line 13.                                                 U.S. trade or business during the tax year. The partnership may 
                                                                     use any reasonable method to determine the number of 
Line 13. Collectibles loss. Report collectibles loss on line 13 
                                                                     personnel, including data that is already prepared and used by 
and not on line 12.
                                                                     the partnership for a non-tax business purpose. For example, if 
Line 15. Other losses.  Each loss must be separately reported        the partnership maintains headcount data (such as weighted 
and shouldn’t be combined on line 15. Instead, if there are more     average headcount data) in its personnel records or for other 
than two other losses during the year, attach a statement to both    purposes such as budgeting, planning, and control, such 
Schedules K-2 and K-3 to expand the lines to report the amount       numbers may be used in the numerator.
of each additional loss.
                                                                     Line 5. Gross receipts from sales or services by SIC code. 
Line 16. Charitable contributions. Charitable contributions          A partnership isn't required to complete this line 5 unless either 
may be deducted whether or not they're effectively connected         (a) the partnership incurs R&E expense; or (b) the partner is 
with a U.S. trade or business; see sections 873(b)(2) and 882(c)     expected to license, sell, or transfer its intangible property to the 
(1)(B), and Regulations section 1.882-4(b) for more information.     partnership (as provided in Regulations section 1.861-17(f)(3)). 

40                                                                   Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 41 -

Page 41 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

For purposes of determining ECI, R&E expenses are definitely partnership is a partnership that carries on a trade or business of
related to gross intangible income reasonably connected with dealing or trading in securities or holds significant investments in
relevant broad product categories of the taxpayer and are securities. A partnership holds a significant investment in
allocable to gross intangible income as a class related to such securities for this purpose if either (a) 25% or more of the value
product categories. The product categories are determined by of the partnership's assets consist of underlying securities or
reference to the three-digit classification of the SIC code. In potential section 871(m) transactions, or (b) the value of the
general, the R&E expenses are apportioned based on gross underlying securities or potential section 871(m) transactions
receipts. See Regulations section 1.861-17. Because R&E equals or exceeds $25 million.
expenses are allocated and apportioned by the partner, the Generally, an underlying security is any interest in an entity
partnership reports to its partners the gross receipts generating that could give rise to a U.S. source dividend (such as shares of
ECI by SIC code. stock of a domestic corporation), and a potential section 871(m)
For each SIC code, in line 5, column (ii), enter the gross transaction is a securities lending or sale-repurchase
receipts that resulted in ECI, and in line 5, column (iii), enter the transaction, a notional principal contract, or any other financial
worldwide gross receipts. Such gross receipts include both the transaction that references one or more underlying securities.
partnership's gross receipts and certain other controlled or See Regulations section 1.871-15 for additional information,
uncontrolled parties' gross receipts. See Regulations sections including the definitions of underlying securities and potential
1.861-17(d)(3) and (d)(4). section 871(m) transactions.
If there are more than two SIC codes, attach a statement to Line 2. On Schedule K-2, specify the total number of units the
Schedules K-2 and K-3 to expand the schedule to include partnership has issued and outstanding. On Schedule K-3,
information on line 5 for the additional SIC codes. specify the number of units of the partnership held by the
Lines 7 and 8. Other allocation and apportionment key. partner.
Report other apportionment keys than those identified on lines 1 Line 3. On both Schedules K-2 and K-3, for each allocation
through 5, as applicable. See Regulations section 1.861-8 period, specify when the allocation period begins and ends, as
through -20 and Temporary Regulations section 1.861-8T well as the dividends, the dividend equivalents, and the total of
and -9T for more detailed information. the dividends and dividend equivalents for the applicable period.
For example, a partnership might enter ECI COGS on line a, On Schedule K-2, the information is for all the issued and
column (i), and total COGS on line b, column (i). If ECI COGS is outstanding units of the partnership. On Schedule K-3, the
$100, the partnership would enter $100 in line a, column (ii), and information is for the units of the partner to which the
if COGS is $200, the partnership would enter $200 in line b, Schedule K-3 relates.
column (ii). As another example, a partnership might enter The allocation period should be determined in accordance
average ECI assets in line a, column (i), and the average total with section 706 and the regulations thereunder. The value of a
assets in line b, column (i). The average ECI assets are the partnership's assets is equal to their FMV, except that the value
partnership’s basis in its assets that generate ECI for purposes of any notional principal contract, futures contract, forward
of Regulations section 1.861-9T(e)(7) using the average tax contract, option, and any similar financial instrument held by the
book value as defined in Regulations section 1.861-9(g). The partnership is deemed to be the value of the notional securities
average total assets are the partnership’s basis in all of its assets referenced by the transaction. See Regulations section 1.871-15
for purposes of Regulations section 1.861-9T(e) using the for additional information regarding dividend equivalents. You
average tax book value as defined in Regulations section can add additional lines if needed. The amounts for the
1.861-9(g). If the partnership doesn't have assets that generate dividends, dividend equivalents, and total in columns (iii), (iv),
ECI, then a partnership doesn’t need to report an amount on and (v) should be reported to the fourth decimal point, rounding
line 7b, unless the partner has requested this amount. If there up for any excess amount. For example, if the amount of a
are more than two other types of apportionment keys, attach a dividend was 0.12344, the reported amount should be 0.1235.
statement to Schedules K-2 and K-3 to expand the schedules to
include all of the information for those apportionment keys. Schedule K-3, Part XIII (Foreign Partner's
Distributive Share of Deemed Sale Items on
Section 4—Reserved for Future Use Transfer of Partnership Interest)
Note. There isn't a corresponding part on Schedule K-2 with
Schedule K-2, Part XI (Section 871(m) Covered respect to Schedule K-3, Part XIII. This part provides the
Partnerships), and Schedule K-3, Part XI information for a foreign partner to use to determine the gain or
(Section 871(m) Covered Partnerships) loss it reports on its return from the transfer of an interest in the
partnership.
Note. Certain partners that enter into section 871(m) Partners will use this information as follows. A partner that:
transactions referencing units in the partnership will use the • Is a nonresident alien individual, foreign trust, or foreign estate
information in this part to determine their U.S. withholding tax completes Schedule P (Form 1040-NR);
and reporting obligations with respect to those transactions • Is a foreign corporation completes Schedule P (Form 1120-F),
under section 871(m) and related rules. Parts IV and V; or
• Had an installment sale, see Form 6252.
Schedules K-2 and K-3, Part XI, must be completed if you're This part generally applies to a partnership that is directly or
a PTP that (a) is a covered partnership as defined in Regulations indirectly engaged in the conduct of a trade or business in the
section 1.871-15(m)(1); or (b) directly or indirectly holds an United States (U.S. trade or business) and had a foreign partner
interest in a lower-tier partnership that is a covered partnership, if either:
in each case regardless of whether your partners are domestic The foreign partner transferred an interest in the partnership
or foreign. •
(including a distribution that results in the recognition of gain or
Line 1. If the partnership is a PTP and (a) a covered loss to a partner (see Regulations section 1.731-1(a)), or
partnership, or (b) directly or indirectly holds an interest in a • The partnership directly or indirectly transferred an interest in
lower-tier partnership that is a covered partnership, check the a partnership that engaged in a U.S. trade or business.
box on Part XI, line 1, of both Schedules K-2 and K-3. A covered

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 41

- 42 -

Page 42 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

The partnership must complete lines 1 through line 3 of this part property in a fully taxable transaction for cash in an amount
if it is notified or otherwise knows that a transfer subject to equal to the FMV of the property immediately before the
section 864(c)(8) has occurred. A partnership that makes a partner's transfer of the interest in the partnership. See
distribution is treated as having actual knowledge of the transfer. Regulations section 1.751-1(a).
See Regulations section 1.864(c)(8)-2(a)(1) and Pub. 541 for the
Lines 2 and 3. Aggregate effectively connected ordinary
rules regarding foreign transferor notifications.
gain or (loss) that would be recognized on the deemed
If the transfer was a section 751(a) exchange, the partnership sale of section 751 property, and Aggregate effectively
must also file a Form 8308, Report of a Sale or Exchange of connected capital gain or (loss) that would be recognized
Certain Partnership Interests. See Regulations section on the deemed sale of non-section 751 property.
1.6050K-1. Determining the amount to report on line 2 and line 3 requires a
Tiered partnerships. If a foreign transferor transferred an three-step process. These instructions provide an overview of
interest in an upper-tier partnership that holds, directly or that process outlined below. For more information, see
indirectly through one or more partnerships, an interest in a Regulations section 1.864(c)(8)-1.
lower-tier partnership engaged in a U.S. trade or business, then Step 1. With respect to each asset the partnership holds,
the upper-tier partnership must include in the foreign transferor’s determine the amount of gain or loss that the partnership would
aggregate deemed sale ECI items the items derived from the recognize in connection with a deemed sale to an unrelated
lower-tier partnership; see Regulations section 1.864(c)(8)-2(b) party in a fully taxable transaction for cash equal to the asset’s
(2)(i). Therefore, to complete this part, the upper-tier partnership FMV immediately before the partner’s transfer of its partnership
will need to obtain the amount of the upper-tier partnership’s interest.
distributive share of deemed sale effectively connected gain or Step 2. Determine the amount of that gain or loss that would
loss from the lower-tier partnership. Under these circumstances, be treated as effectively connected gain or loss (deemed sale
the lower-tier partnership may provide that information to the effectively connected gain and deemed sale effectively
upper-tier partnership using Part XIII even though the upper-tier connected loss).
partnership didn't actually transfer its interest in the lower-tier Step 3. Determine the partner’s distributive share of these
partnership. A lower-tier partnership that uses Part XIII should deemed sale gain or loss amounts.
complete it as though the upper-tier partnership transferred its Enter on line 2 the foreign transferor’s distributive share of
entire interest in the lower-tier partnership. Part XIII may be used deemed sale effectively connected ordinary gain or loss
by each tier of partnerships until it reaches the uppermost tier recognized on the transfer of section 751(a) property.
whose interest was transferred. To indicate that there was no
actual transfer by an upper-tier partnership of its interest in a Enter on line 3 the foreign transferor’s distributive share of
lower-tier partnership, the lower-tier partnership should leave deemed sale effectively connected capital gain or loss
item A blank. When the upper-tier partnership receives the recognized on the transfer of non-section 751(a) property.
information from the lower-tier partnership, whether reported on Lines 4 and 5. Aggregate effectively connected gain (loss)
Part XIII or in some other manner, it should use this information that would be recognized on the deemed sale of section
to complete the Part XIII it issues to its foreign transferor. 1(h)(5) collectible assets, and Aggregate effectively con-
Item A. Date of transfer of the partnership interest. Enter nected gain that would be recognized on the deemed sale
the date that the foreign partner transferred an interest in the of section 1(h)(6) unrecaptured section 1250 gain assets.
partnership or the date that the partnership transferred an Lines 4 and 5 don’t apply to a foreign transferor that is a
interest in a partnership that engaged in a U.S. trade or corporation. These amounts are subsets of the amount of the
business. The partner's notification should provide this date to aggregate effectively connected capital gain (loss) that would be
you. If there are multiple transfers during the tax year with recognized on the deemed sale of non-section 751 property
respect to a foreign partner, complete a separate schedule for reported on line 3.
each transfer. Enter on line 4 the foreign transferor's distributive share of
deemed sale effectively connected gain recognized on the
Item B. Identify the number of units or the percentage in- transfer of section 1(h)(5) collectible assets.
terest in the partnership transferred. Enter either the
percentage interest in the partnership or the number of units in Enter on line 5 the foreign transferor's distributive share of
the partnership that the partner transferred in item B1 or B2, deemed sale effectively connected gain recognized on the
respectively. transfer of section 1(h)(6) unrecaptured section 1250 gain
assets.
Enter zero for item B if a partnership is completing this part for
a partner that is treated as transferring an interest in the Line 6. Check this box if any amount on lines 2 through 5 is
partnership because it received a distribution but whose determined (in whole or in part) under Regulations section
ownership interest in the partnership remains unchanged. 1.864(c)(8)-1(c)(2)(ii)(E) (material change in circumstances
rule for a deemed sale of the partnership's inventory prop-
Item C. Check the box in item C that identifies the type of erty or intangibles). As part of the three-step process for
interest the partner transferred in the partnership. Complete a determining the amount to report on lines 2 and 3, Regulations
separate schedule for each type of partnership interest (such as section 1.864(c)(8)-1 provides certain look-back rules that apply
capital or preferred) transferred, and complete each schedule for purposes of sourcing the deemed sale gain or loss with
based on the portion of the type of interest transferred. If there respect to inventory property and intangibles held by a
are multiple classes of the same type of partnership interest, partnership. However, if a material change in circumstances
complete a separate schedule for each class of interest during the look-back period causes these rules to reach an
transferred. If the categories in item C aren't narrow enough to inappropriate sourcing result, Regulations section 1.864(c)
distinguish between different classes, then check “Other” and (8)-1(c)(2)(ii)(E) allows, in certain cases, the relevant look-back
explain. rule for inventory property or intangibles to be applied by
Line 1. Total ordinary gain or (loss) that would be recog- reference to the date on which the material change in
nized on the deemed sale of section 751 property. Enter the circumstances occurs. The partnership must check the box
amount of income or loss from section 751(a) property that provided on line 6 if the material change in circumstances rule is
would have been allocated to the foreign partner with respect to used to determine the amount provided on line 2 or line 3.
the interest transferred if the partnership had sold all of its

42 Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

- 43 -

Page 43 of 45 Fileid: … 1065schk-2/2023/a/xml/cycle03/source 12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Line 7. Capital gain or (loss) that would be recognized un- partnership isn't subject to section 864(c)(8). Under these
der section 897(g) on the deemed sale of U.S. real property circumstances, the partnership must enter on line 7 for purposes
interests. Section 897(a) treats gain or loss from the of section 897(g) the foreign transferor’s distributive share of the
disposition of a U.S. real property interest (as defined in section partnership’s gain or loss on the deemed sale of the U.S. real
897(c)) by a nonresident alien or foreign corporation as gain or property interests and should not complete lines 1 through 6. A
loss that is effectively connected to a trade or business within the partnership that has this type of income and is also engaged in a
United States. Section 897(g) generally provides that, under U.S. trade or business should instead include this income on
regulations prescribed by the Secretary, the amount of any line 3 and should not complete line 7.
money, and the FMV of any property, received by a nonresident Line 8. Gain that would be recognized under section 897(g)
alien individual or foreign corporation in exchange for all or part on the deemed sale of section 1(h)(6) unrecaptured sec-
of its interest in a partnership, trust, or estate shall, to the extent tion 1250 gain assets. A partnership that has this type of gain
attributable to U.S. real property interests, be considered as an will be engaged in a U.S. trade or business and should report
amount received from the sale or exchange in the United States this amount on line 5. Therefore, there isn’t a need to complete
of such property. A partnership must complete line 7 if it holds this line.
U.S. real property interests and the transfer of an interest in the

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023) 43

- 44 -

Page 44 of 45          Fileid: … 1065schk-2/2023/a/xml/cycle03/source                    12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Index
 
                                         Example 07—Parts II and III required 
A                                        for partnership with no foreign        I
                                         activity 10
Allocation and apportionment                                                    Identifying info., partners 5
  methods for deductions    40           Example 08—Part II, not Part III, 
                                         required for partnership with no       Identifying info., partnership           5
                                         foreign activity 10                    Income re-sourced by treaty              12
B                                        Example 09—Part II: multiple country   Interest expense apportionment 
Base erosion and anti-abuse tax          sources: gross income      13           factors 15
  (Section 59A)  33                      Example 10—Parts II and III: capital   Interest expense on U.S. booked 
Base erosion payments and base           gains and losses   13                   liabilities 40
  erosion tax benefits 34                Example 11—Parts II and III: asset     Interest expense specifically 
                                         method apportionment of interest        allocable under Reg. 1.861–10 
C                                        expense      16                         and -10T    14
Capital gains and losses 13              Example 12—Part III, Section 4: 
                                         multiple country sources: foreign      N
Category of income codes    31           taxes   18                             Name of partnership  5
Charitable contributions 14 40,          Example 13—partners’ reporting of      Net income (loss):
Codes for categories of income    25     DEI and QBAI     20
                                                                                 Controlled foreign corporation 
Codes for classes of PFIC shares     27  Example 14—domestic corporate           (CFC)    31
Codes for types of tax 17                partner; specified tangible 
Compensation/consideration paid for      property   21                           Deduction eligible income (DEI)           20
  services excepted by section           Example 15—Part VIII: subpart F         Effectively connected income 
  59A(d)(5)  35                          income group reporting by unit    31    (ECI)   40
Compensation/consideration paid for      Example 16—Part VIII: more than two 
  services not excepted by section       source countries   33                  O
  59A(d)(5)  35                          Example 17—pass-through partner;       Other forms  8
Computer-generated Schedules             need to complete Part X    37          Other income  14
  K-2 3                                  Example 18—Part X; OID     39          Other information for preparation of 
Cost of goods sold (COGS):              Exception for Form 8621   8              Form 8993    22
  Deduction eligible income (DEI) 20    Excluded foreign source income     31   Other international transactions           5 9, 
  Effectively connected income                                                  Other tax information 19
    (ECI) 41                            F
  Foreign-derived deduction eligible                                            P
    income (FDDEI)    21                FDII deduction apportionment 
                                         factors 16
  In general 11                                                                 Part applicability 5
                                        Foreign branch category income     11
Country codes   6 12,                                                           Partner determination 12
                                        Foreign oil and gas taxes 5
Currency 4                                                                      Partner loan transactions   8
                                        Foreign partner’s distributive share of Partners eligible to claim credit          9
                                         deemed sale items  41                  Partnership determination   11
D                                       Foreign partners’ character and         Partnership election codes               28
Deductions   14                          source of income and                   Partnership QBAI   20
Deductions, other 14                     deductions   37
DEI and QBAI on Form 8993     20        Foreign tax translation 6               Partnership’s interest in foreign 
                                                                                 corporation   30
Distributions from foreign corps. to    Foreign taxes 14                        Partnerships with no foreign partners 
  partnership  23                       Foreign taxes deductible but not         and limited or no foreign activity          9
Dividends, ordinary and qualified    13  creditable 18                          Parts of Sch. K-2 and Sch. K-3, in 
Downstream loans  8                     Foreign taxes paid or accrued to         general 4
Dual consolidated loss 8                 sanctioned countries    17             Passive group codes   31
                                        Foreign taxes related to PTEP 
E                                        resourced by treaty    17              PFIC, QEF general information              27
                                        Foreign-derived DEI on Form 8993     21 Purchase or creation of property 
                                                                                 rights for intangibles 34
EIN 5                                   Foreign-derived gross receipts 21
Examples:                               Form 1116 exemption exception      9    Q
  Example 01—Part IX required to        Form 5471 information   8
    determine base erosion                                                      Qualified derivatives dealer (QDD)           5
    payments   2                        Form 8621, information for  26
  Example 02—domestic filing                                                    R
    exception met; issuance of          G
    Schedule K-3 not required  3        Gains on sales personal property   5    R&E expenses:
  Example 03—domestic filing            General filing instructions 11           Apportionment factors 14 22, 
    exception not met 3                 General property 22                      By SIC code   23
  Example 04—domestic filing            Gross income  12                         Effectively connected income 
                                                                                 (ECI)   40
    exception met; Schedule K-3         Gross receipts 21
    issuance still required 3                                                    Foreign tax credit 14
  Example 05—Part I, box 5; high-taxed                                          Rental income  13
    income   7                          H
                                                                                Rents, royalties, and license fees           34
  Example 06—Form 1116 exemption     9  High-taxed income 6
                                        How to complete Schs. K-2 and K-3     4

          44

- 45 -

Page 45 of 45      Fileid: … 1065schk-2/2023/a/xml/cycle03/source      12:25 - 3-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

                                     Section 951A category income 11  Tiered partnerships 42
S                                    Section 986(c) gain and loss 13  Total deductions (Part IX) 33
Section 1291 and other               Section 987 gain and loss 13     Total gross income 14
  Information 29                     Section 988 gain and loss 13
Section 250 deduction re FDII 19     Splitter arrangements 6          U
Section 267A disallowed deduction  7 Stewardship expenses  15         Upstream loans 8
Section 59(e)(2) expenditures 40
Section 871(m) covered               T                                W
  partnerships 41                    Table 1. Information on Personal When to file 3
Section 901(j) income 11               Property Sold 5                Where to file 3
Section 951(a) inclusions 14         Taxes assigned to section 951A   Withholding foreign partnership                    5
Section 951(a)(1) and section 951A     category 17
  inclusions 24

                                                                                                                          45

PDF file checksum: 1725304491

(Plugin #1/9.12/13.0)