How do I input Schedule K-2 and Schedule K-3 in a 1065 return using worksheet view in CCH® ProSystem fx® Tax and CCH Axcess™ Tax?

  • Article Type:
  • How To
  • Last Modified:
  • 07/25/2022

Objectives

To guide preparers to the available inputs for populating specific parts of Schedule K-2.

 

Environment

  • CCH ProSystem fx Tax
  • CCH Axcess
  • CCH Axcess Tax
  • 1065
  • Worksheet
  • Schedule K-2
  • Schedule K-3

Procedure

Important Note:

  • Software release 2021.04000 / 2021-4.0, per CCH Software News, June 24, 2022:
    • Federal Schedules K-2 and K-3 are now available for electronic filing through XML with the return. Previously, CCH ProSystem fx Tax / CCH Axcess Tax was limited to a 50-partner limit as a PDF autogenerated attachment. With this release, we will no longer generate PDF attachments for Schedules K-2 and K-3. Beginning with this release, Schedules K-2 and K-3 can only be filed through the electronic filing XML and we currently have a 250-partner limit. Upload speed of the return may be affected by the size/information in the return. These delays may appear to the user as longer processing times. With larger returns, a message of “Not Responding” may display in the application. If you see a delay, please wait for the upload to complete before attempting to interrupt the upload. In future releases later this year, the partner limit is planned to be increased.
  • Schedule K-2: The Schedule K-2 form will be generated solely based on the Schedule K-2 worksheets. 
  • Schedule K-3: By default, the Schedule K-3 form will be autogenerated for all shareholders whenever there is input on the Schedule K-2 worksheet. 

This article assumes that the return already has partner input. In a partnership return, go to Partners > Partner Information. Complete a list of partners as applicable to your client.

Inputs below will appear in both the Partners > Schedule K-2 input worksheet and the Foreign > Schedule K-2 worksheets as they are synchronized together.

If an input should be specially allocated, please utilize the Ratio ID fields which are available with nearly all input worksheets and sections below.

  1. Go to Partners > Schedule K-2 - Distributive Share Items - International Parts 1-V.
  2. Expand Section 1 - Schedule K-2 General Information and Part I.
  3. In Lines 1-4 - Complete as applicable.
Part I (Schedule K-2, pages 1 and 2)
  1. In Lines 5-16 - Partnership's Other Current Year International Information, select the checkbox to populate Schedule K-2, page 1, Part I, lines 1-12.
Part II - Foreign Tax Credit Limitation
Section 1 - Income (Schedule K-2, page 1, 2, and 3)
  1. Expand Section 2 - Schedule K-2 Part II Section 1 Income.
  2. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
    • Section 986(c), 987, 988 gains, and Guaranteed payments are by default assumed as US Source and do not allow an input for Country Code and thus are not included in a subtotal sorted by country in Sch K-2 / K-3, line 24A, 24B, or 24C on release 2021.03010 / 2021-3.1 and prior.
    • With release 2021.03020 / 2021-3.2, the 1065 system will allow a Country Code input for Row Codes 5, 16, 17, and 18, and thus provide the option to include or exclude these items from the line 24A/B/C country by country subtotal.
  3. In Column Country Code, select an applicable foreign country from the list.
  4. In the remaining columns, input information as applicable to the Row and Foreign country selected in steps 6 and 7.
  5. Expand Section 3 - Schedule K-2 Part II Other Income
    • Inputs to this section will only carry to the form if the Row Code and Country code matches with an input made with steps 6 and 7.
  6. In Column Row, select Lookup Value F4 and chose an applicable option from the list.
  7. In Column Country Code, select an applicable foreign country from the list.
  8. In the remaining columns, input information as applicable to the Row and Foreign country selected in steps 10 and 11.
Section 2 - Deductions (Schedule K-2, page 4)
  1. Expand Section 4 - Schedule K-2 Part II Section 2 Deductions.
  2. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  3. In remaining columns, input information applicable to the Row code selected in step 14.
  4. Expand Section 5 - Schedule K-2 Part II Other Deductions
  5. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  6. In the remaining columns, input information as applicable to the Row code selected in step 17.
Part III - Other Information for Preparation of Form 1116 or 1118
Section 1 - R&E Expenses Apportionment Factors (Sch K-2, page 5)
  1. Expand Sections 6 - Schedule K-2 Part III Section 1 R&E Expenses Apportionment.
  2. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  3. In the remaining columns, input information as applicable to the Row code selected in step 20.
Section 2 - Interest Expense Apportionment Factors (Schedule K-2, page 6)
  1. Expand Section 8 - Schedule K-2 Part III Section 2 Interest Expense Apportionment.
  2. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  3. In the remaining columns, input information as applicable to the Row code selected in step 23.
  4. Expand Section 9 - Schedule K-2 Part III Other Interest Expense.
  5. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  6. In Column Country Code, select an applicable country code related to the Row code selected in step 26.
  7. In the remaining columns, input information as applicable to the Row and Country codes selected in steps 26 and 27.
Section 3 - Foreign-Derived Intangible Income (FDII) Deduction Apportionment Factors (Schedule K-2, page 6)
  1. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list..
  2. In the remaining columns, input information as applicable to the Row code selected in step 29. 
  3. Expand Section 11 - Schedule K-2 Part III Section 3 Other FDII Deductions.
  4. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  5. In Column Country Code, select an applicable country code related to the Row code selected in step 32.
  6. In the remaining columns, input information as applicable to the Row and Country codes selected in steps 32 and 33.
Section 4 - Foreign Taxes (Schedule K-2, page 7 and 8)
  1. Expand Section 12 - Foreign Tax Options
  2. In Lines 1 and 2 - Foreign Taxes Paid and Accrued, select the checkboxes as applicable.
  3. Expand Section 13 - Schedule K-2 Part III Section 4 Foreign Tax Information.
  4. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  5. In Column Country Code, select an applicable country code related to the Row code selected in step 38.
  6. In the remaining columns, input information as applicable to the Row and Country codes selected in steps 38 and 39.
Section 5 - Distributions From Foreign Corporations to Partnership
  1. Expand Section 14 - Other Tax Information.
  2. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  3. In remaining columns, input applicable information related to the Row code selected in step 42.
  4. Expand Section 15 - Other Category
  5. In Column Row Code, select Lookup Value F4 and choose an applicable option from the list.
  6. In Column Country Code, select an applicable country code related to the Row code selected in step 45.
  7. In the remaining columns, input information as applicable to the Row and Country codes selected in steps 45 and 46.
Part IV (Schedule K-2, page 9)
  1. Expand Section 16 - Schedule K-2 - Part IV Information on Partners' Section 250 Deduction
Sections 1, 2, and 3
  1. In Lines 1-22, input information where applicable as these lines have no prerequisite input to carry to the form.
  2. In Grid 23 - Section 3 - Gross Receipts by SIC Code, an input in Column SIC code is required for Columns Gross Receipts - DEI and Gross- Receipts FDDEI to carry to the form.
  3. In Grid 24 - Section 3 - R&E Expenses by SIC Code, an input in Column SIC code is required for Column Total to carry to the form.
Part V (Schedule K-2, page 10)
  1. Expand Section 17 - Schedule K-2 Part V Distributions from Foreign Corporations.
  2. Review columns and populate fields as they should appear on the Sch K-2, Part V.
Part VI (Schedule K-2, page 11)
  1. Go to Partners > Schedule K-2 - Distributive Share Items - International Part VI.
  2. Expand Section 1 - Schedule K-2 Part VI Options - Part VI Information on Partners' Section 951A Inclusions.
  3. In Line 1 - Separate category, select an applicable option from the drop-down field.
  4. In Line 2 - U.S. Source, select the checkbox if applicable.
  5. Expand Section 2 - Schedule K-2 Part VI Information on Section 951A.
  6. Select Detail.
  7. In Lines 1-15, complete as applicable.
  8. Select Add or  and repeat step 60 for any additional foreign distributions.
Part VII (Schedule K-2, pages 12-14)
Section 1 - General Information on Passive Foreign Investment Company (PFIC), Qualified Electing Fund (QEF), or Qualifying Insurance Corporation (QIC) (Sch K-2, page 12)
  1. Go to Partners > Schedule K-2 - Distributive Share Items - International Part VII. 
  2. Expand Section 1 - Schedule K-2 Information for Form 8621.
  3. In Lines 1-22, complete as applicable.
  4. Expand Section 2 - Schedule K-2 Part VII Section 1291 and Other Information.
  5. Select Detail.
  6. In Lines 1-10, complete as applicable.
  7. Go to Partners > Schedule K-2 - Distributive Share Items - International Part VIII-XI.
  8. Expand Section 1 - Schedule K-2 Part VII Information to Complete Form 8621. 
  9. Select Detail.
  10. In Lines 1-21, complete as applicable.
Part VIII (Schedule K-2, page 15)
  1. Go to Partners > Schedule K-2 - Distributive Share Items - International Part VIII-XI.
  2. Expand Section 2 - Schedule K-2 Part VIII Section 960. 
  3. In Lines 1-5 - Partnership's Interest in Foreign Corporation Income (Section 960), complete as applicable.
  4. In Grid 6 - Subpart F Income Groups, complete as applicable.
Part IX (Schedule K-2, page 15 and 16)
  1. Expand Section 3 - Schedule K-2 Part IX Section 59A. 
  2. In Line 1 - Gross receipts for section 59A(e), input a Total and/or the Total Effectively Connected Income Gross Receipts.
  3. In Line 2-4 - Gross receipts for first, second, and third preceding, input the Total and/or the Total ECI Gross Receipts from applicable prior years.
  4. In Line 5 - Amounts included in the denominator of the base erosion percentage, input the applicable Total.
  5. Expand Section 4 - Schedule K-2 Part IX Section 2 Base Erosion Tax Benefits, which may need to be completed if section 3 is populated.
Part X (Schedule K-2, pages 16-18)
  1. Expand Sections 5 - Schedule K-2 Part X Section 1 Character and Source of Income.
  2. In Column Row Code - select Lookup Value F4 and choose an applicable option from the list.
  3. In Columns under ECI and Non-ECI, input amounts as applicable.
  4. Expand Section 6 - Schedule K-2 Part X Section 2 - Character and Source of Deduction.
  5. In Column Row Code - select Lookup Value F4 and choose an applicable option from the list.
  6. In Columns under ECI and Non-ECI, input amounts as applicable to the row code selected in step 85.
  7. Expand Section 7 - Schedule K-2 Part X Section 3.
  8. In Lines 1-8 - Section 3 - Allocation and Apportionment Methods for Deductions, input amounts as applicable.
  9. In Grid 9 - Section 3 - Gross Receipts From Sales or Services by SIC Code.
  10. In Column SIC Code - input a valid three-digit SIC Code.
  11. In columns under Gross Receipts, input amounts if applicable to he SIC code used in step 90.
  12. In Grid 10 - Section 3 - Other Allocation and Apportionment Key, input an amount in column Allocation as applicable.
Part XI (Schedule K-2, page 19)
  1. Expand Section 8 - Schedule K-2 Part XI Section 871(m) Covered Partnerships.
  2. In Line 1 - X if you are a PTP covered partnership, select the checkbox if applicable.
  3. In Line 2 - Number of units partnership issued, input if applicable.
  4. In Grid 3 - Information for Number of Units Specified, complete with applicable information.
  5. Calculate the return.
Part XII (Schedule K-2, page 19) - Section 871(m) Tax Liability of a Qualified Derivatives Dealer (QDD)
  1. In Boxes 30-32, input applicable Qualified Derivatives Dealer name and tax year dates.
  2. In Boxes 40, 42, and/or 46 - Gross Amount, input an applicable amount(s) to populate Part XII, column a.
  3. In Boxes 41-47 - Withholding Tax Rate, input applicable decimal percentage (range 0.00-1.00) to populate Part XII, column b.
    • Box 44 is not applicable because the government form and line is blocked out.
    • Column c is calculated.
  4. In Boxes 48-68 carry to populate Part XII, line 5.
Schedule K-2, Form 1118 - Schedule I
  1. Go to Interview Form KF-18.
  2. In Box 30 - Income Category Code (Mandatory), select from the following:
    1. 901j
    2. 951A
    3. FB
    4. GEN
    5. PAS
    6. RBT 951A
    7. RBT FB
    8. RBT GEN
    9. RBT PAS
  3. In Boxes 31-34, populate as applicable.
  4. In Boxes 40-65, input Regular Tax amounts as applicable.
  5. Calculate the return.

Notes

  • One way to describe the difference between Schedule K-2 and Schedule K-3
    • Schedule K-2 is the Foreign Schedule K summary.
    • Schedule K-3 is the partners' share of the summary items appearing on the Schedule K-2
      • Schedule K-3 is printed along with a partner's Schedule K-1.
  • Schedule K-2, Part XIII is only within Schedule K-3 and is a library form.
  • If the partnership received a K-3 from a lower tier partnership, then we would input each item from  the lower-tier Schedule K-3 according to its type, with the above input. The lower-tier K-3 information will then appear on the Schedule K-2, and pass-through again on a new Schedule K-3 prepared for the applicable partner(s) next upper-tier tax return.
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