CCH Axcess™ Tax and CCH® ProSystem fx® Tax: What to Expect for New Schedules K-2 and K-3.

  • Article Type:
  • Documentation
  • Last Modified:
  • 11/05/2022

Objectives

To provide basic information on Schedules K-2 and K-3 (new for tax year 2021) and provide expectations around e-filing. Customers whose clients are obligated to report foreign investments or transactions will be affected.

Environment

  • CCH Axcess
  • CCH Axcess Tax    
  • CCH ProSystem fx Tax
  • 1120S
  • 1065
  • 1040 
  • 1040NR
  • 1041
  • Electronic Filing
  • Form 8865

Details

Schedules K-2 and K-3 are new Federal schedules associated with 1065, 1120S and 8865 returns. Customers whose clients are obligated to report foreign investments or transactions will be affected.

NOTE: (2/18/22) IRS Provides 2021 K-2 and K-3 Filing Relief for Certain Domestic S Corporations and Partnerships
 
Return TypeK-2/K-3 replace, supplement and clarify the following in each return type:eFile Availability: 
1065 (Partnership)
  • Former Form 1065, Schedule K, Partners’ Distributive Share Items, line 16, Foreign Transactions.
  • Schedule K-1 (Form 1065), Part III, Partner’s Share of Current Year Income, Deductions, Credits, and Other Items, Line 16, Foreign Transactions. 

Per CCH Software News, July 21, 2022:

Schedule K-2/K-3 XML limit is 250 partners for this release.  We are currently investigating paths for technology changes to increase this limit in upcoming releases. Look for future announcements via Software News as schedules are finalized. 

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.

1120-S (S Corporation)
  • Former Form 1120-S, Schedule K, line 14, Foreign Transactions.
  • Schedule K-1 (Form 1120-S), Part III, Shareholder's Share of Income, Deductions, Credits, etc., line 14, Foreign Transactions.
  • The reporting of certain amounts formerly reported on:
    • Form 1120-S, Schedule K, line 17d, Other items and amounts
    • Schedule K-1, Part III, Line 17, Other information. 

Per CCH Software News, July 21st, 2022:

1120S Schedule K-2 / K-3 eFile schema is available for use by customers with release CCH® ProSystem fx® Tax 2021.04010  and CCH Axcess™ Tax 2021-4.1, available July 24th, 2022.

"With this release, we will no longer generate PDF attachments for Schedule K-2 and K-3. These schedules can only be filed through the electronic filing XML. There is no shareholder limitation. 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."

8865 (Foreign Partnership)
  • Former Form 8865 (Return of US Persons with Respect to Certain Foreign Partnerships) Schedule K, Partners’ Distributive Share Items, line 16, Foreign Transactions. 
  • Schedule K-1 (Form 8865), Part III, Partner’s Share of Current Year Income, Deductions, Credits, and Other Items, Line 16, Foreign Transactions. 
The IRS will not offer Schedule K-2 / K-3 eFile Schema for 8865 until tax year 2022.

For tax year 2021, Form 8865 Schedule K-2 and K-3, are included with an electronic file as a PDF attachment.

Prior to eFile support for K-2 or K-3, PDF copies will be accepted by the IRS. See Notes, below.
1040, 1040-NR and 1041 (entering K-3 data from business returns)
  • Existing K-1 fields will include cross-references to K-3 fields. 
  • K-3 input will need to be manually entered.
  • 1065 and 1120S K-1 Export to Other Returns feature does not include K-3 data.
For tax year 2021, the IRS does not require a copy of the K-3 with 1040, 1040-NR or 1041 filings. 

Notes

  • Prior to eFile support for K-2 or K-3, PDF copies will be accepted by the IRS and CCH Axcess™ Tax and CCH® ProSystem fx® Tax will auto-generate PDFs during this period. However, because K-2/K-3 forms are lengthy (14-22 pages each amongst return type), file sizes for large partnership returns will quickly become a deterrent to filing ahead of the e-file schema delivery and approval.
  • Downstream forms affected by new K-2 / K-3  changes: To date, we’ve received no IRS instructions for “downstream” forms such as Form 1118, 5471, 8621, 8858, 8991. 8992, and 8993. 
  • There are also significant changes to Form 1120-F, which must include K-3 data on Schedule P. 
  • Form 1116 is unaffected by K-2/K-3 changes in 2021.
  • Form 8621 has no changes for 2021; the existing input will remain the same. Input fields will have cross-references to equivalent K-3 fields.
  • State reactions: We anticipate few changes to state forms as a result of K-2 / K-3. 
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