Important Notes:

• With release  CCH Axcess™ Tax 2023-1.0 and CCH® ProSystem fx® Tax  2023.01000
  • Schedule K-2/K-3, Part II, Section 1 & 2 - U.S. Source Column Automation
    • This column will automatically be produced with the applicable amounts flowing from Form 1065, Page 1, Schedule K, Schedule K-1, Form 8825, and Other Rental Schedule and Royalty Schedule when requested on:  
      • Form 1120S — Shareholders > Schedule K-2 — Distributive Share Items — International Parts I-IV > Schedule K-2 General Information and Part I > Print and Calculation Options, line 31 and 32.
• With release CCH Axcess™ Tax 2021-4.1 and (CCH® ProSystem fx® Tax 2021.04010), and forward, Schedules K-2 and K-3 prepared in a return will be included with the IRS electronic filing schema XML. They will not be attached as a PDF. There is no limit to the number of shareholders for electronic filing.
• 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 shareholders input. In an S Corporation return, go to Shareholders > Shareholder Information worksheet. Complete a list of shareholders as applicable to your client.

Inputs below will appear in both the Shareholders > 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 Shareholders > Schedule K-2 - Distributive Share Items - International Parts I-IV worksheet.
2. Expand Section 1 - Schedule K-2 General Information and Part I.
3. In Lines 1-4 - Complete as applicable.

Part I - Corporation's Other Current Year International Information

4. 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

5. Expand Section 2 - Schedule K-2 Part II Section 1 Income.
6. In Column Row, select Lookup Value F4 and chose an applicable option from the list.
7. In Column Country Code,  select Lookup Value F4 and chose an applicable option from the list.
8. In remaining columns, input applicable information related to the Row and Country codes selected in steps 6 and 7.

9. Expand Section 4 - Schedule K-2 Part II Section 2 Deductions.
10. In Column Row, select Lookup Value F4 and chose an applicable option from the list.
11. In remaining columns, input applicable information related to the Row code selected in step 10.

Part III - Other Information for Preparation of Form 1116 or 1118

12. Expand Sections 6 - Schedule K-2 Part III Section 1 R&E Expenses Apportionment.
13. In Column Row, select Lookup Value F4 and chose an applicable option from the list.
14. In Column SIC Code, input a valid Standard Industrial Classification code.
    • OSHA SIC Manual
    • OSHA SIC Search
15. In remaining columns, input applicable information related to the Row and SIC code from steps 13-14.

16. In Column Row, select Lookup Value F4 and chose an applicable option from the list.
17. In remaining columns, input applicable information related to the Row code selected in step 16.

18. Expand Section 10 - Foreign Tax Options.
19. In Lines 1 and 2 - Foreign Taxes Paid and Foreign Taxes Accrued, select as applicable.
20. Expand Section 11 - Foreign Tax Information.
21. In Column Row Code, select Lookup Value F4 and chose an applicable option from the list.
22. In remaining columns, input applicable information related to the Row code selected in step 21.

Part IV - Distributions From Foreign Corporations to Corporation (Sch K-2, page 9)

23. Expand Section 12 - Schedule K-2 Part IV Distributions from Foreign Corporations.
24. Select Detail.
25. In Line 1 - Name of distributing foreign distribution, input applicable description.
26. In Line 2 - EIN or reference ID, input applicable identification number.
27. In Lines 3-10, populate as applicable to your client information.
28. Select Add or  and repeat steps 25-27 for any additional distributions.

Part V

29. Go to Shareholders > Schedule K-2 - Distributive Share Items - International Part V worksheet.
30. Expand Section 1 - Schedule K-2 Part V Options.
31. In Line 1 - Separate category, select Lookup value F4 and choose an applicable option from the list.
32. In Line 2 - U.S. Source, select the checkbox if applicable.
33. Expand Section 2 - Schedule K-2 Part V Information on Section 951A.
34. Select Detail.
35. In lines 1-15, input information as applicable to the category code selected in step 31.
36. Select Add or  and repeat steps 31-35 for any additional Section 951(a)(1) inclusions.

Part VI - Information to Complete Form 8621

37. Go to Shareholders > Schedule K-2 - Distributive Share Items - International Part VI Form 8621.
38. Expand Section 1 - Schedule K-2 Information for Form 8621.
    • Note: This input section synchronizes with worksheet 23 section 1, for Sch K-2, parts VI-VII.
39. In Line 1-8 - Information to Complete Form 8621, input as applicable to populate columns a through e.
40. In Lines 10-13 - Summary of Annual Information, input applicable passive foreign investment company share information to populate columns f, h, and i.
41. In Lines 14-18, Information Regarding Elections, select from the available election options to populate columns j through n.

42. In Lines 19-22 - QEF and Market to Market Information, input applicable qualified electing fund earnings, gains and fair market values to populate columns c through f.
43. Expand Section 2 - Schedule K-2 Part VI Section 1291 and Other Information.
44. Select Detail.
45. In Lines 2-10 - Section 1291 and Other Information, complete as applicable to populate columns g through o.
    • Columns a and b are populated from step 39 above.
46. Select Add or  and repeat step 24 for any additional foreign distributions.

Part VII

47. Go to Shareholders > Schedule K-2 - Distributive Share Items - International Parts VI-VII. Or if this does not apply, then skip to step 53.
48. Expand Section 2 - Schedule K-2 Part VII Section 960.
49. In Line 1 - EIN or reference ID, input applicable identification number.
50. In Line 2 - Separate category, select Lookup value F4 and choose an applicable option from the list.
51. In Lines 3-5, complete when applicable.
52. In Grid 6 - Subpart F Income Groups, input as applicable to populate lines 1-5, columns i, ii, and iii.
53. 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 shareholder's Schedule K-1.
• If the S Corporation 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. The lower-tier Schedule 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 shareholder(s) next upper-tier tax return.