How do I input Schedule K-2 and Schedule K-3 in a 1065 return using interview forms in CCH® ProSystem fx® Tax?

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

Objectives

Guide preparers to available inputs for populating specific parts of Schedule K-2 and Schedule K-3.

 

Environment

  • CCH ProSystem fx Tax    
  • 1065
  • Interview
  • Schedule K-2
  • Schedule K-3

Procedure

Important Note:

  • Software release 2021.04000, 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 > KF series Interview Forms.
  • Schedule K-3: By default, the Schedule K-3 form will be autogenerated for all partners whenever there is input on the Schedule K-2 > KF series Interview Forms.

This article assumes that the return already has partners input. In a partnership return, go to Interview Form K-1 to complete a list of partners as applicable to your client.

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

  1. Go to Interview Form Schedule K-2 > KF-1 - Foreign Partner Information General Information and Part I.
  2. In Boxes 30-33 - Complete as applicable.
Part I (Schedule K-2, pages 1 and 2)
  1. In Boxes - 40-51 - Complete as applicable.
Part II (Schedule K-2, pages 3, 4 and 5)
Section 1 - Income
  1. Go to Interview form KF-2 - Foreign Partner Information Part II Foreign Tax Credit Limitation.
  2. In Boxes 30-54 - Section 1 - Income - Row, select Lookup Value F4 and chose 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 and prior.
    • With release 2021.03020, 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 Boxes 32-56 - Country Code, select Lookup Value F4 and chose an applicable foreign country code from the list.
  4. In Boxes 33-59, 62-79, input income amounts if applicable, associated with the code selected in step 5.
Section 1 - Other Category Income
  1. In Box 81-105 - Section 1 - Other Category Income - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 85-109 - Other Amount, input income amounts if applicable associated with the code selected in step 8.
Section 2 - Deductions
  1. In Boxes 110-134 - Section 2 - Deductions - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 113-139, 142-159, input deductions amounts if applicable associated with the code selected in step 10.
Section 2 - Other Category Deductions
  1. In Boxes 161-181 - Section 2 - Other Category Deductions - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 164-184 - Other Amount, input amounts associated with code selected in step 12, if applicable.
Part III (Schedule K-2, pages 5-8)
Section 1 - R & E Expenses Apportionment Factors
  1. Go to Interview form KF-3 - Foreign Partner Info - Part III Other Info For Form 1116 or 1118 Sections 1 and 2.
  2. In Boxes 30-42 - Row, select Lookup Value F4 and chose an applicable option from the list.
  3. In Boxes 33-56 - input amounts associated with code selected in step 15, if applicable.
Section 2 - Interest Expenses Apportionment Factors
  1. In Boxes 110-130 - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 112-144 - input Interest Expense apportionment amount associated with code selected in step 17.
Section 2 - Other Foreign Source
  1. In Boxes 160-180 - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 162-182 - Country Code, select Lookup Value F4 and chose an applicable Foreign Country from the list.
  3. In Boxes 163-183 - Category Code, select or input 901J.
  4. In Boxes 164-184 - Other Amount, input Other Foreign Source amount associated with code selected in step 19.
Section 3 - FDII Deduction Apportionment Factors
  1. Go to Interview Form KF-4 Foreign Partner Info - Part III Other Info For Form 1116 or 1118 Sections 3 and 5.
  2. In Boxes - 30-54 - Row, select Lookup Value F4 and chose an applicable option from the list.
  3. In Boxes - 32-59 - input amount associated with code selected in step 24.
Section 3 - Other Category
  1. In Boxes 70-90 - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 72-92 - Country Code, select Lookup Value F4 and chose an applicable Foreign Country from the list.
  3. In Boxes 73-93 - Category Code, select or input 901J.
  4. In Boxes 74-94 - Other Amount, input amount associated with code selected in step 26.
Section 4 - Foreign Taxes (Schedule K-2, page 7 and 8)
  1. Go to Interview Form KF-5 - Foreign Partner Info - Part III Other Info For Form 1116 or 1118 Foreign Taxes.
  2. In Boxes 30 and 31 - Foreign Taxes Paid and Foreign Taxes Accrued, select the applicable checkboxes.
  3. In Box 40 - Row Code, select Lookup Value F4 and chose an applicable option from the list.
  4. In Box 42 - Country Code, select the applicable foreign country code from the list.
  5. In Boxes 43-126, input information applicable information related to the Row code and Country code selected in steps 32 and 33.
Section 5 - Other Tax Information
  1. In Boxes 100-110 - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 102-123, input amount associated with code selected in step 25.
Section 5 - Other Category Information
  1. In Boxes 130-140 - Row, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 132-137 - Country Code, select Lookup Value F4 and chose an applicable Foreign Country from the list.
  3. In Boxes 133-143 - Category Code, select or input 901J.
  4. In Boxes 134-144 - Other Amount, input amount associated with code selected in step 27.
Part IV (Schedule K-2, page 9)
  1. Go to Interview Form KF-5 Foreign Partner Info - Part III Other Info For Form 1116 or 1118 Foreign Taxes.
  2. In Box 30 - Foreign Taxes paid, select the checkbox if applicable.
  3. In Box 31 - Foreign taxes accrued, select the checkbox if applicable.
  4. In Boxes 40-64 - Row Code, select Lookup Value F4 and chose an applicable Foreign Country from the list.
  5. In Boxes 42-66 - Country Code, Country Code, select Lookup Value F4 and chose an applicable Foreign Country from the list.
  6. In Boxes 70-134 - Category Income(s), input amount associated with code selected in step 34.
Section 1 - Information to Determine DEI and QBAI
  1. Go to Interview Form KF-6 - Foreign Partner - Part IV Info on Partners' Sec. 250 Deduction with Respect to FDII.
  2. In Boxes 31-49 - input amounts where applicable.
Section 2 - Information to Determine Eligible Income
  1. In Boxes 61-73 - input amounts where applicable.
Section 3 - Foreign Partner - Other Information for Preparation of Form 8993
  1. In Boxes 81-102 - Deduction Eligible Income (DEI), input amounts where applicable.
  2. In Boxes 82-103 - Foreign-derived Deduction Eligible Income (FDDEI), input amounts where applicable.
Section 3 - Gross Receipts by SIC Code
  1. In Boxes 110-114 - SIC Code, input a valid three-digit Standard Industrial Classification code.
  2. In Boxes 112-117 - DEI and FDDEI, input amounts associated with SIC code used in step 42.
Section 3 - R&E Expenses by SIC Code
  1. In Boxes 120-123 - SIC Code, input a valid three-digit Standard Industrial Classification code.
  2. In Boxes 122-125 - Total, input an amount associated with SIC code used in step 44.
Part V (Schedule K-2, page 10)
  1. Go to Interview Form KF-7 - Foreign Partner Info - Distributions From Foreign Corporations to Partnership.
  2. In Boxes 30-102, populate fields as they should appear on the Sch K-2, Part V.
Part VI (Schedule K-2, page 11) Part VII (Schedule K-2, pages 12-14)
  1. Go to Interview Form KF-8 - Foreign Partner Information Part VI.
  2. In Box 30 - Separate category, select Lookup Value F4 and chose an applicable option from the list.
  3. In Boxes 40-102 - populate fields as they should appear on the Sch K-2, Part VI.
Part VII (Schedule K-2, page 13)
Section 1 - General Information on Passive Foreign Investment Company (PFIC), Qualified Electing Fund (QEF), or Qualifying Insurance Corporation (QIC).
  1. Go to KF-9 - Foreign Partner Information - Information to Complete Form 8621.
  2. In Boxes 30-54, input as applicable. 
Section 2 - Additional Information on PFIC or QEF.
  1. In Boxes 60-83, input as applicable. 
Part VIII (Schedule K-2, page 14-15)
  1. Go to Interview Form KF-10 - Foreign Partner Info - Business Interest in Foreign Corporation Income (Section 960).
  2. In Box 31 - Separate Category, select Lookup Value F4 and chose an applicable option from the list.
  3. In Box 40 - Row, select Lookup Value F4 and chose an applicable option from the list.
  4. In Boxes - 30, 32-34, 41-61, input as applicable.
Part IX (Schedule K-2, page 15 and 16)
Section 1 - Applicable Taxpayer
  1. Go to Interview Form KF-12 - Foreign Partner Information - Part XI Base Erosion and Anti-Abuse tax.
  2. In Boxes 31-43 - Section 1 - Applicable Taxpayer, input as applicable.
Section 2 - Base Erosion Payments and Base Erosion Tax Benefits.
  1. In Box 50 - Row Code, select Lookup Value F4 and chose an applicable option from the list.
  2. In Boxes 53-72 - input as applicable.
  3. In Box 73 - Withholding Rate, input a decimal percentage, where 1.0 equals 100%. 
    • Note: the tax withheld calculation appears at Schedule K-2, page 16, Part IX, Section 2, line 18, in a statement.
Part X (Schedule K-2, pages 16-18) - Foreign Partners' Character and Source of Income and Deductions.
Section 1 - Gross Income (Schedule K-2, page 16).
  1. Go to Interview Form KF-13 - Foreign Partner Info - Part X Char and Source of Inc  and Deduct Sections 1 and 2.
  2. In Box 30 - Row Code, select Lookup Value F4 and choose an applicable option from the list.
  3. In Box 32 - Total, input is may not be necessary as Column a rows will automatically populate with Gross Income amounts from all sources from Form 1065.
  4. In Box 33 - Partner Determination, populates Part X, column b, input the applicable amount determined by the partner per IRS instructions.
  5. In Boxes 34-62, input applicable amounts which populate Part X, columns c through g.
Section 2 - Deductions, Losses, and Net Income (Schedule K-2, page 17).
  1. In Box 80 - Row Code, select Lookup Value F4 and chose an applicable option from the list.
  2. In Box 82 - Total, input may not be necessary as column a will automatically total from inputs made to boxes 83-113.
  3. In Boxes 83-113, input as applicable.
Section 3 - Allocation and Apportionment Methods for Deductions.
  1. Go to Interview Form KF-14 - Foreign Partner - Part X Foreign Partners Char and Source of Inc. and Ded. Section 3.
  2. In Boxes 31-45 - input applicable amounts to populate Part X, Section 3, lines 1a-4b.
  3. In Box 50 - SIC Code, input a valid three-digit code according to industry type to populate Part X, Section 3, line 5a-5b.
  4. In Boxes 52 and 53 - ECI and Worldwide, input applicable amounts associated with the SIC code input with step 73.
  5. In Boxes 60-65 - Other Allocation and Apportionment Key, input as applicable to populate Part X, Section 3, lines 7a-8b.
Part XI (Schedule K-2, page 19) - Section 871(m) Covered Partnerships
  1. Go to Interview Form KF-15 - Foreign Partner Information Part XI.
  2. In Boxes 30-44 - input as applicable to your client. 
  3. Calculate the return.
Part XII (Schedule K-2, page 19) - Section 871(m) Tax Liability of a Qualified Derivatives Dealer (QDD)
  1. Go to Interview Form KF-19.
  2. In Boxes 30-32, input applicable Qualified Derivatives Dealer name and tax year dates.
  3. In Boxes 40, 42, and/or 46 - Gross Amount, input an applicable amount(s) to populate Part XII, column a.
  4. 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.
  5. 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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