K-2 and K-3 Reporting Update: Domestic Passthrough Entity Exemption Expanded by IRS
On November 28, 2022, we sent an article on IRS Schedule K-2 and K-3 Estate and Trusts Reporting Instructions and Requirements. However, changes within the latest draft of the Schedule K-2/K-3 Estate and Trusts (1065/1120-S) instructions released on December 2, 2022,
have expanded eligibility for the new domestic Passthrough Entity (PTE) Exemption from filing Schedules K-2 and K-3 Estate and Trusts. This expansion effectively revises the PTE notification requirements for PTEs that want to qualify for the exemption.
The updated Draft 2022 Partnership Instructions for Schedules K-2 and K-3 Estate and Trusts (Form 1065) can be found here.
The updated Draft 2022 S Corporation Instructions for Schedules K-2 and K-3 Estate and Trusts (Form 1120-S) can be found here.
The most significant change is that to qualify for the exemption, a PTE is no longer required to send a notice to the partners/shareholders informing them that they may request Schedule K-3 Estate and Trusts by two months before the original due date of the PTE’s return without regard to extensions (January 15 for calendar-year PTEs).
Instead, qualifying PTEs can simply notify their partners that they can request Schedule K-3 Estate and Trusts when the PTE sends Schedule K-1 to the partner. The notice can even be sent as an attachment to Schedule K-1. However, the partner/shareholder can request the PTE to provide Schedule K-3 Estate and Trusts up to one month before the extended due date of the PTE return (August 15 for calendar-year PTEs).
As before, to qualify for the domestic PTE exemption, the PTEs must have no or only limited foreign activity, and all of its partners/shareholders must be individuals who are U.S. citizens or resident aliens, domestic decedent estates, or domestic grantor trusts. However, what has changed in the most recent draft instructions is that eligible PTEs now include those PTEs with partners that are S corporations owned by a sole shareholder and disregarded single-member LLCs owned by U.S. citizens or resident aliens, domestic decedent estates, domestic grantor trusts, or sole shareholder S corporations.
Get in touch
We welcome your questions surrounding reporting requirements and this update for PTEs. Contact your GC accountant or advisor or email us at contactus@gccpas.net with any questions.