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Generating the Schedules K-2 and K-3 in ProSeries and entering it in the 1040 return

by Intuit Updated 7 months ago

This article will help you:

Who must file Schedules K-2 and K-3?

Generally, any partnership or S corporation must file if they:

  • Have international income, assets, credits, or activity;
  • Have an international owner (partner or shareholder); or
  • Have owners who claim a credit for foreign taxes paid on their return (Form 1116 or 1118).

Domestic filing exception

New for tax year 2022, certain domestic partnerships and S corporations don't need to file Schedules K-2 and K-3 if they meet all of these criteria:

  • No or limited foreign activity;
  • All direct partners are U.S. Citizens or resident aliens;
  • Notify all partners or shareholders that they won't receive a K-3 from this business no later than when the K-1 is furnished;
  • No partner or shareholder requests a K-3 within by the "1-month date", meaning one month before the date the partnership or S corporation files their tax return.

For more information about this exception and examples, review the Schedule K-2 and K-3 instructions.

Common questions about generating the K-2 and K-3 in the business return:

  • How do I generate the K2 / K3 in ProSeries 2022 and newer?
    1. Open the Schedule K-2 Page 1.
    2. Complete Questions A, B and C.
    3. Complete Parts I through XI as needed.
    4. For Partnerships: You can exclude partners on the Schedule K-1 Worksheet by checking the Check box to exclude Schedule K-3 for this partner.
    5. For S-Corporations: You can exclude shareholders on the Schedule K-1 Worksheet by checking the Check box to exclude Schedule K-3 for this shareholder.
  • How do I generate the K2 / K3 in ProSeries 2021?
    1. Open the Schedule K-2 Page 1.
    2. Complete Questions A, B and C.
    3. Complete Parts I through XI as needed.
    4. For Partnerships: On the Schedule K-1 Worksheet check the boxes for each partner under Information for Schedule K-2/K-3 Reporting.
    5. For S-Corporations: On the Schedule K-1 Worksheet check the box for each shareholder under Information for Sch K-2.
  • How are amounts entered on Schedule K-2 allocated to partners or shareholders on the K-3? Amounts entered in the K-2 will be allocated based on the partner or shareholder standard percentages. 
  • Can I specially allocate amounts to the K-3? There isn't a way to do special allocations to the K-3, however on the K-3 there's a checkbox Check box to remove all program computed items for Schedule K-3, page 2-4. By checking this box you can manually complete the Schedule K-3 with the desired amounts for each partner/shareholder.
  • Are the K-2/K-3's e-filed with the return? Starting in tax year 2022, Schedule K-2 and K-3 are e-filed with the return. For prior years, the Schedule K-2 and Schedule K-3 need to be sent as PDF attachments. See here for more details.
  • How do I generate the statement for a Domestic Filing Exemption?
    1. Open the Information Worksheet.
    2. Scroll down to Part IV K-1 Information.
    3. Check Yes on the Print domestic filing exception notification re: Schedule K-3 on Schedule K-1?

Entering a K-3 in the individual return:

If the taxpayer or spouse received a K-3 from the business return, that will need to be entered into the individual return along with their K-1 information. To enter the K-3:

  1. Open the Schedule K-1 Worksheet.
  2. Scroll down to the Foreign Transactions line:
    • For partners, this is line 16.
    • For shareholders, this is line 14.
  3. Check the Schedule K-3 is attached if checked box.
  4. Enter the Name of Country or U.S. Possession.
  5. Complete lines B through AI based on the K-3 received.
Line A: Name of country or U.S. possessionEnter from Schedule K-3, Part 2, Section 1, Line 24, description columns (a,b,c)
Line B: Gross Income from all sourcesEnter from Schedule K-3, Part 2, Section 1, Line 24, Column G
Line C: Gross Income sourced at individual levelEnter from Schedule K-3, Part 2, Section 1, line 24, Column F
Line E: Foreign gross income - Foreign branch categoryEnter from Schedule K-3, Part 2, Section 1, Line 24, Column B
Line F: Foreign gross income - Passive categoryEnter from Schedule K-3, Part 2, Section 1, Line 24, Column C
Line G: Foreign gross income - General categoryEnter from Schedule K-3, Part 2, Section 1, Line 24, Column D
Line H: Foreign gross income - otherEnter from Schedule K-3, Part 2, Section 1, Line 24, Column E
Line I: Deductions allocated at individual levelInterest expense - Enter from Schedule K-3, Part 2, Section 1, sum of Lines 39-43, Column F
Line J: Deductions allocated at individual levelOther - Enter from Schedule K-3, Part 2, Section 1, sum of Lines 39-43, Column F
Line L: Deductions allocated - foreign branch categoryEnter from Schedule K-3, Part 2, Section 1, Line 54, Column B
Line M: Deductions allocated -Passive categoryEnter from Schedule K-3, Part 2, Section 1, Line 54, Column C
Line N: Deductions allocated - General categoryEnter from Schedule K-3, Part 2, Section 1, Line 54, Column D
Line O: Deductions allocated - OtherEnter from Schedule K-3, Part 2, Section 1, Line 54, Column E
Line P: Total foreign taxes paidEnter from Schedule K-3, Part 3, Section 4, Line 1, on Page 8 or 9 depending on income category, if "Paid" is checked.
Line Q: Total foreign taxes accruedEnter from Schedule K-3, Part 3, Section 4, Line 1, on Page 8 or 9 depending on income category, if "Accrued" is checked.
Line R: Reduction in taxes available for creditEnter from Schedule K-3, Part 3, Section 4, Line 1, on Page 8 or 9 depending on income category, if "Accrued" is checked.

The program will display the code meaning in the description column.

If the description is followed by ** (two asterisks), use the QuickZoom button immediately below to go to the additional information worksheet to enter the additional information required for the item.

For descriptions followed by * (one asterisk), you must enter the item on the form or schedule as indicated by the information supplied with the K-1.

  1. At the bottom of the table, select the QuickZoomto enter additional foreign tax information.
  2. The most common entries needed here will be the entries for Foreign taxes paid, and Foreign taxes accrued.
    1. To generate the credit on Form 1116:
      1. On line 2 check box a.
      2. On line 3 double-click in the box and select the copy of the 1116 for these foreign taxes.
      3. Select the country column for Form 1116.
      4. Review the 1116.
    2. To claim a deduction for the foreign taxes:
      1. On line 2 check box b.
      2. On line 4 check box a or box b depending on if there is foreign earned income from this activity reported on Form 2555. ​
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