The Schedule K-3 (Form 1065) was new for the 2021 tax year and was first used during the 2022 filing season, creating confusion for some tax pros. Many are still unfamiliar with the 20-page schedule that replaced foreign transactions formerly reported on Schedule K-1 (Form 1065), Box 16. We’re here to help you sort this all out.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.
Q: The foreign tax credit must be carried back one year first and then carried forward, correct? If there’s no foreign source income in the carryback year, the taxpayer can only carry it forward, correct?
A: Yes, the foreign tax credit is carried back one year and then forward 10 years. Taxpayers can’t use any of the foreign tax credit in the carryback year if they don’t have any foreign source income, so they can only carry it forward.
Q: Why would there be a Schedule K-3 from a partnership if it has no foreign source income/foreign activity?
A: Sometimes partnerships just prepare it for everyone. Also, a partner can request it if they’re claiming the foreign tax credit on Form 1116.
Q: Do you file an amended return to carry back a foreign tax credit?
A: Yes, file an amended return to carry it back.
Q: Do you need to convert foreign income to U.S. dollars to get the foreign tax credit?
A: Yes, convert foreign income and foreign taxes to U.S. dollars.
To learn more about reporting Schedule K-3 information on Form 1116, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.