Schedule K-1 (Form 1065) - Foreign Transactions
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Per IRS Instructions for Form 1116 Foreign Tax Credit (Individual, Estate, or Trust), starting on page 5:

Reporting Foreign Tax Information From Partnerships and S Corporations

If you received a 2020 Schedule K-1 from a partnership or S corporation that includes foreign tax information, use the rules below to report that information on Form 1116.

General Information for Partners and S Corporation Shareholders

Less-than-10% limited partners and certain less-than-10% S corporation shareholders. If you are a limited partner or an S corporation shareholder who doesn't actively participate in the management of the S corporation and you own a less-than-10% interest (by value) in the partnership or S corporation, you generally may categorize your distributive share of foreign source income and deductions from that partnership or S corporation as passive income. See Regulations section 1.904-4(n) for more details and exceptions.

CAUTION! This rule takes precedence over the income category rules outlined in the instructions that follow for line 16, codes C and D–H, of Schedule K-1 (Form 1065) (or line 14, codes C and D–H, of Schedule K-1 (Form 1120-S)), and the apportionment of deductions rules outlined in the instructions for line 16, later, codes J and K–O (or line 14, codes J and K–O) of the Schedule K-1.

Reporting amounts on Form 1116. Include amounts reported to you on Schedule K-1 with any other amounts reportable on Form 1116 using:

  • A separate Form 1116 for each category of income, and
  • A separate column in Part I and a separate line in Part II for each country or possession.

Explanation of Certain Line Items on Schedule K-1

TIP: In each instance that follows, the first line reference is to the Schedule K-1 for Form 1065 and the second line reference is to the Schedule K-1 for Form 1120-S.

Line 16, code B; or line 14, code B—Gross income from all sources. Combine your distributive share of “gross income from all sources” with all of your other gross income and enter the total on line 3e. “Gross income from all sources” is a constant amount (that is, you will enter the same amount on line 3e of all Forms 1116 that you file).

Line 16, code C; or line 14, code C—Gross income sourced at partner or shareholder level. This line includes income from the sale of eligible personal property (most personal property other than inventory, depreciable property, and certain intangible property). See Pub. 514 for details.

CAUTION! Although all income reported to you on this line of the Schedule K-1 has been apportioned to separate categories of income, you must nevertheless first determine (using the rules below) whether the income on this line is U.S. source income or foreign source income. Then, enter only foreign source income in Part I of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received from the partnership or S corporation).

Use the following rules to source the income reported to you on this line of the Schedule K-1. If you are a U.S. resident (as defined below), the income is U.S. source income. If you are a nonresident (as defined later), the income is foreign source income.

U.S. resident. A U.S. resident is a U.S. citizen or resident alien who doesn't have a tax home in a foreign country or a nonresident alien who has a tax home in the United States.

Tax home. Generally, your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you don't have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you don't fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Nonresident. A nonresident is any person who isn't a U.S. resident. U.S. citizens and resident aliens with a foreign tax home won't be treated as nonresidents for a sale of eligible personal property unless a foreign tax of 10% or more was paid or accrued on the gain on the sale (or, in the case of a loss sale, a foreign tax of 10% or more would have been paid had the sale resulted in a gain).

Note. To help you with these rules, the partnership or S corporation has specifically identified the following.

  • Gains on the sale of eligible personal property for which a foreign tax of 10% or more was paid or accrued.
  • Losses on the sale of eligible personal property for which a foreign tax of 10% or more would have been paid had the sale resulted in a gain.

Include foreign source income in Part I of the applicable Form 1116 (that is, the Form 1116 for each category of income provided to you for this line of the Schedule K-1). Don't include in Part I of Form 1116 income that you determined (using the above rules) to be U.S. source income.

CAUTION! If the partnership or S corporation has specifically identified any capital gains or losses or unrecaptured section 1250 gain on this line (Schedule K-1, line 16, code C, or line 14, code C) and you have determined that those gains or losses are foreign source, see Foreign Qualified Dividends and Capital Gains (Losses), later, before entering an amount in Part I of Form 1116.

Line 16, codes D, E, F, G, and H; or line 14, codes D, E, F, G, and H—Foreign gross income sourced at partnership or S corporation level. Income reported on this line has already been sourced for you by the partnership or S corporation. The partnership or S corporation has reported this income to you by country and by category of income. Include these amounts in Part I of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received).

Per IRS Partner's Instructions for Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. (For Partner's Use Only), on page 14:

Box 16. Foreign Transactions

Codes A through R. Use the information identified by codes A through R, code W, code X, and any attached statements to figure your foreign tax credit.

CAUTION! Taxpayers filing Form 1116—If you have any qualified dividends, capital gains (including any capital gain distributions), capital losses, collectibles gain, collectibles losses, unrecaptured section 1250 gain, net section 1231 gain, or net section 1231 losses, you may have to make certain adjustments to those amounts before taking them into account on Form 1116.

For details, see Form 1116, Foreign Tax Credit, and its instructions; Form 1118, Foreign Tax Credit—Corporations, and its instructions; and Pub. 514, Foreign Tax Credit for Individuals.

Per IRS Instructions for Form 1065 U.S. Return of Partnership Income, on page 42:

Line 16a. Name of Country or U.S. Possession (Code A)

Enter the name of the foreign country or U.S. possession from which the partnership had income or to which the partnership paid or accrued taxes. If the partnership had income from, or paid or accrued taxes to, more than one foreign country or U.S. possession, enter “See attached” and attach a statement for each country for lines 16a through 16r (codes A through R and code X of Schedule K-1). On Schedule K-1, if there is more than one country, enter code A followed by an asterisk (A*), enter “STMT,” and attach a statement to Schedule K-1 for each country for the information and amounts coded A through R and code X.

RIC pass-through amounts. Aggregate all income passed through from regulated investment companies (RICs) and report the total on a single line. Enter “RIC” on line 16a and report the total on line 16b. Note that the totals are being reported on a single line because it isn't necessary to report the RIC pass-through amounts on a per-country basis.

Line 16b. Gross Income From All Sources (Code B)

Enter the partnership's gross income from all sources (both U.S. and foreign).

Line 16c. Gross Income Sourced at Partner Level (Code C)

Enter the total gross income of the partnership that is required to be sourced at the partner level. This includes income from the sale of most personal property other than inventory, depreciable property, and certain intangible property. See Pub. 514 and section 865 for details.

CAUTION! You must attach a statement to Form 1065 showing the following information.

  • The amount of this gross income (without regard to its source) in each category identified in the instructions for lines 16e through 16h including each of the listed categories.
  • Specifically identify gains on the sale of personal property other than inventory, depreciable property, and certain intangible property on which a foreign tax of 10% or more was paid or accrued. Also list losses on the sale of such property if the foreign country would have imposed a 10% or higher tax had the sale resulted in a gain. In addition, separately identify the amounts of such gains or losses within each separate limitation category that are long-term capital gains and losses or collectibles (28%) gains and losses. See Determining the Source of Income From the Sales or Exchanges of Certain Personal Property in Pub. 514 and section 865.

Lines 16e–16h. Foreign Gross Income Sourced at Partnership Level

Separately report gross income from sources outside the United States by category of income as follows. See Pub. 514 and the Instructions for Form 1116 for more information on the categories of income.

CAUTION! You must attach a statement to Form 1065 that specifies foreign source qualified dividends, unrecaptured section 1250 gains, and net section 1231 gain (loss).

Line 16e. Foreign branch category (code E). Foreign branch category foreign source income is defined under section 904(d)(2)(J) (i) as the business profits of a U.S. person that are attributable to one or more qualified business units (as defined in section 989(a)) in one or more foreign countries. Report all income that would be foreign branch category income of its partners as if all of its partners were U.S. persons that were not pass-through entities.

Line 16f. Passive category (code F). Passive category foreign source income. This category includes the following income.

  • Passive income.
  • Dividends from a domestic international sales corporation (DISC) or a former DISC.
  • Distributions from a former foreign sales corporation.
  • See Line 16h. Other (code H) for exceptions.

CAUTION! Passive income doesn't include export financing interest.

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