1120-S Schedule K-2 and K-3 – Domestic Filing Exception

Per the IRS instructions, a 2022 S corporation does not need to complete and file with the IRS Schedules K-2 and K-3 or furnish to the shareholder(s) their Schedule K-3 if each of the following 3 criteria are met:

  1. No or limited foreign activity
    • Foreign activity is defined as
      1. Foreign income taxes paid or accrued,
      2. Foreign source income or loss,
      3. Ownership interest in a foreign S corporation,
      4. Ownership interest in a foreign corporation
      5. Ownership of a foreign branch, or
      6. Ownership interest in a foreign entity that is treated as disregarded as an entity separate from its owner.

    • If there is foreign activity, it must be limited to passive category foreign income, which is not more than $300 of foreign income taxes allowable as a credit under Section 901 are treated as paid or accrued by the S corporation, and such income and taxes are shown on a payee statement that is furnished to the S corporation.

  2. Shareholders must receive notification from the S corporation
    1. If the S corporation satisfies criteria 1, the shareholders must receive notification from the S corporation that the shareholders will not receive Schedule K-3 from the S corporation unless the shareholders request the schedule. At the latest, the notification must be furnished when the S corporation furnishes the Schedule K-1 to the shareholder. The notice can be provided as an attachment to the Schedule K-1. See this FAQ: Schedule K-2 Domestic Filing Exception - Entering in Program for how to attach notification to the Schedule K-1.

  3. There were no 2022 Schedule K-3 requests by the 1-month date
    1. To qualify, the S corporation has not received a request from any shareholder for Schedule K-3 information on or before the 1- month date (1 month before the date the S corporation files Form 1120-S). For calendar year filers, the latest 1-month date for tax year 2022 is August 15, 2023, if the S corporation files an extension.