Prior to the changes referenced in Expanded and new filing exceptions for Schedules K-2 and K-3 (Form 1065) beginning tax year 2024, the four criteria for the domestic filing exception to the Schedules K-2 and K-3 for Form 1065 read as follows:
A domestic partnership (as defined under sections 7701(a)(2) and (4)) doesn't need to (a) complete and file Schedules K-2 and K-3, or (b) furnish to a partner Schedule K-3 (except when requested by a partner after the 1-month date (defined in criteria number 4, below)) if each of the following four criteria are met with respect to the partnership’s 2024 tax year and the partnership isn’t a Qualified Derivatives Dealer (QDD) partnership.
1. No or limited foreign activity
During the domestic partnership’s 2024 tax year, the domestic partnership either has no foreign activity (as defined below), or, if it does have foreign activity, such foreign activity is limited to (a) passive category foreign income (determined without regard to the high-taxed income exception under section 904(d)(2)(B)(iii)); (b) upon which not more than $300 of foreign income taxes allowable as a credit under section 901 are treated as paid or accrued by the partnership; and (c) such income and taxes are shown on a payee statement (as defined in section 6724(d)(2)) that is furnished or treated as furnished to the partnership.
Foreign activity
For purposes of the domestic filing exception, foreign activity means any of the following: (a) foreign income taxes paid or accrued (as defined in section 901 and the regulations thereunder); (b) foreign source income or loss (as determined in sections 861 through 865, and section 904(h), and the regulations thereunder); (c) ownership interest in a foreign partnership (as defined in sections 7701(a)(2) and (5)); (d) ownership interest in a foreign corporation (as defined in sections 7701(a)(3) and (5)); (e) ownership of a foreign branch (as defined in Regulations section 1.904-4(f)(3)(vii)); or (f) ownership interest in a foreign entity that is treated as disregarded as an entity separate from its owner (as defined in Regulations section 301.7701-3).
2. U.S. citizen/resident alien partners
During tax year 2024, all the direct partners in the domestic partnership are (a) individuals that are U.S. citizens; (b) individuals that are resident aliens (as defined in section 7701(b)(1)(A) and the regulations thereunder); (c) domestic decedents’ estates (that is, decedents’ estates that aren't foreign estates as defined in section 7701(a)(31)(A)), with solely U.S. citizen and/or resident alien individual beneficiaries; (d) domestic grantor trusts (that is, trusts described under sections 671 through 678) that aren't foreign trusts as defined in section 7701(a)(31)(B)) and that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; (e) domestic non-grantor trusts (that is, trusts subject to tax under section 641 that aren't foreign trusts as defined in section 7701(a)(31)(B) with solely U.S. citizen and/or resident alien individual beneficiaries; (f) S corporations with a sole shareholder; or (g) single-member limited liability companies (LLCs), where the LLC’s sole member is one of the persons in subparagraphs (a) through (f), and the LLC is disregarded as an entity separate from its owner (as defined in Regulations section 301.7701-3).
3. Partner notification
With respect to a partnership that satisfies criteria 1 and 2, partners receive a notification from the partnership at the latest when the partnership furnishes the Schedule K-1 to the partner. The notice can be provided as an attachment to Schedule K-1. The notification must state that partners won't receive Schedule K-3 from the partnership unless the partners request the schedule.
4. No 2024 Schedule K-3 requests by the 1-month date
The partnership doesn't receive a request from any partner for Schedule K-3 information on or before the 1-month date. The 1-month date is 1 month before the date the partnership files the Form 1065. For tax year 2024 calendar year partnerships, the latest 1-month date is August 15, 2025, if the partnership files an extension. Any request from a partner for Schedule K-3 information for a year prior to tax year 2024 will be considered a request for a tax year 2024 Schedule K-3 as well.
Now that the changes in Expanded and new filing exceptions for Schedules K-2 and K-3 (Form 1065) beginning tax year 2024 to the four criteria above have been made:
The IRS is expanding as follow the domestic Schedule K-2 and Schedule K-3 filing exception and creating a new small partnership Schedule K-2 and Schedule K-3 filing exception to filing the Form 1065 (U.S. Return of Partnership Income), Schedules K-2 (Partners’ Distributive Share Items—International) and K-3 (Partner’s Share of Income, Deductions, Credits, etc.—International):
1. Domestic filing exception and U.S. citizen/resident alien partners
During tax year 2024, all the direct partners in the domestic partnership are (a) individuals that are U.S. citizens; (b) individuals that are resident aliens (as defined in section 7701(b)(1)(A) and the regulations thereunder); (c) domestic decedents’ estates (that is, decedents’ estates that aren't foreign estates as defined in section 7701(a)(31)(A)), with solely U.S. citizen and/or resident alien individual beneficiaries; (d) domestic grantor trusts (that is, trusts described under sections 671 through 678) that aren't foreign trusts as defined in section 7701(a)(31)(B)) and that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; (e) domestic non-grantor trusts (that is, trusts subject to tax under section 641 that aren't foreign trusts as defined in section 7701(a)(31)(B) with solely U.S. citizen and/or resident alien individual beneficiaries; (f) S corporations; (g) single-member limited liability companies (LLCs), where the LLC’s sole member is one of the persons in subparagraphs (a) through (f), and the LLC is disregarded as an entity separate from its owner (as defined in Regulations section 301.7701-3); or (h) domestic partnerships with direct partners who are (a) individuals that are U.S. citizens; (b) individuals that are resident aliens (as defined in section 7701(b)(1)(A) and the regulations thereunder); (c) domestic decedents’ estates (that is, decedents’ estates that aren't foreign estates as defined in section 7701(a)(31)(A)), with solely U.S. citizen and/or resident alien individual beneficiaries; (d) domestic grantor trusts (that is, trusts described under sections 671 through 678) that aren't foreign trusts as defined in section 7701(a)(31)(B)) and that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; (e) domestic non-grantor trusts (that is, trusts subject to tax under section 641 that aren't foreign trusts as defined in section 7701(a)(31)(B) with solely U.S. citizen and/or resident alien individual beneficiaries; (f) S corporations; or (g) single-member limited liability companies (LLCs), where the LLC’s sole member is one of the persons in subparagraphs (a) through (f), and the LLC is disregarded as an entity separate from its owner (as defined in Regulations section 301.7701-3).
2. Small partnership K-2/K-3 filing exception
Form 1065, Schedule B, Question 4 exempts a partnership from completing Schedules L, M-1, and M-2; item F on page 1 of Form 1065; or item L on Schedule K-1, if the partnership meets four conditions:
- the partnership’s total receipts for the tax year were less than $250,000.
- the partnership’s total assets at the end of the tax year were less than $1 million.
- Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return.
- the partnership is not filing and is not required to file Schedule M-3.
With respect to a partnership that satisfies the conditions of Schedule B, Question 4 and, therefore, is generally exempt from being required to file Schedule K-2 and K-3, the partners must receive a notification from the partnership at the latest when the partnership furnishes the Schedule K-1 to the partner. The notice can be provided as an attachment to Schedule K-1. The notification must state that partners won't receive Schedule K-3 from the partnership unless the partners request the schedule.
If a partnership receives a request from any partner for Schedule K-3 information on or before the 1-month date, the partnership is required to file the tax year 2024 Schedules K-2 and K-3 and furnish the tax year 2024 Schedule K-3 to the requesting partner(s). The 1-month date is 1 month before the date the partnership files the Form 1065. For tax year 2024 calendar year partnerships, the latest 1-month date is August 15, 2025, if the partnership files an extension.
If a partnership receives a request from a partner for Schedule K-3 information after the 1-month date for tax year 2024 and hasn't received a request from any other partner for Schedule K-3 information on or before the 1-month date, the partnership isn't required to file the tax year 2024 Schedules K-2 and K-3 or furnish the tax year 2024 Schedule K-3 to the non-requesting partners. However, the partnership is required to provide the tax year 2024 Schedule K-3, completed with the requested information, to the requesting partner on the later of the date on which the partnership files Form 1065 or 1 month from the date on which the partnership receives the request from the partner.
Schedules K-2 and K-3 are required to be completed only for the parts and sections relevant to the requesting partner. For example, if a partner requests the information reported on Part III, Section 2, the partnership is required to complete and file Schedule K-2, Part III, Section 2, for the partnership’s total assets and Schedule K-3, Part III, Section 2, for the requesting partner’s distributive share of the assets. On the date that the partnership files Schedules K-2 and K-3, the partnership must provide a copy of the filed Schedule K-3 to the requesting partner. The partnership doesn't need to complete, attach, file, or furnish any other parts or sections of Schedules K-2 and K-3 to the IRS, the requesting partner, or any other partner.
If a partnership receives requests from partners for Schedule K-3 information both on or before the 1-month date and after the 1-month date, the partnership is required to file Schedules K-2 and K-3 as described in the prior paragraph only for the partner requests received on or before the 1-month date. For requests received after the 1-month date, the partnership is required to provide Schedule K-3, completed with that partner’s requested information, on the later of the date on which the partnership files Form 1065 or 1 month from the date on which the partnership receives the request from the partner.
A partner must request Schedule K-3 information for each year, unless the partner specifically requests to receive Schedule K-3 information for the 2024 tax year and all subsequent years (or if the partner specifically requested in a prior year to receive Schedule K-3 for each subsequent year).