Saving Time and Pages

December 15, 2022 Denise Felber, CPA, Tax Partner

tax season 2021

The changes generated by the 2017 Tax Cut and Jobs act were massive, including the computation of foreign tax credits.  In response, the IRS generated additional reporting requirements to claim the credits.  The pages included in 2021 tax returns grew drastically, unfortunately the value of the information did not.  After comments from various professional groups, the IRS has provided exceptions to the filing requirements for 2022 returns.

BASIC: Partnerships and S Corporations (“pass through entities” or PTE) receive no benefit from foreign tax credits; the credit information is reported to and claimed by the owners.

CHANGE IN REPORTING: The foreign information was briefly summarized on the PTE return and Schedule K-1 prior to 2021. New reporting rules resulted from changes in the 2017 Tax Cut and Jobs Act. In implementing the new reporting rules, new forms were required for tax years beginning in 2021.

The PTEs exploded from a small section on the PTE forms to a new attachment (Schedule K-2) numbering 14-19 pages and a Schedule K-1 attachment (Schedule K-3) of 15-20 pages for each owner.

A BIT OF COMMON SENSE FROM THE IRS: The PTE 2021 returns grew dramatically in volume. Those pages can be avoided for 2022 returns, by a PTE

  • with less than $300 of credit (in total) or
  • the apportioned credit to each owner is less than $300.

FIRST EXCEPTION: The S Corporation or domestic partnership can avoid the extra pages if:

  • The only activity foreign activity is passive, and the total credit is less than $300
  • The owners are US individuals, entities, or beneficiaries.
  • The owners are notified the attachments will not be a notice or on Schedule K-1.

SECOND EXCEPTION: For this exception to apply to the PTE, owner action is required. If

  • The owners are not eligible to claim a foreign credit, or
    • The credit assigned to each owner does not exceed ($300 each), and
    • The owner is not required to file Form 1116 ($300 in total).
  • Notification from owners:
    • The PTE must receive a notification from the owners of their exempt status within one month of the filing of the return.

SAVING TIME: Potential time savings can be identified.

  • Examine prior returns or current broker statements for foreign credits, and
  • For those with more than $300 in total credits but less than $300 to each owner, obtain an affirmation regarding their total credit from each owner.

Many do not have foreign income or taxes. The tax season for 2021 returns generated massive amounts of worthless information and attachments. Let us be proactive to avoid time, fees and paper.  

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INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.

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