U. S. Business Income Tax Return

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2025

Partnership Instructions for
Schedules K-2 and K-3 (Form
1065)
Partners’ Distributive Share Items—International and Partner’s Share of Income,
Deductions, Credits, etc.—International
Section references are to the Internal Revenue Code unless
otherwise noted.

Future Developments
For the latest information about developments related to
Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and
their instructions, such as legislation enacted after they were
published, go to IRS.gov/Form1065.

Amended return checkbox. A checkbox has been added to
Schedule K-2 to indicate if the partnership is electronically filing
an administrative adjustment request or amended return for
Schedule K-2.
Expanded domestic filing exception. The scope of criterion 2
of the domestic filing exception has been broadened.
Additionally, the domestic filing exception for criterion 4 no longer
requires the partnership to provide Schedule K-3 to a requesting
partner in subsequent years unless the partner specifically
requests. See Domestic Filing Exception, later.
Small partnership filing exception There is a new exception
to filing Schedules K-2 and K-3 based on Form 1065,
Schedule B, question 4. See Small Partnership Filing Exception,
later.
Schedules K-2 and K-3, Part IV, Section 1. The One Big
Beautiful Bill Act (P.L. 119-21) amended section 250 in part by
adding to the list of gross income items that are excluded in
determining deduction eligible income (DEI). The added
exclusion relates to income and gain from the sale or other
disposition of intangible property (as defined in section 367(d)
(4)), and any other property of a type that is subject to
depreciation, amortization, or depletion by the seller. These
amendments apply to sales or other dispositions occurring after
June 16, 2025.
Schedules K-2 and K-3, Part X, Section 1. Lines 15 and 16
have been revised to allow partnerships to specify other gain
and the amount. Lines 19 and 20 have been revised to allow
partnerships to specify other income and the amount.

General Instructions
The Instructions for Form 1065 and Instructions for Schedule K-1
(Form 1065) generally apply to Schedules K-2 and K-3. These
instructions provide additional information needed to complete
Schedules K-2 and K-3 for tax year 2025. These instructions
apply to both the Schedules K-2 and K-3, unless otherwise
noted.

Oct 24, 2025

Schedule K-2 is an extension of Form 1065, Schedule K, and is
used to report items of international tax relevance from the
operation of a partnership.
Schedule K-3 is an extension of Schedule K-1 (Form 1065)
and is generally used to report to partners their shares of the
items reported on Schedule K-2. Partners must include the
information reported on Schedule K-3 on their tax or information
returns, if applicable.

Who Must File

Any partnership required to file Form 1065 that has items
relevant to the determination of the U.S. tax or certain
withholding tax or reporting obligations of its partners under the
international provisions of the Internal Revenue Code (the Code)
must complete the relevant parts of Schedules K-2 and K-3. See
each part and section for a more detailed description of who
must file each part and section. Penalties may apply for filing
Form 1065 without all required information or for furnishing
Schedules K-3 to partners without all required information. The
penalties that apply to Form 1065 and Schedule K-1 apply to
Schedules K-2 and K-3, respectively. See Penalties in the
Instructions for Form 1065.
Except as otherwise required by statute, regulations, or other
IRS guidance, a partnership isn't required to obtain information
from its direct or indirect partners to determine if it needs to file
each of these parts.
A partnership is only required to complete and file the
relevant portions of Schedules K-2 and K-3, as applicable. For
example, if the partnership doesn’t own (within the meaning of
section 958) stock of a foreign corporation other than solely by
reason of applying section 318(a)(3) (providing for downward
attribution) as provided in section 958(b), it isn’t required to
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.
Schedules K-2 and K-3 consist of the most common
international tax provisions of the Code. However, not all
provisions are specifically identified on these schedules. To the
extent that an international provision is impacted and isn’t
otherwise specifically identified, the partnership should check
box 13 on Schedule K-2, Part I, and Schedule K-3, Part I, and
attach a statement to both Schedules K-2 and K-3 (for
distributive share).
Note: A “QDD partnership” is a partnership that is, or has one or
more branches that are, a qualified derivatives dealer, as defined
under the qualified intermediary agreement in Rev. Proc.
2022-43 (QIA), 2022-52 I.R.B. 570 (QDD). A QDD partnership
must file Form 1065 even if it wouldn’t be required to file if it
wasn’t a QDD partnership and must complete Schedules K-2
and K-3, Part XII. If the QDD partnership is filing Form 1065
solely because it’s a QDD partnership and wouldn’t otherwise be

Instructions for Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065) (2025) Catalog Number 74375Q
Department of the Treasury Internal Revenue Service www.irs.gov

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What’s New

Purpose of Schedules K-2 and K-3

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A partnership with no foreign source income, no assets
generating foreign source income, no foreign partners, and no
foreign taxes paid or accrued may still need to report information
on Schedules K-2 and K-3. For example, if the partner claims a
credit for foreign taxes paid or accrued by the partner, the
partner may need certain information from the partnership to
complete Form 1116, Foreign Tax Credit; or Form 1118, Foreign
Tax Credit—Corporations. Also, a partnership that has only
domestic partners may still be required to complete Part IX when
the partnership makes certain deductible payments to foreign
related parties of its domestic partners. The information reported
in Part IX will assist any domestic corporate partner in
determining the amount of base erosion payments made through
the partnership, and in determining if the partners are subject to
the base erosion and anti-abuse tax (BEAT). Further, if the
domestic partnership with no foreign activity or foreign partners
has direct or indirect domestic corporate partners, Part IV
(concerning foreign-derived intangible income (FDII)) must be
completed. A domestic or foreign publicly traded partnership
(PTP) as defined in section 7704(b) with no foreign activity or
foreign partners may need to complete Part XI. A QDD
partnership must complete Part XII if it has foreign partners or is
directly or indirectly owned by foreign persons (unless there is no
ownership by foreign persons other than through domestic
corporations), even if it has no foreign activity. See each part for
applicability.
Example 1—Part IX required to determine base erosion
payments. Foreign corporation wholly owns DC, a domestic
corporation, and a foreign corporation (foreign subsidiary). DC
satisfies the gross receipts test; see Regulations section
1.59A-2(d). In Year 1, DC owns a 50% interest in a domestic
partnership, USP. An unrelated domestic corporation owns the
remaining 50% interest in USP. DC’s investment in USP doesn’t
qualify for the small partner exception defined in Regulations
section 1.59A-7(d)(2).
In Year 1, USP pays the foreign subsidiary $100 for services.
The services aren’t eligible for the services cost method
exception; see Regulations section 1.59A-3(b)(3)(i). DC’s
distributive share of the $100 payment to the foreign subsidiary
is $50.
For purposes of determining whether a payment or accrual by
a partnership is a base erosion payment, any amount paid or
accrued by USP is treated as paid or accrued by each partner
based on the partner’s distributive share of the item of deduction
with respect to that amount; see Regulations section 1.59A-7(d)
(2). Therefore, DC is treated as having paid $50 to the foreign
subsidiary.
DC must complete Form 8991, Tax on Base Erosion
Payments of Taxpayers With Substantial Gross Receipts, to
compute its base erosion minimum tax amount (if any);
therefore, USP must complete the relevant portions of Schedules
K-2 and K-3, Part IX.

Domestic Filing Exception (Exception to Filing
Schedules K-2 and K-3)
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
criterion number 4, below)) if each of the following four criteria
are met with respect to the partnership’s 2025 tax year and the
partnership isn’t a QDD partnership.
2

1. No or limited foreign activity. During the domestic
partnership’s 2025 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 2025,
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 any of the individuals
or entities listed in (a) through (g).
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 2025 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
Form 1065. For tax year 2025 calendar year partnerships, the
latest 1-month date is August 17, 2026, if the partnership files an
extension. A partner must request that the partnership provide
subsequent year Schedule K-3 information specifically or must
request such information on an annual basis.
Note: For partnerships that satisfy criteria 1 through 4, but
receive a request after the 1-month date. If a partnership
receives a request from a partner for Schedule K-3 information
after the 1-month date for tax year 2025 and hasn’t received a
request from any other partner for Schedule K-3 information on

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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required to file Form 1065, then the QDD partnership isn’t
required to complete Schedules K-2 and K-3 other than
Schedule K-2, Parts B and XII, and Schedule K-3, Parts A
through D and XII.

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Note: For partnerships that satisfy criteria 1 through 3, but
don’t satisfy criterion 4. If the partnership received a request
from a partner for Schedule K-3 information on or before the
1-month date and therefore the partnership doesn’t satisfy
criterion 4, the partnership is required to file Schedules K-2 and
K-3 and furnish Schedule K-3 to the requesting 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. The
partnership should keep records of the information requested by
the partner. See Example 3, later.
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, no later than 1 month from the date on
which the partnership receives the request from the partner. See
Examples 3 and 4, later.
Example 2—domestic filing exception met; issuance of
Schedule K-3 not required. A married couple, U.S. citizens,
each own a 50% interest in USP, a domestic partnership. USP
and the married couple have a tax year end of December 31.
USP invests in a regulated investment company (RIC). With
respect to tax year 2025, USP receives Form 1099 from the RIC
reporting $100 of creditable foreign taxes paid or accrued on
passive category foreign source income. USP doesn’t have any
foreign activity other than that from the RIC. The married couple
receive notification from USP on an attachment to Schedule K-1
that they won’t receive Schedule K-3 unless they request it. The
married couple don’t request Schedule K-3 from USP for tax
year 2025. USP qualifies for the domestic filing exception, and,
as such, USP doesn’t need to complete Schedules K-2 and K-3.
Example 3—domestic filing exception not met. The facts
are the same as in Example 2, except that each spouse owns a
40% interest in USP, and Kirby, a U.S. citizen, owns a 20%
interest in USP. Kirby requests Schedule K-3 from USP for tax
year 2025 and USP receives this request on February 1, 2026.
After requesting an extension, USP files Form 1065 on August
31, 2026. USP doesn’t qualify for the domestic filing exception
because Kirby requested the Schedule K-3 by the 1-month date
(July 31, 2026). As such, USP must complete and file the parts
and sections of Schedules K-2 and K-3 that are relevant to Kirby.
Regarding Schedules K-2 and K-3, USP doesn’t need to
complete, attach, or file any parts or sections relevant to the
married couple. USP must provide a copy of the filed
Schedule K-3 to Kirby on the date that USP files its Form 1065.
USP doesn’t need to furnish Schedule K-3 to the married couple.

Example 4—domestic filing exception met; Schedule K-3
issuance still required. The facts are the same as in
Example 3, except that USP receives the request from Kirby on
August 20, 2026. USP qualifies for the domestic filing exception
because Kirby requested Schedule K-3 after the 1-month date.
USP isn’t required to file the tax year 2025 Schedules K-2 and
K-3 or furnish Schedule K-3 to the married couple. However,
USP is required to provide Schedule K-3, completed with the
requested information, to Kirby on September 20, 2026, no later
than 1 month from August 20, 2026.
Note: If a partnership doesn’t meet the domestic filing
exception, it may meet the Form 1116 exemption exception to
filing Schedules K-2 and K-3.

Small Partnership Filing Exception
Form 1065, Schedule B, question 4, excepts 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
the following four conditions.
1. The partnership’s total receipts for the tax year were less
than $250,000.
2. The partnership’s total assets at the end of the tax year
were less than $1 million.
3. 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.
4. The partnership isn’t filing and isn’t required to file
Schedule M-3.
A partnership is excepted from completing Schedules K-2 and
K-3 if the partnership meets all four conditions of question 4 of
Schedule B.
The partners must receive notification from the partnership at
the latest when the partnership furnishes Schedules K-1 to the
partners. The notice can be provided as an attachment to
Schedules K-1. The notification must state that partners won’t
receive Schedules 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 2025 Schedules K-2
and K-3 and furnish the tax year 2025 Schedule K-3 to the
requesting partner(s). The 1-month date is 1 month before the
date the partnership files Form 1065. For tax year 2025 calendar
year partnerships, the latest 1-month date is August 17, 2026, 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
2025 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 2025 Schedules K-2
and K-3 or furnish the tax year 2025 Schedule K-3 to the
non-requesting partners. However, the partnership is required to
provide the tax year 2025 Schedule K-3, completed with the
requested information, no later than 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

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

3

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or before the 1-month date, the domestic filing exception is met
and the partnership isn’t required to file the tax year 2025
Schedules K-2 and K-3 or furnish the tax year 2025
Schedule K-3 to the non-requesting partners. However, the
partnership is required to provide the tax year 2025
Schedule K-3, completed with the requested information, no
later than 1 month from the date on which the partnership
receives the request from the partner.

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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 no later than 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 2025 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).

Provide Schedule K-3 to the partners of the partnership
according to the timeline for providing Schedule K-1. See the
Instructions for Form 1065.
Also, see the Instructions for Form 1065 for recordkeeping
requirements and amendments or adjustments to Schedules K-2
and K-3.

Computer-Generated Schedules K-2 and K-3

If a computer-generated Schedule K-2 or K-3 conforms to and
doesn’t deviate from the official form and schedules, it may be
filed with the IRS.

Important. Be sure to attach the approval letter to a
computer-generated Schedule K-2 or K-3. However, if the
computer-generated form is identical to the IRS prescribed form,
it doesn’t need to go through the approval process and an
attachment isn’t necessary.
Every year, the IRS issues a revenue procedure to provide
guidance for filers of computer-generated forms. In addition,
every year, the IRS issues Pub. 1167, General Rules and
Specifications for Substitute Forms and Schedules, which
reprints the most recent applicable revenue procedure. Pub.
1167 is available at IRS.gov/pub/irs-pdf/p1167.pdf. For purposes
of Schedules K-2 and K-3, the procedures relevant to Form 1065
and Schedule K-1 (Form 1065) should be conformed with, to the
extent possible.

How To Complete Schedules K-2 and K-3
Reporting currency. Report all amounts in U.S. dollars except
where specified otherwise.
References to other forms. References in these instructions to
Form 1040, U.S. Individual Income Tax Return, are intended, if
applicable, to include Form 1040-SR, U.S. Income Tax Return for
Seniors, as well as other tax returns for noncorporate partners
such as Form 1041, U.S. Income Tax Return for Estates and
Trusts. Similarly, references to Form 1120, U.S. Corporation
Income Tax Return, are intended, if applicable, to apply to other
forms in the 1120 series. References to forms which have been
replaced are intended, if applicable, to include the replacement
forms.
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Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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When and Where To File

Attach Schedules K-2 and K-3 to the partnership’s Form 1065
and file both by the due date (including extensions) for that
return.

Uses of the parts of Schedules K-2 and K-3, in general.
Part I of Schedule K-2 (and Part I of Schedule K-3). Part I
is used to report international tax items not reported elsewhere
on Schedule K-2 or K-3.
Part II of Schedule K-2 (and Part II of Schedule K-3). Part
II is used to figure the partnership’s income or loss by source and
separate category of income; and to report the partner’s
distributive share of such income or loss. Partners will use the
information to figure and claim a foreign tax credit on Form 1116
or 1118.
Part III of Schedule K-2 (and Part III of Schedule K-3).
Part III is used to report information necessary for the partner to
determine the allocation and apportionment of research and
experimental (R&E) expenses, interest expense, and the FDII
deduction for purposes of the foreign tax credit limitation. Part III
is also used to report foreign taxes paid or accrued by the
partnership and the partner’s distributive share of such taxes.
Additionally, it’s used to report income adjustments under
section 743(b) by source and separate category. Partners will
use the information to figure and claim a foreign tax credit on
Form 1116 or 1118.
Part IV of Schedule K-2 (and Part IV of Schedule K-3).
Part IV is used to report the information necessary for the partner
to determine its section 250 deduction with respect to FDII.
Partners will use the information to claim and figure a section
250 deduction with respect to FDII on Form 8993, Section 250
Deduction for Foreign-Derived Intangible Income (FDII) and
Global Intangible Low-Taxed Income (GILTI).
Part V of Schedule K-2 (and Part V of Schedule K-3). Part
V is used to report information the partner needs, along with
other information known to the partner, to determine the amount
of each distribution from a foreign corporation that’s treated as a
dividend or excluded from gross income because the distribution
is attributable to previously taxed earnings and profits (PTEP) in
the partner’s annual PTEP accounts with respect to the foreign
corporation, and the amount of foreign currency gain or loss on
the PTEP that the partner is required to recognize under section
986(c).
Partners will report the dividends and foreign currency gain or
loss on Form 1040 or 1120. If eligible, partners will also use this
information to figure and claim a dividends received deduction
under section 245A on Form 1120.
Part VI of Schedule K-2 (and Part VI of Schedule K-3).
Part VI is used to provide information the partner needs to
determine any inclusions under sections 951(a)(1) and 951A.
Partners will use the information to complete Form 8992, U.S.
Shareholder Calculation of Global Intangible Low-Taxed Income
(GILTI), and Forms 1040 and 1120 for subpart F income
inclusions, section 951(a)(1)(B) inclusions, and section 951A
inclusions.
Part VII of Schedule K-2 (and Part VII of Schedule K-3).
Part VII is used to provide information needed by partners to
complete Form 8621, Information Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing
Fund, and to provide partners with information to determine
income inclusions with respect to the passive foreign investment
company (PFIC).
Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).
Part VIII is used to provide the partnership’s share of a foreign
corporation’s net income in certain income groups for purposes
of the partner’s deemed paid taxes computation with respect to
inclusions under sections 951A, 951(a)(1), and 1293(f). Partners
will use the information to figure and claim a deemed paid
foreign tax credit on Form 1118.
Part IX of Schedule K-2 (and Part IX of Schedule K-3).
Part IX is used to provide information for the partner to figure its
BEAT. Partners will use the information to complete Form 8991.

Part X of Schedule K-2 (and Part X of Schedule K-3). Part
X is used to provide information for the partner to figure its tax
liability for income effectively connected with a U.S. trade or
business (ECI) or with respect to fixed, determinable, annual, or
periodical (FDAP) income. Partners will use the information to
figure and report any U.S. tax liability on Form 1040-NR, U.S.
Nonresident Alien Income Tax Return; and Form 1120-F, U.S.
Income Tax Return of a Foreign Corporation; or other applicable
forms.
Part XI of Schedule K-2 (and Part XI of Schedule K-3).
Part XI is used to provide certain information to U.S. and foreign
partners with respect to section 871(m) by a PTP that satisfies
certain other requirements. Certain partners will use the
information to determine their U.S. withholding tax obligations
and to figure and report any U.S. tax liability on Form 1042,
Annual Withholding Tax Return for U.S. Source Income of
Foreign Persons; and Form 1042-S, Foreign Person’s U.S.
Source Income Subject to Withholding.
Part XII of Schedule K-2 (and Part XII of Schedule K-3).
Part XII is used to provide information regarding the partnership’s
QDD activities. Certain partners may use this information to
determine their U.S. tax liability or U.S. withholding tax
obligations and to figure and report any U.S. tax liability on Form
1042-S.
Part XIII of Schedule K-3. Part XIII is used to provide
information for a foreign partner to figure its distributive share of
deemed sale items on a transfer of an interest in a partnership
that is engaged in the conduct of a trade or business in the
United States. Partners will use this information as follows. A
partner that:
• Is a nonresident alien individual, foreign trust, or foreign
estate completes Schedule P (Form 1040-NR), Foreign
Partner’s Interests in Certain Partnerships Transferred
During Tax Year;
• Is a foreign corporation completes Schedule P (Form
1120-F), List of Foreign Partner’s Interests in Partnerships,
Parts IV and V;
• Is a foreign partnership completes Form 4797, Sales of
Business Property; and Form 8949, Sales and Other
Dispositions of Capital Assets, as needed; or
• Had an installment sale, see Form 6252, Installment Sale
Income.

Specific Instructions
Caution: If the information required in a given section exceeds
the space provided within that section, don’t enter “See
attached” in the section or leave the section blank. Instead,
complete all entry spaces in the section and attach the
remaining information on additional sheets. For all attachments,
include the part, section, line number, and column of the relevant
portions of Schedules K-2 and K-3. The additional sheets must
conform to the IRS version of that section.

Schedule K-2, Identifying Information

At the top of each new page, enter the name of the partnership
and the employer identification number (EIN) of the partnership
as they appear on Form 1065.

Item A—Withholding foreign partnership. If the partnership
is a withholding foreign partnership under Rev. Proc. 2017-21,
2017-6 I.R.B. 791, check “Yes.” Otherwise, check “No.”
If “Yes,” provide the partnership’s withholding foreign
partnership employer identification number (WP-EIN). Enter the
partnership’s WP-EIN regardless of whether the partnership filed
this Form 1065 using its WP-EIN.

Item B—Qualified derivatives dealer (QDD). If the
partnership (including the home office or any branch) is a QDD,
check “Yes.” Otherwise, check “No.”
If “Yes,” provide the partnership’s qualified intermediary
employer identification number (QI-EIN).
Item C—Part applicability. Check “Yes” to indicate the
applicable parts of Schedules K-2 and K-3. Complete each
applicable part.
Check “No” to indicate the inapplicable parts of Schedules
K-2 and K-3. Don’t complete, file, or attach to Form 1065 or
Schedule K-3 the inapplicable parts.
Item D—Check applicable box. Check the “Amended K-2”
box if you’re electronically filing an administrative adjustment
request or amended return. See the Instructions for Form 1065
for further information.

Schedule K-3, Identifying Information
Items A and B. Items A and B should be the same as reported
on Schedule K-1, Part I, items A and B.
Items C and D. Items C and D should be the same as reported
on Schedule K-1, Part II, items E and F.
Item E. Item E should correspond to Schedule K-2, item C.

Schedule K-2, Part I (Partnership’s Other
Current Year International Information); and
Schedule K-3, Part I (Partner’s Share of
Partnership’s Other Current Year International
Information)

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Notes:
• Certain partners will use the information reported in the
attachments for boxes 1 through 5 and 10 to claim and
figure a foreign tax credit on Form 1116 or 1118.
• Certain partners will also use the information reported in the
attachments for box 6 to prepare their tax returns (Forms
1040, 1120, 1040-NR, and 1120-F, as applicable) by taking
into account that under section 267A they aren’t allowed
deductions for the amounts listed in the statement for box 6.
• Certain partners will use the information reported in
attachments for boxes 8 and 9 to identify any international
tax information reporting forms or other international tax
forms that may impact the partners’ tax returns.
• Certain partners may use the information reported in
attachments for box 11 to determine any dual consolidated
losses which may not be deducted on Form 1120.
This part is used to report information for international tax
items not reported elsewhere on Schedule K-2. Check the box to
indicate whether any of the following international tax items are
applicable in the tax year. If applicable, attach statements, as
described below, to Schedule K-2. If applicable, the partnership
must also complete Schedule K-3, Part I, and include with
Schedule K-3 the attachment(s) as described below with the
partner’s distributive share of the amounts.
Box 1. Gain on personal property sale. In general, income
from the sale of personal property is sourced according to the
residence of the seller; see section 865(a). For sourcing
purposes, personal property sold by the partnership is treated as
sold by the partners; see section 865(i)(5). A U.S. citizen or
resident alien individual with a tax home (as defined in section
911(d)(3)) in a foreign country is treated as a nonresident with
respect to the sale of personal property only if an income tax of
at least 10% of the gain derived from the sale is actually paid to a
foreign country for that gain; see section 865(g). In addition, with
the exception of certain property sales, if a U.S. resident
maintains an office or other fixed place of business in a foreign

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TREASURY/IRS AND OMB USE ONLY DRAFT
country, income from the sale of personal property attributable to
such office or other fixed place of business is foreign source only
if an income tax of at least 10% of the income from the sale is
actually paid to a foreign country with respect to such income;
see section 865(e)(1).
If the partnership has income from the sale of personal
property (other than inventory, depreciable personal property,
and certain intangible property excepted from the general rule of
section 865(a)); and the partnership pays income tax to a foreign
country with respect to income from the sale, or the income is
eligible for re-sourcing under an applicable treaty, it must check
box 1 and attach a statement to Schedules K-2 and K-3 (for

distributive share) reflecting all the information shown in Table 1.
Each item of property sold must be listed separately with the
information shown in Table 1. The partnership may combine
sales of stock property by country. Otherwise, don’t combine
sales of property. If the gain is capital, enter “long-term” or
“short-term” in column (b). Enter the two-letter code from the list
at IRS.gov/CountryCodes in column (f). Don’t enter “various” or
“OC” for the country code. If the property sale is taxed by more
than one country, complete a separate line for that country, but
indicate in some manner (for example, a footnote) that the
property entered on both lines is the same property.

Table 1. Information on Personal Property Sold (For use with Schedules K-2 and K-3 (Form 1065), Part I,
box 1)
(b) Long-term/
short-term

(c) Gains

Box 2. Foreign oil and gas taxes. A separate foreign tax credit
limitation is applied to foreign oil and gas taxes. See section
907(a) and Regulations section 1.907(a)-1 for details. If the
partnership has such taxes, it must check box 2 and attach a
completed Schedule I (Form 1118), Reduction of Foreign Oil and
Gas Taxes, to Schedules K-2 and K-3 (with the partner’s
distributive share). The partnership doesn’t need to complete
columns 12 and 13 of Schedule I (Form 1118), Part I; or Part III,
lines 1 and 3. The partnership must attach Schedule I (Form
1118) even if there are no corporate partners because the
limitation applies to individuals eligible to claim a foreign tax
credit.
The partnership attaches a partially completed Schedule I
(Form 1118) so that the partner has the information it needs to
complete Schedule I (Form 1118) or Form 1116. The partnership
isn’t attaching Schedule I (Form 1118) as a form required to be
filed by the partnership for purposes of the partnership
determining creditable taxes because a partnership can’t claim a
foreign tax credit.
Box 3. Splitter arrangements. Foreign income taxes with
respect to a foreign tax credit splitting event are suspended until
the related income is taken into account by the taxpayer; see
section 909. There is a foreign tax credit splitting event with
respect to foreign income taxes of a payor if in connection with a
splitter arrangement, as defined in Regulations section
1.909-2(b), the related income was, is, or will be taken into
account by a covered person; see Regulations section
1.909-2(a). A covered person, as defined in Regulations section
1.909-1(a)(4), includes, for example, any entity in which the
payor holds, directly or indirectly, at least a 10% ownership
interest (determined by vote or value). A payor, as defined in
Regulations section 1.909-1(a)(3), includes, for example, a
person that takes foreign income taxes paid or accrued by a
partnership into account pursuant to section 702(a)(6).
The partnership must report foreign income taxes that are
potentially suspended on Schedule K-2, Part III, Section 4,
line 2E, and each partner’s share of such taxes on Schedule K-3,
Part III, Section 4, line 2E. A partnership may not be able to
determine whether taxes are suspended and whether related
income is taken into account. However, when the partnership is
able to determine that taxes are potentially suspended, or
potentially unsuspended, it must report such taxes and the
information requested in these instructions for box 3. For
example, where a partnership owns a reverse hybrid and the
foreign country assesses tax on the partnership for income
6

(d) Amount of tax paid
in local currency

(e) Amount of tax paid
in U.S. dollars

(f) Taxing country
(enter two-letter
country code)

earned by the reverse hybrid, the partnership should report such
taxes as potentially suspended taxes.
Check box 3 and attach a statement to Schedules K-2 and
K-3 that includes the following for each splitter arrangement in
which the partnership participates that would qualify as a splitter
arrangement under section 909 if one or more partners are
covered persons with respect to an entity that took into account
related income from the arrangement.
Section 1 of attached statement—potentially suspended
taxes.
• Explanation of the splitter arrangement (for example, reverse
hybrid owned by the partnership).
• Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement.
• Amount of related income on which such taxes were paid or
accrued.
• The two-letter code for the country to which the taxes were
paid or accrued from the list at IRS.gov/CountryCodes.
Don’t enter “various” or “OC” for the country code.
• The separate category and source of income to which the
taxes are assigned if determinable by the partnership.
Section 2 of attached statement—potentially
unsuspended taxes.
• Origin year of the splitter arrangement.
• Explanation of the splitter arrangement (for example, reverse
hybrid owned by the partnership).
• Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement in the origin year of
the splitter arrangement.
• Amount of related income on which such taxes were paid or
accrued in the origin year of the splitter arrangement.
• The two-letter code for the country to which the taxes were
paid or accrued from the list at IRS.gov/CountryCodes.
Don’t enter “various” or “OC” for the country code.
• The separate category and source of income to which the
taxes are assigned if determinable by the partnership.
• Amount of related income taken into account in the current
tax year and the amount of taxes originally paid that relate to
that portion of the related income if determinable by the
partnership.
Box 4. Foreign tax translation. Check box 4 if the partnership
reports any foreign taxes on Schedules K-2 and K-3, Part III,
Section 4. Attach the statement described in the instructions for
those sections to Schedules K-2 and K-3.

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(a) Property description

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Box 5. High-taxed income. Check box 5 if the partnership has
passive income and attach a statement to Schedules K-2 and
K-3 with Worksheet 1 or Worksheet 2, or both, completed. The
partner will use this information to determine whether its passive
income is high-taxed passive income.
Income received or accrued by a U.S. person that would
otherwise be passive income isn’t treated as passive income if
the income is determined to be high-taxed income; see section
904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
a partner must group its shares of items of passive income from
a partnership according to the rules in Regulations section
1.904-4(c)(3), except that the portion, if any, of the share of
income attributable to income earned by a domestic partnership

through a foreign qualified business unit (QBU) is separately
grouped under the rules of Regulations section 1.904-4(c)(4);
see also Regulations section 1.904-4(c)(5)(ii). For this purpose,
a foreign QBU is a QBU (as defined in section 989(a)), other
than a controlled foreign corporation (CFC) or noncontrolled
10%-owned foreign corporation, that has its principal place of
business outside the United States; see Regulations section
1.904-4(c)(3).
Note: For purposes of the high-taxed income rules, passive
income isn’t treated as subject to a withholding tax or other
foreign tax when a credit is disallowed in full for such foreign tax,
for example, under section 901(k).

Worksheet 1 for Schedule K-2, Part I, Box 5
A

Passive income subject to withholding tax of 15% or more

B

Passive income subject to withholding tax of less than 15% but greater
than zero

C

Passive income not subject to any foreign tax

D

Passive income subject to no withholding tax, but subject to other
foreign tax

I. Passive income net of allocable expenses

II. Taxes

I. Passive income net of allocable expenses

II. Taxes

DRAFT

DRAFT

Reference: Regulations section 1.904-4(c)(3).

Worksheet 2 for Schedule K-2, Part I, Box 5
Name of foreign QBU:
Complete a separate Worksheet 2 for each foreign QBU.
A

Passive income subject to withholding tax of 15% or more

B

Passive income subject to withholding tax of less than 15% but greater
than zero

C

Passive income not subject to any foreign tax

D

Passive income subject to no withholding tax, but subject to other
foreign tax

Reference: Regulations section 1.904-4(c)(4).

Example 5—Part I, box 5; high-taxed income. In Year 1,
USP, a domestic partnership, has two domestic corporate
partners with equal interests in the partnership. In Year 1, USP
receives $100 of passive dividend income from a noncontrolled
10%-owned foreign corporation subject to a 15% withholding
tax. USP also receives $150 of passive interest income from an
unrelated person subject to a 30% withholding tax. USP incurs
$80 of expenses that are allocable to the interest income. USP
also receives $50 of passive dividend income from a CFC, which
isn’t subject to foreign tax. No expenses are allocable to the
dividend income. USP’s branch operation in Country X, treated

as a QBU under section 989(a), receives $100 of passive
dividend income subject to a 15% withholding tax. Finally, USP
earns $400 of passive income with respect to its branch
operation in Country X. Such income is subject to foreign tax
(but not withholding tax) of $40. Expenses of $120 are allocable
to the distributive share of branch income. No expenses are
allocable to the dividend income.
For Year 1, USP checks box 5 on Schedule K-2 (Form 1065),
Part I, and attaches Worksheet 1 and Worksheet 2 to
Schedule K-2.

Example 5. Worksheet 1
I. Passive income net of allocable expenses

II. Taxes

$170

$60

Passive income subject to withholding tax of less than 15% but greater
than zero

0

0

C

Passive income not subject to any foreign tax

50

0

D

Passive income subject to no withholding tax, but subject to other
foreign tax

0

0

A

Passive income subject to withholding tax of 15% or more

B

Reference: Regulations section 1.904-4(c)(3).

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Example 5. Worksheet 2
Name of foreign QBU: Country X QBU
Complete a separate Worksheet 2 for each foreign QBU.

I. Passive income net of allocable expenses

II. Taxes

$100

$15

Passive income subject to withholding tax of less than 15% but greater
than zero

0

0

C

Passive income not subject to any foreign tax

0

0

D

Passive income subject to no withholding tax, but subject to other
foreign tax

280

40

A

Passive income subject to withholding tax of 15% or more

B

Reference: Regulations section 1.904-4(c)(4).

Box 6. Section 267A disallowed deduction. Check box 6 if
the partnership paid or accrued any interest or royalty for which
the partnership knows, or has reason to know, that one or more
of its partners aren’t allowed a deduction under section 267A.
For additional information regarding section 267A, see the
instructions for Form 1065, Schedule B, question 22, and FAQs
for section 267A at IRS.gov/businesses/partnerships/faqs-forForm-1065-Schedule-B-Other-Information-Question-22. In
addition, for each partner that is disallowed a deduction under
section 267A, the partnership should check box 6 in Part I of the
specific partner’s Schedule K-3 and attach to Schedule K-3 a
statement titled “Section 267A Disallowed Deduction” that
separately lists the following information.
• The amount of interest paid or accrued by the partnership
for which the partner isn’t allowed a deduction under section
267A.
• The amount of royalty paid or accrued by the partnership for
which the partner isn’t allowed a deduction under section
267A.
• The extent to which information reported on other parts of
Schedule K-3 (for example, Part II, Section 2; or Part IX,
Section 2) reflects interest or royalty for which the partner
isn’t allowed a deduction under section 267A.
Caution: When completing other parts of Schedules K-2 and
K-3 (for example, Part II, Section 2; or Part IX, Section 2), list an
amount without regard to whether the partner is disallowed a
deduction under section 267A for the amount.
Note for boxes 8 and 9. If the filer meets an exception, such as
the multiple filer exception, to filing Form 5471, Information
Return of U.S. Persons With Respect to Certain Foreign
Corporations; or Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships, the filer isn’t required to
complete and attach those forms. However, the filer must still
attach to Form 1065 any required statements to qualify for the
exception to filing Form 5471 or Form 8865.
Box 8. Form 5471 information. Check box 8 and attach
Form(s) 5471 to Form 1065 and Schedule K-1 (Form 1065) if
either of the following applies.
• The partnership filed one or more Forms 5471.
• The partnership received Form(s) 5471 as an attachment to
a Schedule K-3 issued to the partnership.
Form 5471 doesn’t need to be attached to Schedule K-1 or
K-3 if the partnership knows or has reason to know that its direct
partner (and any indirect partners) doesn’t need the information
on Form 5471 to prepare its tax return. For example, the
partnership wouldn’t need to attach Form 5471 to Schedules K-3
for certain tax-exempt partners. A pass-through entity partner
that receives Form 5471 with Schedule K-1 or K-3 must provide
the relevant portions of Form 5471 to its partner unless the
8

pass-through entity knows or has reason to know that its direct
partner (and any indirect partners) doesn’t need the information
on Form 5471 to prepare its tax return.
If a partner only needs certain information from Form 5471,
the partnership need only attach that portion to Schedule K-3
and not the complete Form 5471.
Box 9. Other forms. Check box 9 and attach any applicable
forms to Form 1065 and Schedule K-1 if any of the following
apply.
• The partnership filed any other international tax forms.
• Another person filed these forms on behalf of the
partnership.
• The partnership received these forms as an attachment to
Schedule K-1 or K-3 issued to the partnership.
This includes, but isn’t limited to, the following forms.

• Form 5713, International Boycott Report.
• Form 8833, Treaty-Based Return Position Disclosure Under
Section 6114 or 7701(b).

• Form 8621.

Exception for Form 8621. With respect to Schedule K-3, the
partnership should check box 9 if the partnership checked box 9
on Schedule K-2. The partnership should indicate on an
attachment to Schedule K-3 that Form(s) 8621 is attached to
Schedule K-2. The partnership doesn’t need to attach Form
8621 to Schedule K-1 or K-3.
Form 8990. If the partnership has filed Form 8990, check
box 9 and provide on Schedule K-1 the information needed to
complete Form 8990, Schedule A, for each foreign partner which
is required to report its distributive share of excess business
interest expense, excess taxable income, and excess business
interest income, if any, that is attributable to income effectively
connected with a U.S. trade or business. See the instructions for
Schedule K-1 (Form 1065), box 20, code AF.
Withholding tax returns. Don’t include any withholding tax
returns required to be filed under chapters 3 and 4 (sections
1441 through 1474).
See Other Forms, Returns, and Statements That May Be
Required in the Instructions for Form 1065.
Tip: If the partnership attached any of the forms identified in
box 8 or 9 to Form 1065, the partnership doesn’t need to attach
them again to Schedule K-2.
Box 10. Partner loan transactions. Check box 10 and attach
a statement with the information in the applicable Table 2 or
Table 3 if the partnership knows or has reason to know that it (a)
received a loan from its partner (or a member of the partner’s
affiliated group) (downstream loan), as described in Regulations
section 1.861-9(e)(8); or (b) loaned an amount to its partner (or a
member of the partner’s affiliated group) (upstream loan), as
described in Regulations section 1.861-9(e)(9).
Downstream loans. On an attached statement, the
partnership will provide the details for any downstream loans
from its partner or a member of the partner’s affiliated group,

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USP completes the same worksheets with the distributive
shares and attaches those worksheets to each Schedule K-3
provided to the partners.

TREASURY/IRS AND OMB USE ONLY DRAFT
including the amount of interest expense paid or accrued by the
partnership. Report the information on separate lines for each
separate loan. The reporting should be as follows in Table 2.

•

Table 2. Downstream Loans
Name of
lender

Lender’s TIN

Date of loan

Amount of
loan

Interest
expense for
the year

If there are any partners in the same affiliated group as the
lender, attach to each of the Schedules K-2 and K-3 a statement
that adds two separate columns for each such partner’s name
and taxpayer identification number (TIN).
Upstream loans. On an attached statement, the partnership
will provide the details for any upstream loans to its partner or a
member of the partner’s affiliated group, including the amount of
interest income received or accrued by the partnership. Report
the information on separate lines for each separate loan. The
reporting should be as follows in Table 3.

Name of
borrower

Borrower’s TIN

Date of
loan

Amount of
loan

Interest income
for the year

If there are any partners in the same affiliated group as the
borrower, attach to each of the Schedules K-2 and K-3 a
statement that adds two separate columns for each such
partner’s name and TIN.
Box 11. Dual consolidated loss. Check box 11 if either the
reporting partnership (a) owns a foreign branch (as defined in
Temporary Regulations section 1.367(a)-6T(g)) or an interest in
a hybrid entity (as defined in Regulations section 1.1503(d)-1(b)
(3)), or (b) is a hybrid entity (as defined in Regulations section
1.1503(d)-1(b)(3)). However, box 11 should only be checked if
the reporting partnership knows that one or more of its direct or
indirect partners are domestic corporations (other than a RIC, a
real estate investment trust (REIT), or an S corporation). A
domestic corporate partner’s interest in the reporting partnership
or its indirect interest in a foreign branch or hybrid entity may be
treated as a separate unit and subject to the dual consolidated
loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1
through -8.
If box 11 is checked, a reporting partnership should include
on attachments to the Schedule K-2 and the Schedules K-3 of a
partner that is either a domestic corporation or a partnership the
following.
• The foreign country in which each foreign branch is located.
• The foreign country in which each hybrid entity is subject to
an income tax either on their worldwide income or on a
residence basis.
• For each foreign branch and hybrid entity, including if the
reporting partnership owns an interest in a partnership that
owns a foreign branch or hybrid entity:
1. On Schedules K-2, separately state the net income or
loss attributable to each direct and indirect foreign
branch or hybrid entity of the partnership, as
determined under Regulations section 1.1503(d)-5(c);
and
2. On Schedule K-3, for each partner that is a domestic
corporation or a partnership, separately state the
partner’s distributive share of the net income or loss of

•
•

Box 12. Schedule K-2 (Reserved for future use). Schedule K-3, Form 8865 information. If the partnership transferred
property to a foreign partnership that would subject one or more
of its domestic partners to reporting under section 6038B and
Regulations section 1.6038B-2(a)(2) but didn’t file Schedule O
(Form 8865), Transfer of Property to a Foreign Partnership, with
all the information required under Regulations section
1.6038B-2, about the transfer, then the partnership must provide
the necessary information for each partner to fulfill its reporting
requirements under Regulations section 1.6038B-2. The
partnership should check box 12 on Schedule(s) K-3 and attach
the relevant information, as applicable to each partner. Box 12
shouldn’t be checked on Schedule K-2.
Box 13. Other international items. If the partnership has
transactions, income, deductions, payments, or anything else
that is impacted by the international tax provisions of the Code
and such events aren’t otherwise reported on this part or other
parts of Schedules K-2 and K-3, report that information on a
statement that is attached to Schedules K-2 and K-3 and check
box 13.
For box 13, don’t report any withholding tax returns required
to be filed under chapters 3 and 4 (sections 1441 through 1474).
These forms are separately filed with the IRS.
Do report the following for box 13.
• Form 926, Return by a U.S. Transferor of Property to a
Foreign Corporation.
• Information a partner (whether direct or indirect) that is a
U.S. shareholder of a CFC needs to complete Form 5471.
For example, this would be necessary in the case that one
or more partners is a CFC.
• Information a filer needs to complete Form 8865 to the
extent that one of the partners (whether direct or indirect) is
an entity for which there is a Form 8865 filing requirement.
• Information that a partner (whether direct or indirect) needs
to complete Form 8858, Schedule C-1, with respect to a
foreign branch or FDE owned by the partnership, if section
987 is applied to the activities of the foreign branch or FDE
using a method that requires the partner, rather than the
partnership, to recognize section 987 gain or loss.
• If a partner in the partnership, whether direct or indirect,
needs certain information regarding CFCs, foreign tax
credits, or foreign parented multinational groups to
determine the partner’s liability under section 55(a)(2) and
the information isn’t specifically required to be reported on
the Schedule K-3, such information should be provided by
the partnership to the partner.
• Information regarding any top-up tax paid or accrued during
the tax year by the partnership. See Global Anti-Base
Erosion (GloBE) Model Rules (Pillar Two) information for

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Table 3. Upstream Loans

•

each direct and indirect foreign branch or hybrid entity
of the partnership.
Whether a foreign use (as described in Regulations section
1.1503(d)-3 and determined as if a net loss attributable to a
partnership separate unit were a DCL) occurred during the
tax year with respect to net loss of a partnership separate
unit.
Whether a transfer of assets (as described in Regulations
section 1.1503(d)-6(e)(1)(iv)) or a transfer of an interest in a
separate unit (as described in Regulations section
1.1503(d)-6(e)(1)(v)) occurred during the tax year with
respect to a foreign branch or hybrid entity.
The organizational chart described in item 5 of Form 8858,
Information Return of U.S. Persons With Respect to Foreign
Disregarded Entities (FDEs) and Foreign Branches (FBs).
If a foreign disregarded entity (FDE) made its election to be
treated as disregarded from its owner during the tax year,
whether the tax owner claimed a loss with respect to stock
or debt of the FDE as a result of the election.

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Global Anti-Base Erosion (GloBE) Model Rules (Pillar
Two) information for partners. Certain jurisdictions have
enacted legislation to implement the GloBE Model Rules for the
qualified domestic minimum top-up tax (QDMTT), IIR, and
UTPR. See the Organisation for Economic Cooperation and
Development’s (OECD) document, Tax Challenges Arising from
the Digitalisation of the Economy–Global Anti-Base Erosion
Model Rules (Pillar Two) (Dec. 14, 2021), available at https://
www.oecd-ilibrary.org/taxation/
tax-challenges-arising-from-digitalisation-of-the-economy-global
-anti-base-erosion-model-rules-pillar-two_782bac33-en. Under
these rules, if the effective tax rate (ETR) for a jurisdiction is
below 15%, top-up tax may be imposed. The amount of top-up
tax is determined by multiplying the top-up tax percentage (the
positive excess of 15% over the ETR in the jurisdiction) by the
excess profits (the positive amount of the net GloBE income in
such jurisdiction that exceeds a substance-based income
exclusion). The top-up tax is collected under the QDMTT, IIR,
and/or UTPR. If the partnership paid or accrued any QDMTT, IIR,
and/or UTPR (or similar taxes) during the tax year, attach a
statement that separately lists the dollar amount of each type of
tax paid or accrued. See Table 4.

Table 4. Top-Up Tax
Type of other
international item

Other international
item amount

Other international
item explanation

GloBE QDMTT tax

Top-up tax

GloBE IIR tax

Top-up tax

GloBE UTPR tax

Top-up tax

GloBE total taxes

Top-up tax

Temporary relief. Final foreign tax credit regulations were
published January 4, 2022. The new regulations made changes
to the rules relating to the creditability of foreign taxes under
sections 901 and 903. Notice 2023-55 was subsequently
released on July 21, 2023, allowing taxpayers to apply prior rules
in place of certain rules under the new regulations (temporary
relief). The rules described in this Notice were modified in part by
Notice 2023-80, released on December 11, 2023, to address
their application to partnerships and their partners and to extend
the relief period until further notice.
Notice 2023-80 clarified that with respect to foreign taxes paid
or otherwise required to be reported by a partnership, including
foreign taxes paid by a CFC (collectively, the partnership’s
foreign taxes), the partnership makes the decision to apply (or
not apply) the temporary relief. A partnership that applies the
temporary relief to a tax year must apply the temporary relief to
all the partnership’s foreign taxes. In addition, a partnership’s
choice to apply temporary relief for a tax year will generally
cause a partner to be required to apply (or to be precluded from
applying) the temporary relief for the relief year to all other
foreign taxes for which the partner would be eligible to claim a
credit as provided in section 901. For more information, see
Treasury Decision 9959, 2022-03 I.R.B. 328, available at
IRS.gov/irb/2022-03_IRB#TD-9959; Notice 2023-55, 2023-32
10

I.R.B. 427, available at IRS.gov/irb/2023-32_IRB#NOT-2023-55;
and Notice 2023-80, 2023-52 I.R.B. 1584, available at
IRS.gov/irb/2023-52_IRB#NOT-2023-80.
Attach a statement stating whether the partnership has
applied temporary relief to the partnership’s foreign taxes. See
Table 5.

Table 5. Temporary Relief
Type of other
international item
Temporary relief

Other international
item amount
Yes/No

Other international
item explanation
Temporary relief

Schedule K-2, Parts II and III; and Schedule K-3,
Parts II and III

Certain partners will use the following information to claim and
figure a foreign tax credit on Form 1116 or 1118. If the
partnership doesn’t qualify for the domestic filing exception,
Schedules K-2 and K-3, Parts II and III, must be completed
unless (a) the partnership doesn’t have a direct or indirect
partner that is eligible to claim a foreign tax credit, or (b) no direct
or indirect partner would have to file Form 1116 or 1118 to claim
the foreign tax credit.

Partners eligible to claim credit. A partner (including an
indirect partner) that’s eligible to claim a foreign tax credit
includes a domestic corporation, a U.S. citizen or resident, U.S.
citizen or resident beneficiaries of domestic trusts and estates,
certain foreign corporations, and certain nonresident individuals.
See sections 901 and 906. An indirect partner includes a partner
that owns the partnership through a domestic pass-through
entity (for example, a partnership, an S corporation, or a trust
(see Regulations section 1.904-5(a)(4)(iv) for the definition of
pass-through entity)). A partner may claim credits that it is
deemed to pay. See sections 960 and 1293(f).
Form 1116 exemption exception. Under section 904(j),
certain partners aren’t required to file Form 1116 (Form 1116
exemption). For more information, go to IRS.gov/Individuals/
International-Taxpayers/Foreign-Tax-Credit-How-To-Figure-theCredit. A domestic partnership isn’t required to complete
Schedules K-2 and K-3 if all partners are eligible for the Form
1116 exemption and the partnership receives notification of the
partners’ eligibility for such exemption by the 1-month date (as
defined earlier). If a partnership receives notification from only
some of the partners that they’re eligible for the Form 1116
exemption, the partnership doesn’t need to complete
Schedule K-3 for those exempt partners but must complete
Schedules K-2 and K-3 with respect to the other partners to the
extent that the partnership doesn’t qualify for the domestic filing
exception.
A partnership that doesn’t have or receive sufficient
information or notice regarding a direct or indirect partner must
presume such partner is eligible to claim a foreign tax credit and
such partner would have to file Form 1116 to claim a credit. As
such, the partnership must complete Schedules K-2 and K-3,
including Parts II and III, accordingly.
Example 6—Form 1116 exemption. A married couple,
both U.S. citizens, each own a 50% interest in USP, a domestic
partnership. The couple and USP each have a calendar tax year.
USP invests in a RIC. USP receives Form 1099 from the RIC
reporting $400 of creditable foreign taxes paid or accrued on
passive category foreign source income. USP’s only foreign
activity is from the RIC. The married couple don’t pay or accrue
any foreign taxes other than their distributive share of USP’s
foreign taxes. They also don’t have any other foreign source
income. They qualify for the Form 1116 exemption and notify

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•

partners below. For more information about reporting any
top-up tax paid or accrued by certain entities or branches
owned by the partnership, see the instructions for
Schedule G (Form 5471), Schedules K-2 and K-3 (Form
8865), and Schedule G (Form 8858).
Information regarding whether the partnership applied the
temporary relief provided by Notice 2023-55, as modified by
Notice 2023-80, to determine creditability of foreign taxes
paid or otherwise required to be reported by the partnership.
See Temporary relief, later.

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Partnerships with no foreign partners and limited or no foreign activity. In many instances, a partnership with no foreign
partners, no foreign source income, no assets generating foreign
source income, and no foreign taxes paid or accrued may still
need to report information on Schedules K-2 and K-3. For
example, if the partner claims the foreign tax credit, the partner
generally needs certain information from the partnership on
Schedule K-3, Parts II and III, to complete Form 1116 or 1118.
This information should have been reported in prior years,
including before the Tax Cuts and Jobs Act of 2017, with
Schedules K and K-1, and is information the partner needs to
compute the foreign tax credit limitation, which determines the
amount of foreign tax credit available to the partner. However,
see Domestic Filing Exception, earlier.
Section 904 generally limits the foreign tax credit to the lesser
of foreign taxes paid or accrued or the portion of U.S. tax liability
attributable to foreign source taxable income. Foreign source
taxable income is foreign source gross income less allocable
expenses. In general, the partnership must complete Schedules
K-2 and K-3, Parts II and III, because the partnership’s gross
income, gross receipts, expenses, assets, and foreign taxes may
affect the foreign tax credit available to the partner. The source of
certain gross income and gross receipts is determined by the
partner. In addition, some expenses of the partnership are
allocated and apportioned by the partner. Because of this
partner determination, it isn’t possible for the partner to assume
that all income of the partnership is U.S. source and all expenses
of the partnership reduce U.S. source income. Also, the
allocation and apportionment of certain partner expenses take
into account distributive shares of assets and income of the
partnership that aren’t otherwise reported in the specified format
on Schedule K-1.
For example, for sourcing purposes, personal property sold
by the partnership is treated as sold by the partners; see section
865(i)(5). Generally, income from the sale of certain personal
property (excluding, for example, inventory) is sourced according
to the residence of the seller. In cases in which the partner is a
pass-through entity, the partnership might not know the ultimate
residence of the first non-pass-through partner. The partnership
isn’t required to separately state gain from the sale of personal
property on Schedules K and K-1 because it is generally
included in ordinary income. However, the gain is separately
reported on Schedules K-2 and K-3, Part II.
As another example, the partner’s R&E expenses (which
include the distributive share of the partnership’s R&E expenses)
are allocated and apportioned by the partner; see Regulations
section 1.861-17(f). R&E expenses are allocated and
apportioned based on the gross receipts by Standard Industrial
Classification (SIC) code. R&E expenses by SIC code aren’t
required reporting on Schedules K and K-1 but are reported on
Schedules K-2 and K-3, Part II. The partner needs
Schedule K-3, Part III, Section 1, for the partner’s share of the
partnership’s gross receipts by SIC code for purposes of
allocating and apportioning R&E expenses.
In some cases, the partner will be able to use the information
reported on Parts II and III to increase the foreign tax credit
limitation and the amount of available foreign tax credit to the
partner. For example, Part III, Section 2, provides the partner
with the tax book value of the assets of the partnership. In
general, a partner apportions interest expense to reduce U.S.
source income or foreign source income based on the tax book

value of its assets, including its distributive share of the
partnership’s interest expense and assets; see section 864(e)(2)
and Regulations section 1.861-9(e). Taking into account the
assets of a domestic partnership generating solely U.S. source
income would result in more expense allocated to reducing U.S.
source income and less expense allocated to reduce foreign
source income. Additional foreign source income increases the
partner’s foreign tax credit limitation and the ability of the partner
to claim foreign tax credits. The regulations provide exceptions to
asset method apportionment for certain less-than-10% limited
partners, and these instructions take this into account by
excepting the partnership from completing certain portions of
Schedules K-2 and K-3 for these partners. Schedules K and K-1
contain net amounts but don’t include separately stated
reporting for the partnership’s interest expense for international
tax reporting purposes, or the tax book value of the assets; see
Regulations section 1.861-9(e). See Lines 39 and 40 and Lines
41 through 43 under Part II; and Section 2 under Part III, later, for
further guidance.
Example 7—Parts II and III required for partnership with
no foreign activity. U.S. citizens Kirby and Darby own equal
interests in USP, a domestic partnership. USP has no foreign
activity. In Year 1, Kirby pays $2,000 of foreign income taxes on
passive category income other than capital gains reported to
Kirby on a payee statement. Kirby has interest expense of
$5,000, and USP doesn’t have interest expense. None of Kirby’s
interest expense is directly allocable. Kirby doesn’t have an
overall domestic loss in tax year 2025.
Because Kirby must complete Form 1116 to claim a foreign
tax credit, Kirby requests a Schedule K-3 by the 1-month date
and, therefore, the domestic filing exception doesn’t apply to
USP with respect to Kirby. USP must complete the relevant
portions of Parts II and III of Schedules K-2 and K-3 for Kirby.
The tax book value of USP’s assets is $100,000 (reported in
column (a) of Schedule K-2, Part III, Section 2) and Kirby’s share
of those assets is $50,000 (reported in column (a) of
Schedule K-3, Part III, Section 2). Not including Kirby’s
distributive share of the assets of USP, the tax book value of
Kirby’s assets is $50,000. Of Kirby’s assets, $10,000 generates
passive category foreign source income and $40,000 generates
U.S. source income. Kirby has passive category foreign source
taxable income before interest expense of $8,000. Kirby’s U.S.
tax rate is 25%. Kirby’s interest expense and assets and USP’s
assets are characterized in the same category under sections
163 and 469 for purposes of Temporary Regulations section
1.861-9T(d). Kirby uses the tax book value (as opposed to the
alternative tax book value) to allocate and apportion interest
expense.
Kirby’s interest expense is apportioned between U.S. source
and foreign source income ratably based on the tax book value
of Kirby’s U.S. source and foreign source assets. Without taking
into account the distributive share of USP’s assets, the amount
of Kirby’s interest expense that would reduce passive category
foreign source income is $1,000 ($5,000 x ($10,000/$50,000)).
Therefore, Kirby’s passive category foreign source taxable
income would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax
rate, Kirby may only use $1,750 (25% (0.25) x $7,000) of the
$2,000 of foreign taxes. See section 904.
Taking into account the distributive share of USP’s assets, the
amount of Kirby’s interest expense that reduces passive
category foreign source income is $500 ($5,000 x
($10,000/$100,000)). Therefore, Kirby’s passive category foreign
source taxable income would be $7,500 ($8,000 − $500). At a
25% U.S. tax rate, Kirby may use $1,875 (25% (0.25) x $7,500)
of the $2,000 of foreign taxes—an additional foreign tax credit
amount of $125 after taking into account Kirby’s share of the tax
book value of the partnership assets. Darby doesn’t request a
Schedule K-3 from USP for tax year 2025. Under the domestic

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USP by the 1-month date that they don’t need Schedule K-3.
Even though USP doesn’t qualify for the domestic filing
exception because the creditable foreign taxes paid or accrued
by USP are greater than $300, because the married couple
notify USP by the 1-month date that they don’t need
Schedule K-3 under the Form 1116 exemption exception, USP
doesn’t need to complete Schedules K-2 and K-3.

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Example 8—Part II, not Part III, required for partnership
with no foreign activity. The facts are the same as in
Example 7, except that Kirby has $5,000 of deductions that
aren’t definitely related to any gross income as described in
Regulations section 1.861-8(e)(9), and Kirby and USP have no
other expenses. Further, Kirby’s share of USP’s gross income is
$50,000. Not including Kirby’s distributive share of the income of
USP, Kirby’s gross income is $50,000. Of Kirby’s gross income,
$5,000 is passive category foreign source gross income and
$45,000 is U.S. source gross income. USP doesn’t have any
gross income the source of which is determined by the partner.
Kirby’s expenses must be ratably apportioned based on
Kirby’s gross income (including its distributive share of the
income of USP); see Regulations section 1.861-8(c)(3).
Therefore, USP must complete Schedule K-2, Part II, and
Schedule K-3, Part II, for Kirby. Before taking into account the
distributive share of USP’s gross income, the amount of Kirby’s
expenses described in Regulations section 1.861-8(e)(9) that
reduce foreign source income is $500 ($5,000 x
($5,000/$50,000)). Therefore, Kirby’s foreign source taxable
income would be $4,500 ($5,000 − $500). At a 25% U.S. tax
rate, Kirby may only use $1,125 (25% (0.25) x $4,500) of the
$2,000 of foreign taxes. See section 904.
Taking into account the distributive share of USP’s gross
income, the amount of Kirby’s expenses described in
Regulations section 1.861-8(e)(9) that reduce foreign source
income is $250 ($5,000 x ($5,000/$100,000)). Therefore, Kirby’s
foreign source taxable income would be $4,750 ($5,000 − $250).
At a 25% U.S. tax rate, Kirby may use $1,187.50 (25% (0.25) x
$4,750) of the $2,000 of foreign taxes in Year 1, which is an
additional foreign tax credit amount of $62.50 after taking into
account Kirby’s distributive share of the gross income of USP.
Because Kirby and USP don’t have R&E expenses or interest
expense, and because USP didn’t pay or accrue any foreign
taxes, USP doesn’t need to complete Schedules K-2 and K-3,
Part III.
Note: A partner may need the distributive share of the
partnership’s gross income for purposes of allocating and
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9).
General filing instructions. On Schedule K-2, Parts II and III,
the partnership reports its gross income, gross receipts, cost of
goods sold (COGS), certain deductions, and taxes by source
and separate category. The partnership also reports information
that the partner needs to allocate and apportion expenses and
determine the source of certain items of gross income and gross
receipts. Unless specifically noted below, the partnership reports
on Schedule K-3, Parts II and III, the partner’s share of the
partnership’s gross receipts, gross income, COGS, certain
deductions, and taxes by source and separate category. The
partner adds its share of the partnership’s foreign source gross
income, gross receipts, COGS, certain deductions, and taxes by
separate category to its other foreign source gross income,
gross receipts, COGS, certain deductions, and taxes in that
separate category to figure its foreign tax credit. The partnership
also reports on Schedule K-3 the distributive share of expenses
and the allocation and apportionment factors so that the partner
may determine expenses allocated and apportioned to foreign
source income.
Partnership determination. The source and separate
category of certain gross receipts, gross income, and COGS as
well as the allocation and apportionment of certain deductions
can be determined by the partnership. This includes deductions
that are definitely related to certain gross income of the
12

partnership; see Regulations section 1.861-8(b)(1). See the
following portions of Schedule K-2 that require reporting by
partnership determination.
• Part II, columns (a) through (e).
• Part III, Section 1, columns (a) through (e).
• Part III, Section 3, columns (a) through (d).
• Part III, Section 5, columns (a) through (f).
In columns (a) through (e) of Part III, Section 2, some
partnership assets may be characterized by source and
separate category by the partnership. This includes certain
assets that attract directly allocated interest expense under
Temporary Regulations sections 1.861-10T(b) and (c); see
Temporary Regulations section 1.861-10T(d)(2).
In Part III, Section 4, in the U.S. and Foreign columns, the
partnership assigns foreign income taxes paid or accrued to a
separate category and source.
The partner’s distributive share of the amounts determined by
the partnership is reported in corresponding columns of
Schedule K-3, Parts II and III.
Certain gross income, gross receipts, assets, COGS,
deductions, and taxes aren’t assigned to a source or separate
category by the partnership. See Partner determination, later.
Schedule K-3. If the partnership knows that some of its
partners are limited partners that own less than 10% of the value
of the partnership and that don’t hold their interests in the
ordinary course of the partner’s active trade or business, when
completing Schedule K-3 for the less-than-10% limited partners,
the partner’s distributive share of the partnership’s foreign source
gross income and gross receipts should be reported as passive
category income. Simultaneously, its deductions that have been
allocated and apportioned to foreign source income should be
reported as reducing passive category income; see Regulations
section 1.904-4(n)(1)(ii)(A). See the following portions of
Schedule K-3 that require reporting by partnership
determination.
• Part II, column (c).
• Part III, Section 1, column (c).
• Part III, Section 3, column (b).
• Part III, Section 5, column (d).
Report the foreign taxes paid or accrued on foreign source
income as passive category income in column (d) of Part III,
Section 4.
If the partnership meets the requirements to report the
income as passive category income to some or all of the
partners, the partnership doesn’t need to complete
Schedule K-3, Part III, Section 2, for these partners. See
Regulations section 1.861-9(e)(4)(i).
Foreign branch category income. A domestic partnership
itself doesn’t have foreign branch category income. However, it
reports all amounts that would be foreign branch category
income of its partners as if all partners were U.S. persons that
were not pass-through entities. See the following portions of
Schedule K-2 that require reporting of foreign branch category
income.
• Part II, column (b).
• Part III, Sections 1 and 2, column (b).
• Part III, Sections 4 and 5, column (c).
The partner’s distributive share of the amounts determined by
the partnership is reported in corresponding columns of
Schedule K-3, Parts II and III.
Schedule K-3. Any amounts reported on Schedule K-2 as
foreign branch category income should be reported as general
category income in Schedule K-3, Parts II and III, provided to
foreign individuals and foreign corporations.
Section 901(j) income. Income derived from each sanctioned
country is subject to a separate foreign tax credit limitation. If the

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filing exception, USP doesn’t need to complete Schedule K-3 for
Darby.

TREASURY/IRS AND OMB USE ONLY DRAFT
partnership derives such income, enter code 901j on the line
after category code. Include the section 901(j) amounts in the
following places of Schedule K-2.
• Part II, Sections 1 and 2, column (e).
• Part III, Sections 1 and 2, column (e).
• Part III, Section 3, column (d).
• Part III, Sections 4 and 5, column (f).
The partner’s distributive share of the amounts determined by
the partnership is reported in corresponding columns of
Schedule K-3, Parts II and III. See the Instructions for Form 1118
for the potential countries to be listed with the section 901(j)
category of income.

Section 951A category income. Section 951A category
income is any amount of global intangible low-taxed income
(GILTI) includible in gross income under section 951A (other
than passive category income). If the partnership pays or
accrues tax on the receipt of a distribution of PTEP assigned to
the reclassified section 951A PTEP group or section 951A PTEP
group, the partnership must assign those taxes to section 951A
category income.
The partnership will enter such taxes in column (b) of Part III,
Section 4. This code isn’t utilized in other portions of Parts II and
III.
Income re-sourced by treaty. If a sourcing rule in an
applicable income tax treaty treats any U.S. source income as
foreign source, and there is an election to apply the treaty, the
income will be treated as foreign source. This category applies if
the partnership pays or accrues foreign income taxes on receipt
of a distribution of PTEP that is sourced from an annual PTEP
account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) or 951A
and re-sourced as foreign source income under a treaty.
The designations below are only relevant for column (f) of
Part III, Section 4.
• Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source
passive category income, and there is an election to apply
the treaty, enter “RBT PAS.”
• Code RBT GEN. If an applicable income tax treaty treats
any U.S. source general category income as foreign source
general category income, and there is an election to apply
the treaty, enter “RBT GEN.”
• Code RBT 951A. If an applicable income tax treaty treats
any U.S. source section 951A category income as foreign
source section 951A category income, and there is an
election to apply the treaty, enter “RBT 951A.”
Partner determination. Enter the gross income, income
adjustments, and gross receipts of the partnership that are
required to be sourced by the partner on Schedule K-2 as
follows.
• Part II, Section 1, column (f).
• Part III, Section 1, column (f).
• Part III, Section 3, lines 1 and 2, column (e).
• Part III, Section 5, column (g).
This generally includes income from the sale of most
personal property other than inventory, depreciable property, and
certain intangible property sourced under section 865. This also
includes certain foreign currency gain on section 988
transactions; see the instructions for Forms 1116 and 1118 and
Pub. 514, Foreign Tax Credit for Individuals, for additional
details. Attach a statement to Form 1065 to identify the separate

This includes most interest expense and R&E expenses. See
Regulations sections 1.861-9(e) and -17(f).
Enter the assets that are assigned to a source and separate
category by the partner in column (f) of Schedule K-2, Part III,
Section 2.
Enter the foreign income taxes that are assigned to a source
of income by the partner on Schedule K-2, Part III, Section 4, in
the Partner column. This includes taxes imposed on certain
sales income.
The partner’s distributive share of the amounts determined by
the partnership is reported in corresponding columns of
Schedule K-3, Parts II and III.

Schedule K-2, Part II; and Schedule K-3, Part II
(Foreign Tax Credit Limitation)
Section 1—Gross Income (Lines 1 Through 24)
Form 1118, Schedule A, requires a corporation to separately
report certain types of gross income and gross receipts by
source and separate category. Separate reporting is required
because each type of gross income and gross receipts has a
different sourcing rule. See sections 861 through 865 (and
section 904(h) and, in some cases, U.S. income tax treaties).
Schedules K-2 and K-3, Part II, Section 1, generally follow the
separately reported types of gross income and gross receipts on
Form 1118, Schedule A. Individuals must follow the same
sourcing rules, but Form 1116 only requires reporting of total
gross income from foreign sources by separate category.
Therefore, those required to file Form 1116 will report
Schedule K-3, Part II, Section 1, line 24, by country on their Form
1116, Part I, line 1a. Section 1 also generally follows the types of
gross income and gross receipts separately reported on Form
1065, Schedule K.
For each line in Schedules K-2 and K-3, Part II, Section 1,
report the total for each country in column (g).
Country code. Forms 1116 and 1118 require the taxpayer to
report the foreign country or U.S. territory with respect to which
the gross income and gross receipts are sourced. On Schedules
K-2 and K-3, Part II, Section 1, lines 1 through 24, for each gross
income and gross receipts item, enter on a separate line (A, B,
or C) the two-letter code from the list at IRS.gov/CountryCodes
for the foreign country or U.S. territory within which the gross
income and gross receipts are sourced. If a type of income is
sourced from more than three countries, attach an additional
schedule with the same information required on Schedules K-2
and K-3, Part II, for that type of income.
If income is U.S. source, enter “US.” Don’t enter “various” or
“OC” for the country code.
Note: For column (f) of Part II, Section 1, enter code “XX” if the
partnership can’t determine the country or U.S. territory with
respect to which the gross income and gross receipts are
sourced because the source is determined by the partner.
However, don’t enter code “XX” for column (f) of Part II, Section
1, if an income tax of at least 10% of the gain derived from the
sale is actually paid to a foreign country with respect to that gain;
see sections 865(e) and (g). Instead, enter the foreign country to
which the partnership paid the tax of at least 10% of the gain.

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Note: As of the date of these instructions, section 901(j) is the
only category reported in column (e) of Part II, Sections 1 and 2;
column (e) of Part III, Sections 1 and 2; column (d) of Part III,
Section 3; and column (f) of Part III, Section 5.

category of income under section 904(d) of the amounts listed in
column (f) of Part II, Section 1.
Include deductions that are allocated and apportioned by the
partner on Schedule K-2 as follows.
• Part II, Section 2, column (f).
• Part III, Section 3, lines 3 and 4, column (e).

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Example 9—Part II: multiple country sources: gross
income. In Year 1, USP, a domestic partnership, has employees
who perform services in Country X and Country Y. USP earns
$25,000 of general category services income, $10,000 with
respect to Country X and $15,000 with respect to Country Y. The
two-letter code for Country X is AA and the two-letter country
code for Country Y is YY. USP makes the following entries on the
first two lines of Schedule K-2, Part II, Section 1, line 2.

Example 9 Table
Foreign source
Description
2

(d) General category
income

Gross income from performance of services
A AA

$10,000

B YY

$15,000

Lines 3 and 4. Rental income. These lines are reported
separately because they’re reported separately on Form 1065,
Schedule K. The sourcing rule may be the same for both types of
rental income.
Lines 7 and 8. Ordinary dividends and qualified dividends.
Enter only ordinary dividends on line 7 and only qualified
dividends on line 8. Don’t include as ordinary dividends or
qualified dividends the amount of any distributions received to
the extent that they’re attributable to PTEP in annual PTEP
accounts of the partnership.
Note: The amount of distributions which are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn’t determined by the partnership and therefore isn’t taken into
account for purposes of determining the ordinary dividends to be
entered on line 7 or the qualified dividends to be entered on
line 8.
Lines 11 through 15 and 27 through 30. Capital gains and
losses. These lines generally match the types of gains and
losses reported separately on Form 1065, Schedule K. Further,
section 904(b)(2)(B) contains rules regarding adjustments to
account for capital gain rate differentials (as defined in section
904(b)(3)(D)) for any tax year.
Example 10—Parts II and III: capital gains and losses.
Partnership has the following amounts for tax year 2025.
14

Sources of Income for Example 10
Short-term capital gains/losses
Total

$900

U.S. source

$1,000

Passive category (France)

$400

Passive category (Canada)

($300)

Passive category (Haiti)

($200)

Partnership reports these amounts on Schedule K-2, Part II,
Section 1, line 11, as follows.

Example 10. Schedule K-2, Part II, Section 1, Line
11
Foreign source
Description

(a) U.S. source

(c) Passive category
income

11 Net short-term capital
gains
A US

$1,000

B FR

$400

C CA

($300)

D HA

($200)

Line 12. Net long-term capital gain. On line 12, report net
long-term capital gain, excluding amounts reported on lines 13,
14, and 15.
Line 13. Collectibles (28%) gain. Report collectibles gain on
line 13 and not on line 12.
Line 14. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 14 and not on line 15. Include
an attachment indicating the amount of unrecaptured section
1250 gain that is also net section 1231 gain.
Line 15. Net section 1231 gain. Report net section 1231 gain
on line 15 and not on line 12 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 14.
Lines 16 and 46. Section 986(c) gain and loss. Include the
partnership’s share of a lower-tier pass-through entity’s section
986(c) gain or loss, and the amount of section 986(c) gain or
loss on distributions of PTEP sourced from an annual PTEP
account of the partnership. This isn’t reported as a net amount
but rather separate items. Enter total section 986(c) gains for the
year on line 16. Enter total section 986(c) losses on line 46.
Note: A partnership is only responsible for computing and
reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
account of the partnership. It isn’t responsible for computing or
reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
account of a direct or indirect partner.
Lines 17 and 47. Section 987 gain and loss. The source of
section 987 gain or loss is generally determined using the asset
method under Regulations section 1.861-9(g) and Temporary
Regulations section 1.861-9T. A partnership may also obtain
section 987 gain or loss information from Form 8858,
Schedule C-1. This isn’t reported as a net amount but rather
separate items. Enter total section 987 gains on line 17. Enter
total section 987 losses on line 47.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Each gross income and gross receipts item (for example,
sales vs. interest income) may have different countries listed on
lines A, B, C, etc., given that the partnership might not have
sales income and interest income from the same country.
Line 24 should combine each country’s total income reported on
Part II, regardless of the line on which such income is reported,
whether A, B, C, etc.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to RICs and section 863(b). See the instructions for
Forms 1116 and 1118 for the exceptions that apply in completing
Schedules K-2 and K-3, Parts II and III. Don’t enter a foreign
country or U.S. territory (to report on a country-by-country basis)
for lines 16 through 18.
Schedules K-2 and K-3 request that gross income and gross
receipts be reported by country or U.S. territory because such
information is requested on Forms 1116 and 1118. Income and
taxes are reported by country on Forms 1116 and 1118 so, for
example, the IRS may initially evaluate whether taxpayers are
claiming credits for compulsory payments to foreign
governments.

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Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer
partner, report the section 988 gain and loss in column (f).
Line 20. Other income. Include other income by country and
attach a statement to explain the type of other income for each
line. If there are more than three types of other income by
country, then attach a statement identifying these other types of
income by country. For electronic filers, the rows will expand
automatically. The statement must conform to the format of Part
II.
Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then, add the gross income
on lines 1 through 23 by country or territory and enter the total by
country in rows A, B, and C (and additional rows if more than
three countries). The sum of the amounts in rows A, B, C, etc.,
doesn’t need to equal the amount on line 24, given that not every
gross income amount is required to be reported by country.

Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
type of deduction may be allocated and apportioned according
to a different methodology; see, for example, Regulations
sections 1.861-8 through -20 and Temporary Regulations
sections 1.861-8T and -10T. For purposes of allocating and
apportioning expenses, in general, a partner adds the
distributive share of the partnership’s deductions to its other
deductions incurred directly by the partner; see Regulations
section 1.861-8(e)(15). Generally, Section 2 follows the
separately reported types of deductions and losses on Form
1118, Schedule A. Individuals must generally follow the same
expense allocation and apportionment rules, but Form 1116 only
requires separate reporting of certain deductions by separate
category; see Form 1116, Part I, lines 2 through 5. Section 2 also
generally corresponds to the deductions separately reported on
Form 1065, Schedule K.
Line 28. Net long-term capital loss. Report net long-term
capital loss on line 28, excluding collectibles loss which is
reported on line 29.
Line 29. Collectibles loss. Report collectibles loss on line 29
and not on line 28.
Line 32. R&E expenses. In column (f), enter the amount of
R&E expenses associated with each SIC code. In general, R&E
expenses are allocated and apportioned by the partner as
provided in Regulations section 1.861-17(f). R&E expenses, as
described in section 174, are ordinarily definitely related to gross
intangible income reasonably connected with relevant broad
product categories of the taxpayer and are allocable to gross
intangible income as a class related to such product categories.
The product categories are determined by reference to the
three-digit classification of the Standard Industrial Classification
Manual (SIC code); go to osha.gov/data/sic-manual.
Line 38. Charitable contributions. Enter charitable
contributions in column (a). Regulations section 1.861-8(e)(12)
provides that charitable contribution deductions are apportioned
solely to U.S. source gross income.
Lines 39 and 40. Interest expense specifically allocable under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. On line 39, enter interest expense
allocable under Regulations section 1.861-10(e).

Lines 41 through 43. Other interest expense. A partner’s
distributive share of a partnership’s interest expense that isn’t
directly allocable to income from specific partnership property is
generally allocated and apportioned by the partner, subject to
certain exceptions, and included in column (f); see Temporary
Regulations section 1.861-9T(e)(1).
Interest expense incurred by certain individuals, estates, and
trusts is characterized based on the categories of interest
expense in sections 163 and 469: active trade or business
interest, investment interest, or passive activity interest, adjusted
for any interest expense directly allocated under Temporary
Regulations section 1.861-10T; see Temporary Regulations
section 1.861-9T(d). The amounts in each category of interest
expense are reported on lines 41 through 43; see Example 11,
later. If the partnership’s only partners are corporate partners,
the partnership doesn’t need to report its interest expense by the
categories of interest expense in sections 163 and 469. All such
interest expense may be reported as business interest expense
on line 41.
Exception. For limited partners that each own less than 10%
of the capital and profits interests of the partnership, and such
interests aren’t owned in the ordinary course of the partner’s
active trade or business, the partnership reports the partners’
distributive shares of interest expense as reducing passive
category foreign source income in column (c). However, if the
partnership interest is held in the ordinary course of the partner’s
active trade or business, a partner’s share of the partnership’s
interest expense (other than partnership interest expense that is
directly allocated to identified property under Temporary
Regulations section 1.861-10T) is apportioned in accordance
with the partner’s relative distributive share of gross foreign
source income in each separate category and of gross domestic
source income from the partnership in columns (a) through (e),
as applicable. See Regulations sections 1.861-9(e)(4)(i) and
1.904-4(n)(1)(ii) for more information.
Exception. See Regulations sections 1.861-9(e)(8) and (9)
for a special rule for partnership loans. See also Box 10. Partner
loan transactions, earlier.
Interest expense is always included on lines 39 through 43
and not on other lines.
Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of foreign
taxes that aren’t creditable but deductible.
Foreign taxes that are creditable (even if a partner chooses to
deduct such taxes) aren’t reported as expenses in Part II.
Creditable taxes are reported in Part III, Section 4.
Lines 49 and 50. Other deductions. Attach to Schedules K-2
and K-3 a statement describing the amount and type of other
deductions. The statement must conform to the format of Part II.

Schedule K-2, Part III; and Schedule K-3, Part III
(Other Information for Preparation of Form 1116
or 1118)
Section 1—R&E Expenses Apportionment Factors
This section requires the partnership to report information that a
partner will use to allocate and apportion its R&E expenses for
foreign tax credit limitation purposes.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

15

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Section 2—Deductions (Lines 25 Through 54)

Apart from interest expense entered on line 39, on line 40,
enter interest expense that is directly allocable under Temporary
Regulations section 1.861-10T to income from specific
partnership property. Such interest expense is treated as directly
allocable to income generated by such partnership property. See
Temporary Regulations section 1.861-9T(e)(1).

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A partnership isn’t required to complete Section 1 of Part III
unless either (a) the partnership incurs R&E expenses; or (b) the
partner is expected to license, sell, or transfer its intangible
property to the partnership (as provided in Regulations section
1.861-17(f)(3)).

Column (e). Other. As of the date of these instructions, the
only separate category that could be included in column (e) is
the section 901(j) category of income. See the Instructions for
Form 1118 for the potential countries to be listed with the section
901(j) category of income.
Line 1. Gross receipts by SIC code. Enter the gross receipts
by SIC code for each grouping. Such gross receipts include both
the partnership’s gross receipts and certain other parties’ gross
receipts; see Regulations sections 1.861-17(d)(3) and (4). Sales
of parties controlled by the partnership should be included on
line 1 if such controlled parties can reasonably be expected to
benefit from the R&E expenses connected with the product
categories. This includes sales that benefit from the partner’s
R&E expenses if licensed through the partnership. Sales of
uncontrolled parties are also taken into account if such sales
involve intangible property that was licensed or sold to the
uncontrolled party if the uncontrolled party can reasonably be
expected to benefit from the R&E expenses. See Regulations
sections 1.861-17(d)(3) and (4) for more information on
uncontrolled and controlled parties.
Line 2. Exclusive apportionment with respect to total R&E
expenses entered on Part II, line 32. On line 2A, report the
amount of R&E expenses related to activity performed in the
United States by SIC code. On line 2B, enter the amount of R&E
expenses related to activity performed outside the United States
by SIC code. The total of the amounts on Schedule K-2, Part III,
Section 1, line 2, must equal Schedule K-2, Part II, line 32.
Similarly, the total of the amounts of each partner’s
Schedule K-3, Part III, Section 1, line 2, must equal
Schedule K-3, Part II, line 32.
Note: Line 2 isn’t reported according to source or separate
category.
Note: The SIC code for line 2B(i) doesn’t need to be the same
SIC code for line 2A(i).

Section 2—Interest Expense Apportionment
Factors
This section requires the partnership to report information that a
partner will use to allocate and apportion its interest expense for
foreign tax credit limitation purposes.
Complete this Section 2 only if the partnership or the partners
have interest or stewardship expenses.
16

For corporate partners with an interest in the partnership of
10% or more, interest expense, including the partner’s
distributive share of partnership interest expense, is apportioned
by reference to the partner’s assets, including the partner’s share
of partnership assets; see Regulations section 1.861-9(e)(2).
Interest expense is apportioned based on the average value of
assets; see Regulations section 1.861-9(g)(2)(i)(A). A taxpayer
can use either the tax book value or the alternative tax book
value to determine the value of its assets; see Regulations
section 1.861-9(i). Under both methods, the partner uses the
partnership’s inside basis in its assets, including adjustments
required under sections 734(b) and 743(b); see Regulations
sections 1.861-9(e)(2) and (3). When reporting the basis in an
asset which is stock in nonaffiliated 10%-owned corporations,
adjust such amount for earnings and profits (E&P). See
Regulations section 1.861-12(c)(2)(i)(A).
Note: Attach to Form 1065 a second Part III, Section 2, if the
partnership reports both the tax book value and the alternative
tax book value of its assets to the partners.
Column (b). Foreign branch category income. The
partnership characterizes its share of the partnership assets that
give rise to foreign branch category income as assets in the
foreign branch category. See Regulations section 1.861-9(e)
(10).
Line 1. Total average value of assets. On Schedule K-2,
report the average of the beginning-of-year and end-of-year
inside bases in the partnership’s total assets; see Regulations
section 1.861-9(g)(2)(i)(A). Include on line 1 assets without
directly identifiable yield referred to in Temporary Regulations
section 1.861-9T(g)(3)(iii).
On Schedule K-3, report the partner’s distributive share of the
assets reported on Schedule K-2.
Line 2. Sections 734(b) and 743(b) adjustment to assets—average value. On Schedule K-2, report the
partnership’s average of the beginning-of-year and end-of-year
inside bases adjustments under sections 734(b) and 743(b).
On Schedule K-3, report the partner’s distributive share of the
adjustments reported on Schedule K-2.
Lines 3 and 4. Assets and other assets attracting directly
allocable interest expense under Regulations section
1.861-10(e) and Temporary Regulations section 1.861-10T.
On Schedule K-2, report reductions in the partnership’s asset
values to reflect the partnership’s directly allocable interest under
Regulations section 1.861-10(e) and Temporary Regulations
section 1.861-10T; see also Temporary Regulations section
1.861-9T(e)(1).
On Schedule K-3, report the partner’s distributive share of the
reductions in the partnership’s assets.
Line 5. Assets excluded from apportionment formula. On
Schedule K-2, report the average value of partnership assets
excluded from the apportionment formula; see section 864(e)(3).
Include on line 5 assets without directly identifiable yield referred
to in Temporary Regulations section 1.861-9T(g)(3)(iii).
On Schedule K-3, report the partner’s distributive share of the
excluded assets reported on Schedule K-2.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Deductible R&E expenses, as described in section 174, are
ordinarily definitely related to gross intangible income
reasonably connected with relevant broad product categories of
the taxpayer and are allocable to gross intangible income as a
class related to such product categories. The product categories
are determined by reference to the three-digit classification of
the SIC code. In general, R&E expenses are apportioned based
on gross receipts. Under Regulations section 1.861-17(f)(1),
R&E expenses incurred by the partnership are allocated and
apportioned by the partner. This requires that the partnership
report to its partners the gross receipts by SIC code according to
source and separate category of income. This also requires that
the partnership report the amount of R&E expenses performed in
the United States and outside the United States to apply
exclusive apportionment; see Regulations section 1.861-17(f)
(2).

Stewardship expenses. In the case of the partner’s
stewardship expenses incurred to oversee the partnership, the
partnership’s value is determined and characterized under the
asset method in Regulations section 1.861-9 (taking into
account any adjustments under sections 734(b) and 743(b)); see
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the Part III,
Section 2, instructions for interest expense apportionment
factors apply generally to the partner’s stewardship expense
apportionment.

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Example 11—Parts II and III: asset method
apportionment of interest expense. Kendall, a U.S. citizen,
has a 10% interest in USP, a domestic partnership. USP is
engaged in the active conduct of a U.S. trade or business. USP’s
business generates only domestic source income. USP also has
an investment portfolio consisting of several less-than-10% stock
investments. USP has a bank loan. The proceeds of the bank
loan were divided equally between the business and the
investment portfolio. Kendall’s only assets attracting interest
expense are those owned by USP. Kendall’s only business
assets and investment assets are its distributive share of those
owned by USP. Kendall’s only interest expense is that from its
distributive share of USP’s interest expense.
Kendall’s share of the interest expense for the loan for USP’s
business is $2,000. It is apportioned on the basis of business
assets. Because all business income is domestic source, the
business assets are domestic assets and reported in column (a)
of Schedules K-2 and K-3, Part III, Section 2, line 6b. Kendall’s
$2,000 share of the interest expense is reported in column (f) of
Schedule K-3, Part II, line 41. It is apportioned to U.S. source
income by the partner.
The interest expense for Kendall’s share of the loan for USP’s
investments is $2,000 and is reported in column (f) of
Schedule K-3, Part II, line 42. The investment interest must be
apportioned on the basis of investment assets. Applying the
asset method, $80,000 of USP’s adjusted basis in its investment
portfolio stock generates domestic source income and $120,000
of USP’s adjusted basis in the stock generates foreign source
passive income. USP reports these amounts in columns (a) and
(c), respectively, of Schedule K-2, Part III, Section 2, line 6c.
Kendall’s distributive share of the adjusted basis in USP’s stock
is $8,000 for the stock generating domestic source income and
$12,000 for the stock generating foreign source passive income.
Such amounts are reported in columns (a) and (c), respectively,
of Schedule K-3, Part III, Section 2, line 6c. With respect to the
interest expense on the loan for USP’s investments, $800
(($8,000/$20,000) x $2,000) is apportioned to domestic source
income and $1,200 (($12,000/$20,000) x $2,000) is apportioned
to foreign source passive income.
Schedule K-3. If the partnership’s partners aren’t limited to
corporate partners, when completing Schedule K-3, Part III,
Section 2, for the corporate partners with an interest of 10% or
more in the partnership, don’t complete lines 6b through 6d.
Include the total distributive share on line 6a.
Lines 7 and 8. Basis in stock of 10%-owned noncontrolled
foreign corporations and of CFCs. The amounts reported on
lines 7 and 8 are subsets of the amounts reported on line 6
representing the value of stock held by the partnership in certain

foreign corporations. In determining its foreign tax credit
limitation, a partner should disregard interest expense that is
properly allocable to stock of a 10%-owned foreign corporation
that has been characterized as a section 245A asset; see
section 904(b)(4) and Regulations section 1.904(b)-3(a)(1)(ii).
The amount of properly allocable deductions is determined by
treating the section 245A subgroup for each separate category
as a statutory grouping for purposes of allocating and
apportioning interest deductions on the basis of assets. Assets
in a section 245A subgroup only include stock of a specified
10%-owned foreign corporation that has been characterized as a
section 245A asset.
The stock is characterized as a section 245A asset to the
extent it generates income that would generate a dividends
received deduction under section 245A if distributed. This
doesn’t include income that is included as GILTI, subpart F
income, or a section 951(a)(1)(B) inclusion or income described
in section 245(a)(5) (which gives rise to a dividends received
deduction under section 245 instead of section 245A).
In the case of a specified 10%-owned foreign corporation that
isn’t a CFC, all of the value of its stock is potentially in a section
245A subgroup because the stock generally generates
dividends eligible for the section 245A deduction (and can’t
generate an inclusion under section 951(a)(1) or 951A(a)), if the
partner meets the requirements for eligibility; see Regulations
section 1.904(b)-3(c)(2). However, because the partnership may
not have the information to determine if a partner is eligible for a
section 245A deduction (for example, due to tiered ownership),
the partner must determine to what extent the stock is treated as
an asset in a section 245A subgroup.
For a partnership-owned specified 10% foreign corporation
that isn’t a CFC, the partnership will report in columns (a)
through (e) of line 7 the total value of the stock in all such foreign
corporations. The value of the stock is the partnership’s basis in
the stock adjusted to take into account the E&P of the foreign
corporations as explained in Regulations section 1.861-12(c)(2).
The partnership must attach a statement to Schedules K-2 and
K-3 with the following information for each foreign corporation for
which adjusted basis is reported on line 7.
• Name of foreign corporation.
• EIN or reference ID number. Don’t enter “FOREIGNUS” or
“APPLIED FOR.”
• Percentage of voting and value of stock owned by
partnership in such foreign corporation.
• Value of the stock in such corporation included in each of
the groupings on lines 6b through 6d (identify separately
each of those groupings).
If the specified 10%-owned foreign corporation is a CFC, a
portion of the value of stock in each separate category and in the
residual grouping for U.S. source income is subdivided between
a section 245A and a non-section 245A subgroup under the
rules described in Regulations section 1.861-13(a)(5).
However, because the partnership will generally not have the
information to apply the stock characterization rules described in
Regulations section 1.861-13(a)(5), the partner must apply those
rules to characterize the stock.
For partnership-owned CFCs, the partnership will report in
column (f) of line 8 the total value of its stock in all such foreign
corporations. The value of the stock is the partnership’s inside
basis in the stock adjusted to take into account the E&P of the
foreign corporations as explained in Regulations section
1.861-12(c)(2). The partnership must attach a statement to
Schedules K-2 and K-3 with the following information for each
foreign corporation for which basis is reported on line 8.
• Name of foreign corporation.
• EIN or reference ID number. Don’t enter “FOREIGNUS” or
“APPLIED FOR.”

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

17

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Line 6. Total assets used for apportionment. Individual
partners who are (a) general partners, (b) limited partners with
an interest in the partnership of 10% or more, or (c) limited
partners with an interest in the partnership of less than 10% but
hold such interest in the ordinary course of the partner’s active
trade or business follow the same rules as corporate partners
whose interest in the partnership is 10% or more except that
their interest expense must be apportioned according to the
interest expense classifications under sections 163 and 469; see
Temporary Regulations section 1.861-9T(d). This includes
reporting the assets according to such classifications. If the
partnership has no such partners, the partnership doesn’t need
to complete Schedule K-2, Part III, Section 2; or Schedule K-3,
Part III, Section 2.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
and 6d if the partnership has individual, estate, and certain trust
partners (whether direct or indirect through a pass-through
entity).

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• Percentage of voting and value of stock owned by the
•

partnership in such foreign corporation.
Value of the stock in such corporation included in each of
the groupings on lines 6b through 6d (identify separately
each of those groupings).

Section 3—Foreign-Derived Intangible Income
(FDII) Deduction Apportionment Factors

• The amounts in both foreign currency and U.S. dollars. See
section 986(a).

Column (a). Enter the code for the type of tax.

Codes for Types of Tax

Don’t complete this Section 3 if the partnership knows that it has
no domestic corporate partners (whether direct or indirect).

If a partner is a member of a consolidated group, see
Regulations section 1.861-14(e)(4) for specific allocation and
apportioning rules.
Accordingly, this section requires the partnership to report
information that its partners will use to determine the source and
separate category of its income so that the partners may allocate
and apportion the FDII deduction under section 250(a)(1)(A) for
purposes of the foreign tax credit limitation.
Lines 1 and 2. Report the partnership’s foreign-derived gross
receipts and COGS, respectively, by source and separate
category.
Lines 3 and 4. Report the partnership’s deductions allocable to
foreign-derived gross receipts and other partnership deductions
apportioned to foreign-derived gross receipts, respectively; see
Part IV, Section 2, lines 11 and 12. Although these deduction
amounts are necessary to figure the partner’s FDII deduction,
once this amount is determined, the actual FDII deduction itself
is allocated and apportioned as described in Regulations section
1.861-8(e)(13).
Column (d). Other. As of the date of these instructions, the
only separate category that could be included in column (d) is
the section 901(j) category of income. See the Instructions for
Form 1118 for the potential countries to be listed with the section
901(j) category of income.

Section 4—Foreign Taxes
Don’t complete this Section 4 if the partnership doesn’t pay or
accrue foreign income taxes that are creditable under section
901 or 903.
In Part III, Section 4, the partnership assigns foreign income
taxes paid or accrued (including on U.S. source income) to a
separate category and source. Include taxes paid or accrued to
foreign countries or to U.S. territories.
Attachment. As previously mentioned in the instructions for
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for
distributive share), for each of the amounts listed on lines 1
through 3, attach to the Schedules K-2 and K-3 a statement
reporting the following information.
• The dates on which the taxes were paid or accrued.
• The exchange rates used.
18

Type of tax

WHTD

Withholding tax on dividends

WHTP

Withholding tax on distributions of
PTEP

WHTB

Withholding tax on branch
remittances

WHTR

Withholding tax on rents, royalties,
and license fees

WHTI

Withholding tax on interest

ECI

Taxes paid or accrued to foreign
countries or territories on certain
effectively connected income

OTHS

Other foreign taxes paid or accrued
on sales income

OTHR

Other foreign taxes paid or accrued
on services income

OTH

Other foreign taxes paid or accrued

If there are multiple types of tax for the same country,
generate multiple alpha rows for the same country, one row for
each type of tax. For example, see below.

Example of Multiple Types of Income for the Same
Country
Description

(a) Type of tax

1 Direct (section 901 or 903) foreign taxes:
Paid

Accrued

A AA

WHTD

B AA

OTH

Column (b). Section 951A category income. Taxes assigned
to section 951A category income are taxes paid or accrued on
distributions of PTEP assigned to the reclassified section 951A
PTEP and section 951A PTEP groups. A partnership might not
be able to complete this column due to lack of information
regarding the treatment of the current year distributions.
Column (f). Other category.
Foreign taxes paid or accrued to sanctioned countries.
No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries.
Foreign taxes related to PTEP re-sourced by treaty. If the
partnership pays or accrues foreign income taxes on receipt of a
distribution of PTEP that is sourced from an annual PTEP
account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) and
re-sourced as foreign source income under a treaty, such taxes
are included in column (f).
On the line after category code, enter one of the following
codes.
• Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source
passive category income, and there is an election to apply
the treaty, enter “RBT PAS.”
• Code RBT GEN. If an applicable income tax treaty treats
any U.S. source general category income as foreign source

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This section requires the partnership to report information that
a partner will use to allocate and apportion its FDII deduction
under section 250(a)(1)(A) for foreign tax credit limitation
purposes. The deduction is definitely related and allocable to the
class of gross income included in the partner’s foreign-derived
deduction eligible income (FDDEI) (as defined in section 250(b)
(4)) and is apportioned within the class, if necessary, ratably
between the statutory grouping (or among the statutory
groupings) of gross income and the residual grouping of gross
income based on the relative amounts of FDDEI in each
grouping; see Regulations section 1.861-8(e)(13).

Code

TREASURY/IRS AND OMB USE ONLY DRAFT
•

general category income, and there is an election to apply
the treaty, enter “RBT GEN.”
Code RBT 951A. If an applicable income tax treaty treats
any U.S. source section 951A category income as foreign
source section 951A category income, and there is an
election to apply the treaty, enter “RBT 951A.”

Note: Don’t include on line 1 any foreign income taxes not
creditable but deductible as reported on Part II, Section 2,
line 45.
If the partnership uses the cash method of accounting, check
the “Paid” box and enter foreign income taxes paid during the tax
year on line 1. Report each partner’s share on Schedule K-3,
Part III, Section 4, line 1.
If the partnership uses the accrual method of accounting,
check the “Accrued” box and enter foreign income taxes accrued
on line 1. Report each partner’s share on Schedule K-3, Part III,
Section 4, line 1.
Note: Check only one box, “Paid” or “Accrued,” depending on
the method of accounting the partnership takes into account
foreign income taxes.
Enter on a separate line, indicated by the letters A through F,
taxes paid or accrued to each country. Enter the two-letter code
from the list at IRS.gov/CountryCodes. Don’t enter “various” or
“OC” for country code.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to RICs and section 863(b). These exceptions apply as
well to reporting of taxes in this section.
Example 12—Part III, Section 4: multiple country
sources: foreign taxes. The facts are the same as in
Example 9, earlier. USP uses the cash method of accounting
and pays income taxes of $1,000 and $3,000 to Countries AA
and YY, respectively. USP completes Part III, Section 4, line 1, as
follows.

Example 12 Table
Description

(e) General
(a) Type of tax category income
Foreign

1 Direct (section 901 or 903) foreign
taxes:

⻫

Paid

Accrued

A AA

OTHR

$1,000

B YY

OTHR

$3,000

Line 2. Reduction of taxes (total). Enter on line 2, as negative
number, the sum of the taxes in the following categories.
• Taxes on foreign mineral income (section 901(e)).
• Taxes attributable to boycott operations (section 908).
• Reduction in taxes for failure to timely file (or furnish all of
the information required on) Forms 5471 and 8865 (section
6038(c)).

•

•

year with respect to splitter arrangements under section
909.
Foreign income taxes on foreign corporate distributions. For
example, report taxes on dividends eligible for a deduction
under section 245A and ineligible for credit under section
245A(d). Also, include taxes on a distribution of PTEP
assigned to the following PTEP groups: reclassified section
965(a) PTEP, reclassified section 965(b) PTEP, section
965(a) PTEP, and section 965(b) PTEP, a portion of which
isn’t creditable. The partnership may be unable to determine
the amount of a distribution that is attributable to
non-previously taxed E&P or PTEP for which a foreign tax
credit may be partially or entirely disallowed. However, it is
important to track this amount as a tax on a distribution.
Other. Attach a statement to Schedules K-2 and K-3
indicating the reason for the reduction.

Don’t report amounts on line 2 by country.
Line 3. Foreign tax redeterminations. Enter in U.S. dollars
the change in foreign tax as a result of a foreign tax
redetermination as provided in section 905(c) and Regulations
sections 1.905-3 through -5. If the amount is less than the
original foreign tax, report the change as a negative amount. If
the amount is more than the original foreign tax, report the
change as a positive amount.
Exception. Partnerships subject to subchapter C of
chapter 63 of the Code (BBA partnerships) are generally
required to file an administrative adjustment request (AAR)
under Regulations section 1.905-4(b)(2)(ii) to account for a
foreign tax redetermination. If an AAR is filed for a foreign tax
redetermination (or if an AAR will be timely filed), don’t report the
foreign tax redetermination on line 3.
Note: Payment of additional foreign income taxes that relate to
an earlier tax year by a partnership that uses the cash method of
accounting doesn’t result in a foreign tax redetermination; see
Regulations section 1.905-3(a). Such amounts should be
reported on line 1 as foreign income taxes paid by the
partnership in the current year.
Report the U.S. tax year to which the foreign income tax
relates. This is the U.S. tax year that includes the close of the
foreign tax year to which the tax relates. Also, report the date on
which the tax was paid. If there is more than one date tax is paid,
enter one of the dates paid on the schedule itself and then attach
to the Schedules K-2 and K-3 a statement including all of the
information reported on the schedule with the other dates paid.
If there is more than one redetermination in a year with
respect to different countries, report such redeterminations on
separate lines. Enter the two-letter code from the list at IRS.gov/
CountryCodes.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory with
respect to RICs and section 863(b). These exceptions apply as
well to reporting of taxes in this section. Don’t enter “various” or
“OC” for the country code.
Similarly, if there is more than one redetermination in a year
with respect to the same country, but the redeterminations are
related to different years, report such redeterminations on
separate lines.
In addition, if the direct or indirect partners are corporations,
attach a statement that includes the information on Schedule L
(Form 1118), Parts I and II, as applicable, with respect to each
foreign tax redetermination. If the direct or indirect partners are
individuals, estates, or trusts, attach a statement that includes
the information on Schedule C (Form 1116), Parts I and II, as
applicable, with respect to each foreign tax redetermination. If

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

19

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Line 1. Direct (section 901 or 903) foreign taxes. Enter in
U.S. dollars the total foreign income taxes (described in section
901 or 903) that were paid or accrued by the partnership
(according to its method of accounting for such taxes). Don’t
reduce the amount that you report on line 1 by the reductions
reported on line 2. Don’t report redetermined taxes on line 1.
Report such taxes on line 3. If a partnership applies temporary
relief provided by Notice 2023-55, include on line 1 the foreign
taxes that are foreign income taxes under temporary relief. See
the instructions for Part I, box 13, for additional information.

• Foreign income taxes paid or accrued during the current tax

TREASURY/IRS AND OMB USE ONLY DRAFT

Contested taxes. In general, a contested foreign income tax
liability doesn’t accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
contested foreign income tax liability isn’t a reasonable
approximation of the final foreign income tax liability and,
therefore, isn’t considered an amount of tax paid for purposes of
section 901 until the contest is resolved. Thus, a partnership
generally doesn’t take into account a contested liability as a
creditable foreign tax expenditure until the contest is resolved
and the liability has been paid; see Regulations section
1.905-1(f)(1). However, to the extent that a partnership has
remitted a contested foreign income tax liability to a foreign
country, partners may elect to claim a provisional foreign tax
credit for their distributive shares of such contested foreign
income tax liability; see Regulations section 1.905-1(f)(2).
Partnerships that are contesting a foreign income tax liability
with a foreign country but that have remitted all or a portion of
such contested liability should report information about the
contested tax on line 3 and check the “Contested tax” box. In
addition, partnerships should attach a statement and include
information necessary for partners to complete Form 7204 and
Schedule L (Form 1118) (for direct or indirect corporate
partners), or Schedule C (Form 1116) (for direct or indirect
individual, trust, or estate partners), including a description of the
contest and a description of the contested foreign income tax. If
it is unknown whether the partners are corporations, individuals,
estates, or trusts, provide the information necessary for the
partners to complete both Schedule L (Form 1118), Parts I and II
(as applicable); and Schedule C (Form 1116), Parts I and II (as
applicable).
Partnerships must also file a statement each year for which
there are one or more contested liabilities outstanding or in
which a contested tax is resolved that includes information
necessary for partners to complete both Schedule L (Form
1118), Part V; and Schedule C (Form 1116), Part V.

Section 5—Other Tax Information
This section provides other tax information that a partner needs
to figure its foreign tax credit limitation.
Column (f). Other. As of the date of these instructions, this
column will only include the section 901(j) category of income
and the countries relevant to that category. See the Instructions
for Form 1118 for the potential countries to be listed with the
section 901(j) category of income. No credit is allowed for taxes
paid or accrued to a country described in section 901(j).
However, a deduction is generally allowed for a tax described in
section 901(j).
Line 1. Section 743(b) positive income adjustment. For
partnerships other than PTPs, report the total of all partners’
shares of the net positive income adjustments resulting from all
section 743(b) basis adjustments. Net positive income
adjustments from all section 743(b) basis adjustments means
the excess of all section 743(b) adjustments allocated to the
partner that increase the partner’s taxable income over all
section 743(b) adjustments that decrease the partner’s taxable
income.
Attach to Schedules K-2 and K-3 a statement showing each
section 743(b) basis adjustment making up the total and identify
the assets to which it relates and the separate category and
source of the income generated by the assets. Make sure to
include the class of gross income or deduction, for example,
sales income, interest income, or depreciation deduction. The
20

partnership may group these section 743(b) basis adjustments
by asset category or description in cases where multiple assets
are affected if the assets generate the same separate category
and source of income. The section 743(b) positive income
adjustments should be included as relevant on other parts of
Schedule K-2. For example, the section 743(b) income
adjustments should be reflected as part of the total depreciation
reported on Part II, Section 2.
Line 2. Section 743(b) negative income adjustment. For
partnerships other than PTPs, report the total of all partners’
shares of the net negative income adjustments resulting from all
section 743(b) basis adjustments. Net negative income
adjustments from all section 743(b) basis adjustments means
the excess sum of all section 743(b) adjustments allocated to the
partner that decrease the partner’s taxable income over all
section 743(b) adjustments that increase the partner’s taxable
income. Attach to Schedules K-2 and K-3 a statement showing
each section 743(b) basis adjustment making up the total and
identify the assets to which it relates and the separate category
and source of the income generated by the assets. Make sure to
include the class of gross income or deduction, for example,
sales income, interest income, or depreciation deduction. The
partnership may group these section 743(b) basis adjustments
by asset category or description in cases where multiple assets
are affected if the assets generate the same separate category
and source of income. The section 743(b) negative income
adjustments should be included as relevant in other parts of
Schedule K-2. For example, the section 743(b) income
adjustments should be reflected as part of the total depreciation
reported on Part II, Section 2.

Schedule K-2, Part IV (Information on Partners’
Section 250 Deduction With Respect to
Foreign-Derived Intangible Income (FDII)); and
Schedule K-3, Part IV (Information on Partner’s
Section 250 Deduction With Respect to
Foreign-Derived Intangible Income (FDII))
Note: Certain partners will use the following information to claim
and figure a section 250 deduction with respect to FDII on Form
8993.
This part is used by the partnership to report information to a
direct domestic corporate partner (other than REITs, RICs, and S
corporations) or to a partner that is a partnership that has a
direct or indirect domestic corporate partner (other than REITs,
RICs, and S corporations) needed to determine the domestic
corporate partner’s FDII. A partnership that doesn’t have or
receive sufficient information or notice regarding a partner must
presume the partner is a domestic corporate partner or a
partnership that has a direct or indirect domestic corporate
partner, and the partnership must complete Schedules K-2 and
K-3, Part IV, accordingly. Any partnership with direct or indirect
domestic corporate partners must complete this part, even if the
partnership doesn’t have foreign-derived gross receipts. Even if
a partnership has no foreign activities, and therefore has no
FDDEI as reported in Section 2 of this part, the partnership must
still report the information required by Sections 1 and 3 of this
part so that any direct or indirect domestic corporate partner can
correctly determine its section 250 deduction. For example, a
domestic corporate partner would still need information about
the partnership’s qualified business asset investment (QBAI)
(see the instructions for line 8 of this part) in such a case to
determine its deemed tangible income return (DTIR) and
deemed intangible income (DII); see section 250(b)(2).
Section 250 allows a domestic corporation a deduction for its
FDII, and a direct or indirect domestic corporate partner must
take into account certain activities of a partnership in computing

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DRAFT

DRAFT

the indirect partners are unknown, attach a statement that
includes both the information on Schedule L (Form 1118), Parts I
and II, as applicable; and Schedule C (Form 1116), Parts I and II,
as applicable.

TREASURY/IRS AND OMB USE ONLY DRAFT
the domestic corporation’s FDII. For the treatment of a domestic
corporation that is a partner in a partnership, see Regulations
sections 1.250(b)-1(e), -2(g), and -3(e). These instructions
generally indicate how a partnership should complete Part IV (of
both Schedules K-2 and K-3). However, Schedule K-2 includes
the total of all partners’ amounts and Schedule K-3 includes
each partner’s share.

Special rules for determining foreign use apply to transactions
that involve property or services provided to related parties; see
section 250(b)(5)(C) and Regulations section 1.250(b)-6.
For special substantiation requirements under the
regulations, see Regulations sections 1.250(b)-3(f), -4(d)(3),
and -5(e)(4). In all other cases, a taxpayer claiming a deduction
under section 250 will still be required to substantiate that it’s
entitled to the deduction even if it isn’t subject to the specific
substantiation requirements contained in the regulations; see
section 6001 and Regulations section 1.6001-1(a). Therefore,
the partner must be able to satisfy the general or special
substantiation requirements to be eligible for the deduction. To
the extent the partner doesn’t have the necessary information in
its possession to substantiate the deduction, the partnership
must maintain the information.
As described above, the partnership should determine the
partner’s share of each item below in accordance with the
partner’s distributive share of the underlying item of income,
gain, deduction, and loss of the partnership.
Example 13—partners’ reporting of DEI and QBAI. DC is
a domestic corporation that owns a 50% interest in a domestic
partnership, USP. USP manufactures and sells Product A and
provides services, both solely to U.S. persons. The services give
rise to domestic oil and gas extraction income (DOGEI) for
purposes of section 250(b)(3)(A)(i)(V). USP has $200 in gross
receipts from sales of Product A, $100 in COGS, and $50 in
properly allocated and apportioned deductions (none of which
are interest or R&E expenses). USP reports these amounts on
Schedule K-2, Part IV, Section 1, lines 2a through 2c,
respectively, and 50% of these amounts on the same section
and lines of the Schedule K-3 that USP issues to DC, because
this information is necessary for DC to compute its deduction
eligible income (DEI). The net amount increases DC’s DEI,
which increases its DII and in turn increases its section 250
deduction for FDII. DC uses these amounts to calculate its gross
DEI on Form 8993, Part I, line 4.
USP has $100 in gross receipts from services, $50 in cost of
services, and $25 in properly allocated and apportioned
deductions (none of which are interest or R&E expenses).
Because the performance of these services results in DOGEI, it
doesn’t give rise to DEI, but rather the net amount of $25 ($100 –
($50 + $25) = $25) is reported on Schedule K-2, Part IV, Section
1, line 6, and 50% of the net amount is reported to DC on the

Section 1—Information To Determine Deduction
Eligible Income (DEI) and Qualified Business
Asset Investment (QBAI) on Form 8993

DRAFT

DRAFT

Enter each amount and total amounts in U.S. dollars. The
partnership should determine and report the partner’s share of
each item of the partnership contained on this form in
accordance with the partner’s distributive share of the underlying
item of income, gain, deduction, and loss of the partnership. The
partnership should report these amounts based on the best
information available to it about how its partners might use this
information to determine their FDII deduction. The partnership
may report certain information differently to each partner
depending on federal income tax determinations that the partner
makes. Each partner must then figure its FDII deduction using
Form 8993 including the information reported to it in
Schedule K-3, Part IV, taking into account partner
determinations. A partner must obtain (and if requested by a
partner, the partnership must provide) any further necessary
information from the partnership to correctly determine its FDII
deduction.

same line and section of Schedule K-3, so that DC can treat this
amount as an exclusion from its DEI. DC’s DEI is determined
without this amount by subtracting the amount from DEI on Form
8993, Part I, line 2e.
USP owns two properties, Asset C which has an adjusted
basis of $1,000, and Asset D which has an adjusted basis of
$1,200. Asset C is used in the production of Product A and Asset
D is used in providing the DOGEI services. Because sales of
Product A give rise to DEI, USP should report the partnership’s
adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV,
Section 1, line 8 (and $500 is reported to DC on the same
section/line of Schedule K-3). This increases DC’s QBAI and
thereby increases DC’s DTIR. The increase to DTIR decreases
DC’s DII which in turn decreases its section 250 deduction for
FDII. DC uses the amount to determine its DTIR from
partnerships on Form 8993, Part I, line 7b. The services,
however, don’t give rise to DEI, so USP shouldn’t include the
partnership’s adjusted basis in Asset D ($1,200) on
Schedule K-2, Part IV, Section 1, line 8.
USP has no sales or services provided to foreign persons and
therefore no FDDEI to report on Part IV, Section 2. Even though
the partnership has no interest or R&E deductions, in many
cases, the partnership would still have to complete Part IV,
Section 3.

Line 1. Net income (loss). This amount may equal line 1 of
Analysis of Net Income (Loss) per Return on Form 1065.
Line 2a. DEI gross receipts. Enter DEI gross receipts.
Line 2b. DEI COGS. Enter the amount of COGS attributable to
the amount on line 2a.
Line 2c. DEI properly allocated and apportioned deductions. Enter the amount of deductions (including taxes) properly
allocable to gross DEI, without interest and R&E expenses. See
Regulations section 1.250(b)-1(d)(2) for more details. Enter the
amounts of interest and R&E expenses on Section 3, lines 13
and 16, respectively. Deductions properly allocable to gross DEI
are determined without regard to sections 163(j), 170(b)(2), 172,
246(b), and 250.
Lines 3 through 7 are exclusions from DEI used to determine
the partner’s DEI.
Note: Partners will determine whether any amount included in
the gross income of such corporate partner is GILTI under
section 951A (or the section 78 gross-up with respect to this
inclusion under section 951A), which can only be determined by
the partner and therefore isn’t reported on Schedules K-2 and
K-3, Part IV, Section 1.
Note: For purposes of lines 3a and 3b, sale or other disposition
includes a deemed sale or other deemed disposition or a
transaction subject to section 367(d). Sale or other disposition
doesn’t include any lease or license.
Line 3a. Income and gain from the sale or other disposition
of intangible property under section 250(b)(3)(A)(i)(VII)
(aa). Except as otherwise provided by the Secretary, enter the
net amount of income and gain from the sale or other disposition
of intangible property (as defined in section 367(d)(4)) before
interest and R&E deductions, occurring after June 16, 2025.
Line 3b. Income and gain from the sale or other disposition
of certain other property under section 250(b)(3)(A)(i)(VII)
(bb). Except as otherwise provided by the Secretary, enter the
net amount of income and gain from the sale or other disposition

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21

TREASURY/IRS AND OMB USE ONLY DRAFT
of any other property of a type that is subject to depreciation,
amortization, or depletion by the seller before interest and R&E
deductions, occurring after June 16, 2025.
Line 4. Controlled foreign corporation (CFC) dividends.
Enter the amount of any dividend received from a CFC with
respect to which the partner is a U.S. shareholder as defined
under section 951(b). Don’t include as a dividend any amount
received from a CFC to the extent that such amount is
attributable to PTEP in the annual PTEP accounts of the
partnership. See sections 959(a) and (d).
Note: The amount by which distributions are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn’t taken into account for purposes of determining the CFC
dividends to be entered on line 4.
Line 5. Financial services income. Enter the amount of net
financial services income (as defined in section 904(d)(2)(D))
before interest and R&E deductions.

Line 7. Foreign branch income. Enter the amount of net
foreign branch income before interest and R&E deductions as
defined in section 904(d)(2)(J). A partnership should report all
income that would be foreign branch income of its partners as if
all partners were U.S. persons.
Line 8. Partnership QBAI. Enter the amount, if any, of the
partnership QBAI. A domestic corporation’s QBAI is its share of
the average of the aggregate adjusted bases, determined as of
the close of each quarter of the tax year, in certain specified
tangible property. See Regulations section 1.250(b)-2(b).
The adjusted basis is determined by using the alternative
depreciation system under section 168(g) and allocating
depreciation deductions with respect to such property ratably to
each day during the period in the tax year to which such
depreciation relates. See Regulations section 1.250(b)-2(e).
The specified tangible property is that which is used in the
trade or business of the corporation in the production of gross
income included in the domestic corporation’s gross DEI and is
of a type with respect to which a deduction is allowable under
section 167. See Regulations section 1.250(b)-2(b).
If a domestic corporation holds an interest in one or more
partnerships during a tax year (including indirectly through one
or more partnerships that are partners in a lower-tier
partnership), the QBAI of the domestic corporation for the tax
year is increased by the sum of the domestic corporation’s
partnership QBAI with respect to each partnership for the tax
year. See Regulations section 1.250(b)-2(g)(1).
Partnership QBAI is the sum of the domestic corporation’s
proportionate share of the partnership’s adjusted basis in the
property and the domestic corporation’s partner specific QBAI
basis in the property for the partnership tax year that ends with
or within the tax year. See Regulations section 1.250(b)-2(g)(2).
Partnership specified tangible property means, with respect
to a domestic corporation, tangible property that is used in the
trade or business of the partnership, of a type with respect to
which a deduction is allowable under section 167, and used in
the production of gross income included in the domestic
corporation’s gross DEI. See Regulations section 1.250(b)-2(g)
(5).
If a partnership can’t determine the portion of partnership
specified tangible property (for example, if the partnership
doesn’t know if property gives rise to the production of gross
income in one of the excluded categories from DEI that is
22

Example 14—domestic corporate partner; specified
tangible property. W and Y are both domestic corporations
that are partners in USP, a partnership that holds three types of
assets: B, C, and D. All types of assets are tangible property
used in the trade or business of USP and with respect to which a
deduction is allowable under section 167.
The production of income from B assets is DEI with respect to
W and Y. Thus, the B assets are partnership specified tangible
property with respect to W and Y, and USP includes a
proportionate amount of the adjusted bases of all B assets in
calculating each partner’s partnership QBAI.
The production of income from C assets is DEI with respect to
W. However, with respect to Y, the production of income from C
assets is non-DEI. Thus, the C assets are partnership specified
tangible property with respect to W only, and USP includes a
proportionate amount of the adjusted bases of all C assets only
in calculating W’s partnership QBAI.
The D assets are dual-use property because the production
of only part of the income from the D assets is DEI with respect
to W and Y. Thus, the D assets are partnership specified tangible
property with respect to both W and Y, but USP includes a
proportionate amount of the adjusted bases of all D assets in
calculating each partner’s partnership QBAI only in the
proportion that the amount of the gross income included in DEI
produced with respect to the D assets bears to the total amount
of gross income produced with respect to the D assets.

Section 2—Information To Determine
Foreign-Derived Deduction Eligible Income
(FDDEI) on Form 8993
Foreign-derived gross receipts means, with respect to a
partnership, gross receipts of the partnership for the
partnership’s tax year that are used to figure the amount of gross
FDDEI as defined in Regulations section 1.250(b)-1.
Each place where general property is listed refers to amounts
connected to the sale, lease, exchange, or other disposition of
general property to a foreign person, and is for a foreign use as
defined in Regulations sections 1.250(b)-3 and -4(d). The term
“general property” means any property other than intangible
property; a security (as defined in section 475(c)(2)); an interest
in a partnership, trust, or estate; or a commodity described in
section 475(e)(2)(A) that isn’t a physical commodity or a

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Line 6. Domestic oil and gas extraction income. Enter the
amount of net DOGEI before interest and R&E deductions. The
term “domestic oil and gas extraction income” means income
described in section 907(c)(1) determined by substituting “within
the United States” for “without the United States.”

determined by the partner, which would cause such property to
not be classified as partnership specified tangible property), then
in reporting the amount of a partner’s share of the partnership
QBAI, the partnership must separately state any information so a
direct or indirect domestic corporate partner can distinguish
between the amount of the adjusted bases in a partnership’s
tangible property that the domestic corporation would include in
its adjusted bases in the partnership specified tangible property
and the amount of the adjusted bases in the partnership’s
tangible property that the domestic corporation wouldn’t include
in its adjusted bases in the partnership specified tangible
property.
If tangible property was used in the production of DEI and in
the production of income that is non-DEI, then it is considered
dual-use property and treated as specified tangible property in
the same proportion that the amount of the gross income
included in DEI produced with respect to the property bears to
the total amount of gross income produced with respect to the
property. See Regulations section 1.250(b)-2(g)(8), Example 2,
for guidance on how to figure the partner adjusted basis. If
specified tangible property is only partially depreciable, then only
the depreciable portion is QBAI. See Regulations section
1.250(b)-2(b).

TREASURY/IRS AND OMB USE ONLY DRAFT
commodity described in sections 475(e)(2)(B) through (D). See
Regulations section 1.250(b)-3(b)(10).

Column (c). Services. Enter the amount of the deductions that
are allocated and apportioned to gross FDDEI from all services.

Each place where intangible property is listed refers to
amounts connected to the sale, license, exchange, or other
disposition of intangible property to a foreign person, and is for a
foreign use as defined in Regulations sections 1.250(b)-3
and -4(d)(2).

Line 12. Other apportioned deductions. Enter all other
apportioned deductions that relate to gross FDDEI that aren’t
otherwise included on lines 11, 13, and 16. If a deduction
doesn’t bear a definite relationship to a class of gross income
constituting less than all of gross income, it shall ordinarily be
treated as definitely related and allocable to all of the taxpayer’s
gross income, including gross DEI and gross FDDEI, except
where otherwise directed in the regulations.

Each place where services are listed refers to amounts
connected to services that are provided to any person, or with
respect to property, located outside the United States as defined
in Regulations section 1.250(b)-5.
If a transaction includes both a sales component and a
service component, the transaction is classified as either a sale
or a service according to the overall predominant character of
the transaction. See Regulations section 1.250(b)-3(d).

For purposes of determining a domestic corporation’s
deductions that are properly allocable to gross FDDEI, the
corporation’s deductions are allocated and apportioned to gross
FDDEI under the rules of Regulations sections 1.861-8
through -14T and 1.861-17 by treating section 250(b) as an
operative section described in Regulations section 1.861-8(f).
See Regulations section 1.250(b)-1(d)(2).
Line 9. Gross receipts. Enter the amount, if any, of the
partnership’s foreign-derived gross receipts separately for
aggregate sales of general property, aggregate sales of
intangible property, and aggregate services. Foreign-derived
gross receipts means gross receipts that are used to figure gross
FDDEI as defined in Regulations section 1.250(b)-1(c)(16).
Line 10. COGS. Enter the amount of COGS attributable to the
amount(s) on line 9.
For purposes of this form, when figuring FDDEI, COGS
includes the COGS to customers, and adjusted basis of
non-inventory property sold or otherwise disposed of in a trade
or business.
In making that determination, attribute COGS to gross
receipts using a reasonable method in accordance with
Regulations section 1.250(b)-1(d)(1).
COGS must be attributed to gross receipts with respect to
gross DEI or gross FDDEI regardless of whether certain costs
included in COGS can be associated with activities undertaken
in an earlier tax year (including a year before the effective date of
section 250).
Line 11. Allocable deductions. Enter the amount of the
allocable deductions. See Regulations section 1.250(b)-1(d)(2)
for more details. Enter the amounts of interest and R&E
expenses on Section 3, lines 13 and 16, respectively.
Deductions are determined without regard to sections
163(j),170(b)(2), 172, 246(b), and 250.
Column (a). General property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of general property.
Column (b). Intangible property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of intangible property.

Line 13. Interest deductions. The term “interest” refers to the
gross amount of interest expense incurred by a taxpayer in a
given year. Generally, interest expense includes any expense
that is currently deductible under section 163 (including original
issue discount (OID)), and interest equivalents. See Regulations
section 1.861-9(b)(1) for the definition of interest equivalents,
and Temporary Regulations section 1.861-9T(c) for sections that
disallow, suspend, or require the capitalization of interest
deductions. Include excess business interest expense (EBIE)
determined under section 163(j)(4) on this line. Under
Regulations section 1.250(b)-1(d)(2)(ii), deductions are
determined without regard to section 163(j).
Lines 13A and 13B. Interest expense specifically allocable
under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. Apart from interest expense
entered on line 13A, enter on line 13B interest expense that is
directly allocable under Temporary Regulations section
1.861-10T to income from specific partnership property. Such
interest expense is treated as directly allocable to income
generated by such partnership property. See Temporary
Regulations section 1.861-9T(e)(1).
Line 13C. Other interest expense. Enter all interest
deductions not otherwise included on lines 13A and 13B.
Line 14. Interest expense apportionment factors. This line
requires the partnership to report information that a partner will
use to allocate and apportion its interest expense for FDII
purposes.
Interest deductions are apportioned to gross DEI and FDDEI
ordinarily based on the tax book value of the taxpayer’s assets;
see Temporary Regulations section 1.861-9T(g)(1)(i). A taxpayer
can use either the tax book value or the alternative tax book
value of its assets; see Regulations sections 1.861-9(g)(2)(i)(B)
and -9(i). Under both methods, the partner whose interest in the
partnership is 10% or more uses the partnership’s inside basis in
its assets, including adjustments required under sections 734(b)
and 743(b); see Regulations sections 1.861-9(e)(2) and (3).
When reporting the basis in an asset which is stock in
nonaffiliated 10%-owned corporations, adjust such amount for
E&P; see Regulations section 1.861-12(c)(2)(i)(A).
The total interest expense deductions for the members of the
corporation’s affiliated group are allocated and apportioned to
the statutory and residual groupings under final and Temporary
Regulations sections 1.861-8 through 1.861-14.
A corporate partner with a less than 10% interest in a
partnership shall directly allocate its distributive share of the
partnership’s interest expense to its distributive share of
partnership gross income. See Regulations section 1.861-9(e)
(4).
Note: The “Total” column isn’t a sum of DEI and FDDEI but
rather refers to the partnership’s specific line totals (that is, that
would also include non-DEI).

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

23

DRAFT

DRAFT

Note: Don’t include any income and gain from the sale or other
disposition (including pursuant to the deemed sale or other
deemed disposition or a transaction subject to section 367(d)) of
intangible property (as defined in section 367(d)(4)), and any
other property of a type that is subject to depreciation,
amortization, or depletion by the seller, occurring after June 16,
2025 (see the instructions for line 3a and line 3b, earlier).

Section 3—Other Information for Preparation of
Form 8993

TREASURY/IRS AND OMB USE ONLY DRAFT
Line 14A. Total average value of assets. Enter the amount of
the average of the beginning-of-year and end-of-year inside
bases in the partnership’s total assets. See Regulations section
1.861-9(g)(2)(i)(A).

annual PTEP accounts and report foreign currency gain or loss
with respect to the PTEP on Forms 1040 and 1120. If eligible,
partners will also use this information to figure and claim a
dividends received deduction under section 245A on Form 1120.

Line 14B. Sections 734(b) and 743(b) adjustments to assets. Enter the amount of the average of the beginning-of-year
and end-of-year inside bases adjustments under sections 734(b)
and 743(b).

Use Schedule K-2, Part V, to report the distributions made by
foreign corporations to the partnership.

Lines 14C and 14D. Assets attracting directly allocable interest expense under Regulations section 1.861-10(e) and
Temporary Regulations section 1.861-10T. Enter the amount
of the reductions in the partnership’s asset values to reflect the
partnership’s directly allocable interest under Regulations
section 1.861-10(e) and Temporary Regulations section
1.861-10T. See also Temporary Regulations section 1.861-9T(e)
(1).

Note: Certain partners will use the following information, in
combination with other information known to the partners,
including Schedule P (Form 5471), to exclude from gross income
distributions to the extent that they’re attributable to PTEP in their

Note: If the partnership is a domestic partnership, the
partnership may have annual PTEP accounts under section 959
with respect to the foreign corporation or may have earnings with
respect to the foreign corporation that, when distributed, can be

Lines 15 and 16. R&E expenses apportionment factors.
These lines require the partnership to report information that a
partner will use to allocate and apportion its R&E expenses for
FDII purposes. A partnership isn’t required to complete lines 15
and 16 unless either (a) the partnership incurs R&E expenses; or
(b) the partner is expected to license, sell, or transfer its
intangible property to the partnership (as provided in
Regulations section 1.861-17(f)(3)). R&E expenses deducted, or
amortized and deducted, under section 174 are definitely related
to all gross intangible income reasonably connected with
relevant broad product categories of the taxpayer and are
allocable to all items of gross intangible income as a class
related to such product categories. The product categories are
generally determined by reference to the three-digit SIC code.
R&E expenses are apportioned between the statutory and
residual groupings based on an analysis of the taxpayer’s gross
receipts from certain sales, leases, licenses, and services; see
Regulations section 1.861-17. The exclusive apportionment rule
in Regulations section 1.861-17(c) doesn’t apply for purposes of
apportioning R&E expenses to gross DEI and gross FDDEI.
R&E expenses are allocated and apportioned by the partner.
This requires that the partnership report to its partners the gross
receipts related to certain income within the statutory and
residual groupings within a SIC code and the partner’s
distributive share of the partnership’s R&E deductions, if any,
connected with the SIC codes.
Line 15. Gross receipts by SIC code. Enter the gross receipts
that resulted in gross income for each category shown on the
form: DEI, FDDEI, and then total gross receipts. Note that the
Total column isn’t a sum of DEI and FDDEI but refers to all the
partnership’s gross receipts. Such gross receipts include both
the partnership’s sales and certain other parties’ sales; see
Regulations section 1.861-17(d). Gross receipts from certain
transactions of parties both controlled or uncontrolled by the
partnership may be included on line 15; see generally
Regulations section 1.861-17(d).
Line 16. R&E expenses by SIC code. Enter the amount of
R&E expenses by SIC code.

24

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

DRAFT

Schedule K-2, Part V; and Schedule K-3, Part V
(Distributions From Foreign Corporations to
Partnership)

Rows A through O. Use rows A through O to report information
with respect to each distribution by a foreign corporation with
respect to its stock that the partnership (directly or through
pass-through entities) owns (within the meaning of section 958)
other than solely by reason of applying section 318(a)(3)
(providing for downward attribution) as provided in section
958(b). Each row should relate to the partnership’s direct
ownership of stock in the foreign corporation or direct ownership
of the ownership interests in a pass-through entity that (directly
or through other pass-through entities) owns (within the meaning
of section 958) stock in the foreign corporation other than solely
by reason of applying section 318(a)(3) (providing for downward
attribution) as provided in section 958(b). For example, if a
partnership (upper-tier partnership) directly owns 50% of the
foreign corporation’s stock and owns 50% of the foreign
corporation’s stock through another partnership (lower-tier
partnership), then distributions by the foreign corporation to both
the upper-tier partnership and the lower-tier partnership are to
be reported on separate rows of the upper-tier partnership’s
Schedules K-2 and K-3 (Form 1065), Part V. If the partnership
owns stock of a foreign corporation through another partnership
(lower-tier partnership) from which it receives Schedule K-3
(Form 1065 or 8865), Part V, the partnership must replicate each
line of Schedule K-3 (Form 1065 or 8865), Part V, on its
Schedules K-2 and K-3 (Form 1065), Part V. Rows for
distributions with respect to a partnership’s direct ownership of
foreign corporation stock should be listed before rows for
distributions with respect to a partnership’s ownership of foreign
corporation stock through a pass-through entity.
Exception. Schedule K-2, Part V, isn’t required to be
completed with respect to distributions by a foreign corporation if
the partnership knows that (a) none of the distributions by the
foreign corporation are attributable to PTEP in annual PTEP
accounts of any direct or indirect partner, and (b) none of the
partnership’s direct or indirect partners are eligible to claim a
deduction under section 245A with respect to any distribution by
the foreign corporation. Nevertheless, the partnership may be
required to attach Worksheet 3 to Schedule K-2 (discussed
below).
Exception. Schedule K-3, Part V, for a partner doesn’t need
to be completed with respect to distributions by a foreign
corporation if the partnership knows that (a) none of the
distributions by the foreign corporation are attributable to PTEP
in annual PTEP accounts of the partner or any U.S. person that
is treated as indirectly owning stock of the foreign corporation
through the partner (relevant indirect partners), and (b) the
partner and relevant indirect partners aren’t eligible to claim a
deduction under section 245A with respect to any distributions
by the foreign corporation. Nevertheless, the partnership may be
required to attach Worksheet 4 to Schedule K-3 for the partner
(discussed below). If this exception is applicable with respect to
a foreign corporation, the sum of the amounts reported on
Schedules K-3, Part V, with respect to the foreign corporation
may not equal the amounts reported on Schedule K-2, Part V,
with respect to the foreign corporation.

Line 14E. Assets excluded from apportionment factors.
Enter the amount of the average value of assets excluded from
the apportionment formula. See section 864(e)(3).

DRAFT

Use Schedule K-3, Part V, to report the partner’s share of the
amounts reported on Schedule K-2, Part V.

TREASURY/IRS AND OMB USE ONLY DRAFT
amounts that may be excluded from the partners’ gross
income due to a prior inclusion of income from the PFIC by
reason of a qualified electing fund (QEF) election made by
the partnership.
However, if the partnership is a domestic partnership, to the
extent a distribution is attributable to PTEP in an annual PTEP
account of the partnership with respect to a foreign corporation,
or attributable to E&P that are excludable from the partnership’s
gross income under section 1293(c), that corresponds to a tax
year of the foreign corporation that ended with or within a tax
year of the partnership (a) that began after December 31, 2012;
and (b) for which an election under Regulations section
1.1411-10(g) wasn’t made by the partnership (such PTEP, net
investment income (NII) PTEP), attach Worksheet 3 to
Schedule K-2 and Worksheet 4 to each Schedule K-3 in the
format shown, adding additional rows as necessary for each
distribution by a foreign corporation. For more information about
NII and net investment income tax (NIIT) relating to CFCs and
QEFs, see Regulations section 1.1411-10.
Note: If additional rows are required, attach statements to
Schedules K-2 and K-3 that look like the current versions of
Schedule K-2, Part V, and Schedule K-3, Part V, respectively.

Worksheet 3

DRAFT

DRAFT

excluded from the partnership’s income under section 1293(c)
for amounts included in income by the partnership under section
951(a) or section 1293(a), respectively. In such a case, the
partnership should complete Schedules K-2 and K-3, Part V, as
follows.
• If the distributing foreign corporation is a PFIC and isn’t a
CFC with respect to which any direct or indirect partner is a
U.S. shareholder (as defined in section 951(b)), the
partnership may exclude any distribution from the foreign
corporation to the extent such distribution constitutes a
distribution of earnings excludable from the partnership’s
gross income under section 1293(c).
• If the distributing foreign corporation is a CFC with respect to
which the partnership has PTEP for amounts it included in
income under section 951(a) (only to the extent such PTEP
relates to tax years of the CFC beginning before January 25,
2022), the partnership may exclude any distribution from the
foreign corporation to the extent such distribution is
attributable to PTEP under section 959.
• If the distributing foreign corporation is both a CFC and a
PFIC, and the partnership has no PTEP for amounts
included in income under section 951(a) that can be
excluded from the partnership’s gross income under section
959 when distributed, the partnership must report the entire
distribution and provide information to its partners on any

Worksheet 3 (Schedule K-2)
(a) Name of distributing foreign
corporation

(b) EIN or reference ID
number

(c) Date of
distribution

(d) Functional
(e) Amount of NII
currency of
PTEP in functional
distributing foreign currency
corporation

(f) Spot rate
(functional
currency to U.S.
dollars)

(g) Amount of NII
PTEP in U.S.
dollars

(f) Spot rate
(functional
currency to U.S.
dollars)

(g) Partner’s share
of NII PTEP in U.S.
dollars

Worksheet 4
Worksheet 4 (Schedule K-3)
(a) Name of distributing foreign
corporation

(b) EIN or reference ID
number

(c) Date of
distribution

Column (b). EIN or reference ID number. Enter the EIN or
reference ID number of the distributing foreign corporation. Don’t
enter “FOREIGNUS” or “APPLIED FOR.” For basic information
about reference ID numbers (including the requirements as to
the characters permitted), see the Instructions for Form 1118.
Column (c). Date of distribution. Enter the year, month, and
day in which the distribution was made using the format
YYYYMMDD.
Column (d). Functional currency of distributing foreign corporation. Enter the applicable three-character alphabet code
for the foreign corporation’s functional currency using the ISO
4217 standard. These codes are available at ISO.org/ISO-4217currency-codes.html.
Note: Columns (e) and (f) are reported in functional currency.
Column (e). Amount of distribution in functional currency.
This represents the partnership’s share of the amount distributed
in functional currency. See column (c) of Schedule R (Form
5471).

(d) Functional
currency of
distributing foreign
corporation

(e) Partner’s
share of NII PTEP
in functional
currency

Column (f). Amount of E&P distribution in functional currency. This represents the partnership’s share of the amount of
E&P distributed in functional currency. See column (d) of
Schedule R (Form 5471). The total of the amounts reported in
column (f) of Schedule K-2, Part V, with respect to a distributing
foreign corporation should equal the partnership’s share of the
total reported on line 9 of all Schedules J (Form 5471) on a
separate category of income basis as reported on Schedule J
(Form 5471), TOTAL filed with respect to the distributing foreign
corporation.
If a Schedule J (Form 5471) with “TOTAL” entered on line a
isn’t filed with respect to the distributing foreign corporation, then
the total of the amounts reported in column (f) of Schedule K-2,
Part V, with respect to a distributing foreign corporation should
equal the partnership’s share of the amount reported in column
(f) of Schedule J (Form 5471), line 9, filed with respect to the
distributing foreign corporation.
Column (g). Spot rate (functional currency to U.S. dollars).
Enter the exchange rate on the date of distribution used to
translate the amount of the distribution in functional currency to

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

25

TREASURY/IRS AND OMB USE ONLY DRAFT
U.S. dollars; see section 989(b)(1). Report the exchange rate
using the divide-by convention specified under Reporting
exchange rates on Form 5471 in the Instructions for Form 5471.
Column (h). Amount of distribution in U.S. dollars. Enter
the amount of the distribution in U.S. dollars. Translate column
(e) using the spot rate reported in column (g).
Column (i). Amount of E&P distribution in U.S. dollars.
Enter the amount of E&P distributed in U.S. dollars. Translate
column (f) using the spot rate reported in column (g).
Column (j). Qualified foreign corporation. If the distributing
foreign corporation is a qualified foreign corporation, determined
without regard to section 1(h)(11)(C)(iii)(I), check the box. See
section 1(h)(11)(C).

Note: Certain partners will use the following information to
complete Form 8992 and Forms 1040 and 1120 for income
inclusions under section 951(a)(1)(A) (subpart F income
inclusions), section 951(a)(1)(B) inclusions, and section 951A
inclusions.
Schedules K-2 and K-3, Part VI, must be completed with
respect to a CFC if the partnership owns (within the meaning of
section 958) stock of the CFC, unless the partnership owns
stock of the CFC solely by reason of applying section 318(a)(3)
(providing for downward attribution) as provided in section
958(b).
Generally, a foreign corporation is a CFC if more than 50% of
either (a) the total combined voting power of all classes of stock
entitled to vote, or (b) the total value of the stock of the
corporation is owned (within the meaning of section 958(a)) or is
considered as owned by applying the rules of section 958(b) by
U.S. shareholders. For this purpose, a U.S. shareholder is a U.S.
person (as defined in section 957(c)) who owns (within the
meaning of section 958(a)), or is considered as owning by
applying the rules of ownership of section 958(b), 10% or more
of the total combined voting power of all classes of stock entitled
to vote, or 10% or more of the total value of shares of all classes
of stock of such foreign corporation.
If the partnership is a domestic partnership, then the domestic
partnership doesn’t have subpart F income inclusions or section
951(a)(1)(B) inclusions with respect to a foreign corporation
under Regulations section 1.958-1(d)(1). In columns (e) and (f)
of Schedule K-3, Part VI, report the information partners will
need to figure and report their subpart F income inclusions and
section 951(a)(1)(B) inclusions with respect to the CFC.
Exception. Schedule K-2, Part VI, doesn’t need to be
completed with respect to a CFC if the partnership knows that it
doesn’t have a direct or indirect partner (through pass-through
entities only) that is a U.S. shareholder of the CFC required to
include in gross income a subpart F income inclusion and/or a
section 951(a)(1)(B) inclusion with respect to the CFC, or figure
section 951A inclusions by taking into account GILTI items
(defined below) with respect to the CFC.
GILTI items. A partner’s GILTI is figured based on its share of
the following amounts for each CFC with respect to which it is a
U.S. shareholder: tested income, tested loss, QBAI, tested loss
QBAI amount, tested interest income, and tested interest
expense (collectively, GILTI items). CFC items refers to a CFC’s
subpart F income and GILTI items.
Exception. Schedule K-3, Part VI, for a partner doesn’t need
to be completed with respect to a CFC if the partnership knows
26

Use Schedule K-3, Part VI, to report the partner’s share of the
amounts needed to figure its subpart F income inclusions, its
section 951(a)(1)(B) inclusions, and its share of items of CFCs
needed to determine the partner’s section 951A inclusion, with
respect to CFCs owned (within the meaning of section 958) by
the partnership.
If the partnership must complete Schedules K-2 and K-3, Part
VI, with respect to a CFC, then the partnership must complete
Schedules K-2 and K-3, Part VI, by assuming that each partner
in the partnership is a U.S. shareholder of the CFC and is
required to include in gross income its share of the CFC’s
subpart F income, an amount determined under section 956 with
respect to the CFC (section 951(a)(1)(B) inclusion), and its
GILTI.
A partner’s share of a CFC’s subpart F income, amounts used
to determine its section 956 amount with respect to a CFC, and a
CFC’s GILTI items may not be limited to the partner’s share of
such income, amounts, or items through its ownership in the
partnership. However, for purposes of completing Schedules K-2
and K-3, Part VI, use only the partner’s share of a CFC’s subpart
F income, amounts used to determine its section 956 amount
with respect to a CFC, and a CFC’s GILTI items through the
partner’s ownership in the partnership.
A partner’s share through its ownership in the partnership of
subpart F income and GILTI items is generally anticipated to be
figured by multiplying the percentage in column (d) of Part VI, by
the amount of subpart F income or GILTI items, respectively. For
example, in general, a partner’s share through its ownership
interest in the partnership of tested income in column (i) is
anticipated to be figured by multiplying the percentage in column
(d) by the amount of tested income in column (g). If the partner’s
share through its ownership in the partnership of subpart F
income or GILTI items isn’t figured by multiplying the percentage
in column (d) by the amount of subpart F income or GILTI items,
respectively (for example, because of special allocations), then,
instead of entering a percentage in column (d) for that CFC,
attach a statement to Schedules K-2 and K-3 explaining the
partner’s share through its ownership in the partnership of the
CFC’s subpart F income and GILTI items.
Line a. Complete a separate Part VI for each applicable
separate category of income. However, all GILTI items must be
reported on only one Part VI. If GILTI items include passive
category income, report all GILTI items on the Part VI completed
for passive category income; otherwise, report all GILTI items on
the Part VI completed for general category income. Enter the
appropriate code on line a.
Note: The other reporting requirements of a partnership with
respect to reporting income by separate category don’t change

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

DRAFT

DRAFT

Schedule K-2, Part VI (Information on Partners’
Section 951(a)(1) and Section 951A Inclusions);
and Schedule K-3, Part VI (Information on
Partner’s Section 951(a)(1) and Section 951A
Inclusions)

that (a) the partner isn’t a U.S. shareholder of the CFC required
to include in gross income a subpart F income inclusion and/or a
section 951(a)(1)(B) inclusion with respect to the CFC, or figure
section 951A inclusions by taking into account GILTI items of the
CFC; and (b) no U.S. person that indirectly owns (through
pass-through entities only) an interest in the CFC through the
partner is a U.S. shareholder of the CFC required to include in
gross income a subpart F income inclusion and/or a section
951(a)(1)(B) inclusion with respect to the CFC, or figure section
951A inclusions by taking into account GILTI items of the CFC. If
the partnership doesn’t complete Schedule K-3, Part VI, for a
partner with respect to a CFC, the sum of each partner’s share of
the CFC’s subpart F income, section 951(a)(1)(B) inclusion with
respect to the CFC, and share of the CFC’s GILTI items reported
on all Schedules K-3 may not equal the aggregate share of
subpart F income of the CFC, the aggregate section 951(a)(1)
(B) inclusion with respect to the CFC, and the aggregate share of
the CFC’s GILTI items, respectively, reported on Schedule K-2.

TREASURY/IRS AND OMB USE ONLY DRAFT
by reason of the partnership reporting GILTI items that include
general category income on a Part VI completed for passive
category income.

Codes for Categories of Income
Code

Category of income

PAS

Passive category income

901j

Section 901(j) income

GEN

General category income

Line 1. Partnership total. Use lines A through K to report
information with respect to CFCs owned (within the meaning of
section 958) by the partnership, and for which Schedules K-2
and K-3, Part VI, must be completed. If the partnership owns a
CFC through another partnership (lower-tier partnership) from
which it receives a Schedule K-3 (Form 1065 or 8865), Part VI,
the partnership must replicate each line of Schedule K-3 (Form
1065 or 8865), Part VI, that is related to the CFC on its
Schedule K-2 (Form 1065), Part VI. For example, if a partnership
directly owns 50% of the CFC’s stock and owns 50% of the
CFC’s stock through a lower-tier partnership, the CFC should be
listed on two lines with one line related to the partnership’s direct
ownership and the other line related to the partnership’s
ownership through the lower-tier partnership. Lines related to a
partnership’s direct ownership of CFCs should be listed before
lines related to a partnership’s non-direct ownership of CFCs. If
additional lines are required, attach a statement to Schedules
K-2 and K-3 that looks like the current version of Part VI.
Column (a). Name of CFC. Enter the name of each CFC for
which Part VI must be completed.
Column (b). EIN or reference ID number. Enter the EIN or
reference ID number of the CFC. Don’t enter "FOREIGNUS" or
"APPLIED FOR." For basic information about reference ID
numbers (including the requirements as to the characters
permitted), see the Instructions for Form 1118.
Column (c). Ending of CFC tax year. Enter the end of the
CFC’s tax year using the format YYYYMMDD.
Column (d). Partners’ share of CFC items through their
ownership in the partnership. Enter the partners’ shares of
CFC items through the partners’ ownership in the partnership
(aggregate share). See Regulations sections 1.951-1(b),
1.951-1(e), and 1.951A-1(d)(1) for rules on determining the
partners’ shares.
Column (e). Aggregate share of subpart F income. Enter
the aggregate share of the amount of the CFC’s subpart F
income, if any. Note that an amount determined under section
956(a) isn’t considered subpart F income. For guidance on
computing a CFC’s subpart F income and the partners’ shares of
a CFC’s subpart F income, see Worksheet A in the Instructions
for Form 5471.
Column (f). Aggregate section 951(a)(1)(B) inclusion. Enter
the amount determined under section 956 with respect to the
partners that relate to those partners’ ownership in the
partnership, as outlined below. To determine the section 956
amount, use only the partners’ shares through their ownership in
the partnership of the following.
• The average of the amounts of U.S. property held (directly or
indirectly) by the CFC as of the close of each quarter of the
CFC’s tax year.
• The applicable earnings of the CFC.

Column (g). Tested income. Enter the CFC’s tested income, if
any, from Schedule I-1 (Form 5471), line 6, for each CFC.
Column (h). Tested loss. Enter the CFC’s tested loss, if any,
from Schedule I-1 (Form 5471), line 6, for each CFC.
Column (i). Aggregate share of tested income. Enter the
aggregate share of the tested income listed in column (g) for
each CFC with tested income.
Column (j). Aggregate share of tested loss. Enter the
aggregate share of the tested loss listed in column (h) for each
CFC with tested loss.
Column (k). Aggregate share of QBAI. If the CFC has a
tested loss in column (h), enter zero. If the CFC has tested
income in column (g), enter the aggregate share of QBAI. A
CFC’s QBAI is reported on Schedule I-1 (Form 5471), line 8.
Column (l). Aggregate share of the tested loss QBAI
amount. If the CFC has tested income in column (g), enter zero.
If the CFC has a tested loss in column (h), enter the aggregate
share of the CFC’s tested loss QBAI amount; see Regulations
section 1.951A-4(b)(1)(iv). A CFC’s tested loss QBAI amount is
reported on Schedule I-1 (Form 5471), line 9c, which must be
translated to U.S. dollars.
Column (m). Aggregate share of tested interest income.
Enter the aggregate share of the CFC’s tested interest income. A
CFC’s tested interest income is reported on Schedule I-1 (Form
5471), line 10c.
Column (n). Aggregate share of tested interest expense.
Enter the aggregate share of the CFC’s tested interest expense.
A CFC’s tested interest expense is reported on Schedule I-1
(Form 5471), line 9d.

Schedule K-2, Part VII; and Schedule K-3, Part
VII (Information Regarding Passive Foreign
Investment Companies (PFICs))
Note: Partners will use the following information to complete
Form 8621 and/or determine income inclusions with respect to
the PFICs reported on Schedules K-2 and K-3, Part VII.
Except as otherwise provided, Schedules K-2 and K-3, Part
VII, must be filed by every partnership that owns PFIC stock,
directly or indirectly. However, the following exceptions apply.
• A partnership that knows it doesn’t have direct or indirect
partners that are U.S. persons, including U.S persons that
own an indirect interest in the partnership through one or
more foreign entities, isn’t required to complete Schedules
K-2 and K-3, Part VII.

• A domestic partnership that has elected to treat a PFIC as a

pedigreed QEF or made a mark-to-market (MTM) election
under section 1296 with respect to a PFIC applicable to the
partnership’s tax year (other than a domestic partnership
making an MTM election under section 1296 with respect to
PFIC stock in the current tax year if the current tax year isn’t
the first year of the partnership’s holding period in the stock
(non-initial section 1296 MTM election)) isn’t required to
complete Schedules K-2 and K-3, Part VII, with information
regarding that PFIC if the partnership files Form 8621 for
that PFIC. The term “pedigreed QEF” is defined in
Regulations section 1.1291-1(b)(2)(ii).

• A partnership that owns stock of a foreign corporation that is
treated as a qualifying insurance corporation (QIC) (as

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

27

DRAFT

DRAFT

Line b. If any portion of a CFC item is U.S. source, complete a
separate Part VI for U.S.-source CFC items, and check the box
on line b of that separate Part VI.

Don’t reduce the amount reported in column (f) for any reduction
to the partners’ section 956 amount under Regulations section
1.956-1(a)(2). For guidance on computing the partners’ shares
of a CFC’s earnings invested in U.S. property, see Worksheet B
in the Instructions for Form 5471.

TREASURY/IRS AND OMB USE ONLY DRAFT
defined in section 1297(f)(1)) and which isn’t treated as a
PFIC by reason of section 1298(b)(1), or a domestic
partnership that satisfies the deemed election requirements
of Regulations section 1.1297-4(d)(5)(iv) with respect to a
foreign corporation eligible to be treated as a QIC (and that
isn’t treated as a PFIC by reason of section 1298(b)(1)), isn’t
required to complete Schedules K-2 and K-3, Part VII, with
respect to that foreign corporation.

• A partnership that knows that all of its direct and indirect

partners that are U.S. persons are (a) not subject to the
PFIC rules with respect to the foreign corporation under
section 1297(d) because they’re subject to the subpart F
rules with respect to the foreign corporation, (b) tax-exempt
entities that aren’t subject to the PFIC rules with respect to
the foreign corporation under Regulations section
1.1291-1(e), or (c) pass-through entities with no direct or
indirect U.S. taxable owners isn’t required to complete
Schedules K-2 and K-3, Part VII, with respect to the foreign
corporation.

• A partnership that marks to market stock of a PFIC as

DRAFT

Use Schedule K-2, Part VII, to report certain information with
respect to any PFIC owned, directly or indirectly, by the
partnership for which reporting is required, including (a) PFICs
with respect to which no QEF or section 1296 MTM election has
been made and unpedigreed QEFs (section 1291 funds); and
(b) PFICs with respect to which pedigreed QEF, section 1296
MTM, or other elections have been, or may be, made, and for
which the partnership isn’t filing a Form 8621.
Domestic partnerships must also use Schedule K-2, Part VII,
to report information for any PFIC with respect to which the
partnership is making a non-initial section 1296 MTM election,
and for any foreign corporation eligible to be treated as a QIC
that’s treated as a PFIC by reason of section 1298(b)(1),
regardless of whether it files Form 8621 for that PFIC. See
section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for
more information related to non-initial section 1296 MTM
elections.
Use Schedule K-3, Part VII, to report the partner’s share,
through its ownership in the partnership, of the amounts reported
on Schedule K-2, Part VII.
Complete only one line on both Sections 1 and 2 for each
PFIC for which reporting on Schedule K-2, Part VII, and
Schedule K-3, Part VII, is required. Each line completed for a

28

The partnership may have additional required information with
respect to a PFIC for certain columns (for example, scenarios
where the partnership may have multiple different events with
respect to the PFIC in the same tax year, such as multiple dates
of acquisitions of, or distributions with respect to, the PFIC
stock). In that case, complete Schedules K-2 and K-3, Part VII,
with the first of those entries for a PFIC and attach a statement
including the remaining entries for that PFIC to Schedule K-2,
Part VII, and its corresponding Schedules K-3, Part VII, with the
information contained in Table 6 and/or Table 7.
If the partnership has additional PFICs for which to report
information that doesn’t fit on single Schedules K-2 and K-3, Part
VII, it can attach additional Parts VII of Schedules K-2 and K-3,
as needed.

Section 1—General Information
Columns (a) through (c). Enter the name, U.S. EIN or
reference ID number, and address of each PFIC held directly or
indirectly by the partnership during its tax year. Don’t enter
“FOREIGNUS” or “APPLIED FOR.”
For basic information about reference ID numbers (including
the requirements as to the characters permitted), see the
Instructions for Form 8621.
Columns (d) and (e). Beginning and ending of PFIC tax
year. Enter the beginning and ending of the PFIC’s tax year
using the format YYYYMMDD.
Column (f). Description of each class of PFIC shares. Enter
each class of shares in the PFIC owned by the partnership using
the following codes.

Codes for Classes of PFIC Shares
Code

Class of PFIC shares

COM

Common or ordinary shares

PRE

Preferred shares

OTH

Other equity interest

VAR

Multiple classes of shares or equity
interests

Column (g). Dates PFIC shares acquired during tax year. If
the partnership acquired any PFIC shares during its tax year,
provide the date(s) of acquisition of those shares using the
format YYYYMMDD. If the partnership acquired no shares in a
particular PFIC during its tax year, leave this column blank with
respect to that PFIC.
Note: If the partnership acquired shares in a PFIC on multiple
dates during the tax year, attach a statement with the information
contained in Table 6 to Schedule K-2, Part VII, and its
corresponding Schedules K-3, Part VII, providing those dates.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

DRAFT

described in Regulations section 1.1291-1(c)(4) doesn’t
need to report information about the PFIC on Schedules K-2
and K-3, Part VII. The partnership should report its MTM
gain or loss on Form 1065, Schedule K, and report the
partners’ shares of those amounts on Schedule K-1 (Form
1065), Part III. Note, however, there may be instances in
which the partnership will need to provide its partners with
additional information to meet their tax obligations with
respect to a PFIC the stock of which the partnership has
marked to market as described in Regulations section
1.1291-1(c)(4), such as when section 1291 rules apply
because the stock wasn’t marked in the first year of the
partnership’s holding period. In such instances, the
partnership may use Part VII to provide the needed
information.

PFIC in Section 1 should correspond to the same line in Section
2. If there is no information to report with respect to a PFIC in
columns (c) through (o) of Section 2, only complete the name
and EIN of the PFIC in columns (a) and (b) of Section 2, and
leave columns (c) through (o) blank for that PFIC. For additional
information on determining indirect ownership of PFICs, see
Regulations section 1.1291-1(b)(8).

TREASURY/IRS AND OMB USE ONLY DRAFT
Table 6
Additional Information for Part VII, Section 1
General Information
(a) Name of PFIC

Annual Information
(b) EIN or reference ID number

Column (i). Total value of PFIC shares held at end of tax
year. Enter the total value of all shares in the PFIC held by the
partnership at the end of the tax year. If the PFIC shares aren’t
publicly traded, the partnership may rely upon periodic account
statements provided at least annually to determine the value of a
PFIC unless the partnership has actual knowledge or reason to
know based on readily accessible information that the
statements don’t reflect a reasonable estimate of the PFIC’s
value and the information provides a more reasonable estimate
of the PFIC’s value.
Note: A partner may need additional information not required to
be reported on this Schedule K-2, Part VII (or the partner’s
Schedule K-3, Part VII), from the partnership with respect to the
value of the PFIC shares as of a particular date to aid the partner
in making certain elections under Regulations section
1.1291-10, 1.1297-3, or 1.1298-3.
Column (j). Election by partnership. If the partnership is a
domestic partnership and has made either of the following
elections with respect to the PFIC, indicate which election was
made using the following codes. If the partnership hasn’t made
an election with respect to the PFIC, leave this column blank with
respect to that PFIC.

Partnership Election Codes
Code

Partnership election type

QEF

Qualified electing fund election

MTM

Section 1296 mark-to-market election

Reminder. If the partnership is a domestic partnership and has
made a pedigreed QEF election or section 1296 MTM election
(other than a non-initial section 1296 MTM election) with respect
to a PFIC, and the partnership files Form 8621 for that PFIC, it
isn’t required to report information regarding that PFIC on
Schedule K-2 or K-3, Part VII. If the partnership has marked
stock in a PFIC to market as described in Regulations section
1.1291-1(c)(4), it isn’t required to report information regarding
that PFIC on Schedule K-2 or K-3, Part VII.
Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations section 1.1297-4 for
additional information on QICs.
Column (l). Check the box if the PFIC has indicated that its
shares are marketable stock as defined in section 1296(e) and
Regulations section 1.1296-2.

Column (m). Check the box if the PFIC also constitutes a CFC
within the meaning of section 957 (PFIC/CFC).
Reminder. A partnership that knows that all of its direct and
indirect partners that are U.S. persons aren’t subject to the PFIC
rules with respect to a PFIC/CFC under section 1297(d) because
they’re subject to the subpart F rules with respect to the
PFIC/CFC isn’t required to complete Schedule K-2 or K-3, Part
VII, with respect to that PFIC/CFC.
Note: If the PFIC is a PFIC/CFC, a partner may need certain
additional information with respect to the PFIC/CFC’s E&P not
required to be reported on this Schedule K-2, Part VII (or the
partner’s Schedule K-3, Part VII), from the partnership to aid the
partner in making certain elections under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3.
Column (n). Complete column (n) in the following manner.
Completing Part VII, Section 1, Column (n)
IF...

THEN...

• this is the first year of the
partnership’s holding period in stock
of the foreign corporation, and
• the partnership has determined
(directly or otherwise) that the foreign
corporation is a PFIC under the
income test or asset test of section
1297(a)

check the box.

• the foreign corporation was a PFIC
in a prior tax year of the partnership’s
holding period, and
• the partnership hasn’t determined
(directly or otherwise) the foreign
corporation is a former PFIC within
the meaning of Regulations section
1.1291-9(j)(2)(iv)

check the box.

• the foreign corporation was a PFIC
in a prior tax year of the partnership’s
holding period, and
• the partnership has determined
(directly or otherwise) the foreign
corporation is a former PFIC within
the meaning of Regulations section
1.1291-9(j)(2)(iv)

don’t check the box.

Note: If the foreign corporation is a former PFIC within the
meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may
need additional information not required to be reported on this
Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII),
from the partnership with respect to the PFIC to aid the partner in
making certain elections under Regulations section 1.1298-3.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

29

DRAFT

DRAFT

Column (h). Total number of PFIC shares held at end of tax
year. Enter the total number of all classes of shares of the PFIC
the partnership owned at the end of its tax year.

(g) Dates PFIC shares acquired during tax
year (if applicable)

TREASURY/IRS AND OMB USE ONLY DRAFT
Section 2—Additional Information on PFIC or
Qualified Electing Fund (QEF)
General Information
Columns (a) and (b). Enter the name and U.S. EIN (or
reference ID number) of each PFIC held directly or indirectly by
the partnership during its tax year. Don’t enter “FOREIGNUS” or
“APPLIED FOR.”

Columns (c) and (d). Enter the partnership’s share of the total
ordinary earnings and net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year
in which or with which the tax year of the PFIC ends in columns
(c) and (d), respectively. The PFIC must provide the partnership
(or any other shareholder or intermediary through which the
partnership owns stock of the PFIC) with a statement that
provides information to assist the partnership in determining
these amounts. See Regulations section 1.1295-1(g) for
additional information on PFIC annual information and
intermediary statements.
A domestic partnership must provide this information for any
PFIC with respect to which it has made a pedigreed QEF
election but for which it doesn’t file Form 8621, and for any PFIC
it has elected to treat as an unpedigreed QEF. A foreign
partnership must provide this information for any PFIC if (a) it has
received a PFIC annual information or intermediary statement
with respect to the PFIC; or (b) it receives a Schedule K-3, Part
VII, in its capacity as a partner of a lower-tier partnership with
information regarding the PFIC, unless the partnership knows
that no direct or indirect partner has made, or intends to make, a
QEF election with respect to the PFIC; the partnership may
obtain this knowledge in any reasonable manner, provided it
retains a written record in its books and records.
Reminder. If the partnership is a domestic partnership and has
made a pedigreed QEF election with respect to a PFIC, and if
the partnership files Form 8621 for that PFIC, the partnership
isn’t required to report information regarding that PFIC on
Schedule K-2 or K-3, Part VII. The partnership should report its
inclusion of its share of the QEF’s ordinary earnings and net
capital gain on Form 1065, Schedule K, and report the partners’
shares of those amounts on Schedules K-1, Part III. However,
certain partners which receive a distributive share of the
partnership’s QEF inclusions may be entitled to claim foreign tax
credits under section 960 with respect to those inclusions. See
the instructions for Schedules K-2 and K-3, Part VIII, regarding
deemed paid foreign tax credits under section 960, including for
inclusions with respect to a QEF under section 1293(f).
Note: Certain partners may need additional information not
required to be reported on this Schedule K-2, Part VII (or the
partner’s Schedule K-3, Part VII), from the QEF with respect to
its computation of its net capital gain (as defined in Regulations
section 1.1293-1(a)(2)). This information is needed to perform
certain computations under section 1061 or the regulations
thereunder. The partnership may aid the partner in obtaining this
information from the QEF, though the QEF isn’t required to
provide it. See section 1061 and Regulations sections 1.1061-4
and -6 for more information.

Section 1296 Mark-to-Market Information
Columns (e) and (f). FMV of PFIC shares at beginning and
end of tax year. Enter the fair market value (FMV) of the PFIC
stock at the beginning and end of the partnership’s tax year in
30

Reminder. If the partnership is a domestic partnership and has
made an MTM election under section 1296 with respect to a
PFIC (other than a non-initial section 1296 MTM election), and if
the partnership files Form 8621 for that PFIC, the partnership
isn’t required to report information regarding that PFIC on
Schedule K-2 or K-3, Part VII. The partnership should report its
section 1296(a) MTM gain or loss on Form 1065, Schedule K,
and report the partners’ shares of those amounts on Schedules
K-1, Part III.
If the partnership has marked stock in a PFIC to market as
described in Regulations section 1.1291-1(c)(4), it isn’t required
to report information regarding that PFIC on Schedule K-2 or
K-3, Part VII, though it may use Part VII to provide its partners
with additional information to meet their tax obligations with
respect to the PFIC in certain instances, such as when the
section 1291 rules apply because the partnership didn’t mark the
stock to market in the first year of its holding period.
Note: If the partnership is a domestic partnership that has made
an MTM election under section 1296 with respect to a PFIC but
doesn’t file Form 8621 for that PFIC, a partner may need
additional information not required to be reported on this
Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII),
regarding its share of the partnership’s adjusted tax basis in the
partnership’s MTM PFIC stock in order to complete Form 8621.

Section 1291 and Other Information
Generally, the information in columns (g) through (o) is to assist
shareholders of section 1291 funds in satisfying any information
reporting obligations and in computing income inclusions with
respect to section 1291 funds. However, this information may be
relevant to PFICs with respect to which a QEF election
(pedigreed or unpedigreed), a section 1296 MTM election
(including a non-initial section 1296 MTM election), or other
election has been made by the partnership, partner, or other
indirect PFIC shareholder. Accordingly, the partnership must
complete columns (g) through (o) with respect to each PFIC for
which reporting on Schedules K-2 and K-3, Part VII, is required.
However, note the exception in the instructions for column (k)
regarding reporting distributions from PFICs with respect to
which the partnership has made a pedigreed QEF election or
section 1296 MTM election (other than a non-initial section 1296
MTM election) and for which the partnership doesn’t file Form
8621.
Reminder. If the partnership has additional required information
with respect to a PFIC for any of columns (g) through (j) or (l)
through (m) (for example, if the partnership received multiple
distributions with respect to stock in a PFIC), it must complete
that column with the first of those entries and attach a statement
including the remaining entries to Schedule K-2, Part VII, and its
corresponding Schedules K-3, Part VII, with the information
contained in Table 7.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

DRAFT

DRAFT

QEF Information

columns (e) and (f), respectively. If any shares of the PFIC were
acquired during the tax year for which the Form 1065 is being
filed, the FMV in column (e) should reflect the FMV of those
shares as of the date of acquisition. A domestic partnership must
provide this information for any PFIC with respect to which it has
made an MTM election under section 1296 but for which it
doesn’t file Form 8621 and for any PFIC with respect to which it’s
making a non-initial section 1296 MTM election. A foreign
partnership must provide this information unless it knows that no
direct or indirect partner has made, or intends to make, an MTM
election under section 1296 with respect to the PFIC; the
partnership may obtain this knowledge in any reasonable
manner, provided it retains a written record in its books and
records.

TREASURY/IRS AND OMB USE ONLY DRAFT
Column (g). Dates PFIC shares were acquired. Enter the
date(s) on which the partnership initially acquired each block of
stock in the PFIC using the format YYYYMMDD.

Table 7
Additional Information for Part VII, Section 2
Section 1291 and Other Information

General Information
(b) EIN or
reference ID
number

(g) Dates
(h) Amount
PFIC shares of cash and
were acquired
FMV of
property
distributed by
PFIC during
the current
tax year (if
applicable)

(i) Dates of
distribution

Column (h). Amount of cash and FMV of property distributed by PFIC during the current tax year. Enter the amount
of each distribution of cash and/or the FMV of any other property
distributed to the partnership by the PFIC during the tax year, if
any.
Note: Deemed distributions by QEFs don’t need to be reported
on this Schedule K-2, Part VII (or the partner’s Schedule K-3,
Part VII). However, partners which have made, or intend to make,
an election under section 1294, and which are deemed to have
received a distribution from the QEF, may require this information
to complete any computations under section 1294 (including for
Form 8621, if required). See section 1294(f) and Temporary
Regulations section 1.1294-1T for additional information.
Column (i). Dates of distribution. Enter the date(s) of
distribution of the amounts entered in column (h) using the
format YYYYMMDD.
Column (j). Total creditable foreign taxes attributable to
distribution by PFIC. Enter the total creditable foreign taxes
attributable to a distribution from the PFIC. See section 1291(g)
and the instructions for Form 8621, Part V, line 16d, for additional
information on creditable foreign taxes attributable to PFIC
distributions, including apportioning creditable foreign taxes to
the portion of a distribution which constitutes an excess
distribution and certain rules related to creditable foreign taxes
on a disposition of PFIC stock.

(j) Total
creditable
foreign taxes
attributable to
distribution
by PFIC

(l) Dates
PFIC shares
disposed of
during tax
year (if
applicable)

(m) Amount (n) Tax basis
realized on
of PFIC
disposition of
shares on
PFIC shares
date of
disposition

(o) Gain or
(loss) on
disposition of
PFIC shares

MTM election (other than a non-initial section 1296 MTM
election) and for which the partnership doesn’t file Form 8621.
Column (l). Dates PFIC shares disposed of during tax year.
Enter the date(s) on which the partnership disposed of any block
of stock in the PFIC during the partnership’s tax year, if any,
using the format YYYYMMDD.
Column (m). Amount realized on disposition of PFIC
shares. If the partnership disposed of any block of stock in the
PFIC during the partnership’s tax year, enter the amount realized
by the partnership on each disposition.
Column (n). Tax basis of PFIC shares on dates of disposition. If the partnership disposed of any block of stock in the
PFIC during the partnership’s tax year, enter the partnership’s
tax basis in the shares of the PFIC on the date of disposition.
Schedule K-3. Enter the partner’s share, through its
ownership in the partnership, of the partnership’s tax basis in the
PFIC shares. The partner’s share of the basis in the PFIC shares
should include any applicable adjustments specific to the
partner, such as section 743(b) adjustments or adjustments
made under the PFIC regime. See sections 1293(d) and
1296(b), and Regulations sections 1.1291-9, 1.1291-10,
1.1297-3, and 1.1298-3 for adjustments made under the PFIC
regime.
Column (o). Gain (loss) on disposition of PFIC shares.
Enter the partnership’s gain or loss on the disposition of PFIC
shares. This equals column (m) minus column (n).

Note: Creditable foreign taxes entered in column (j) don’t
include taxes attributable to QEF inclusions under section
1293(f). Enter only creditable foreign taxes within the meaning of
section 1291(g) in column (j). See the instructions for Schedules
K-2 and K-3, Part VIII, regarding deemed paid foreign tax credits
under section 960, including for inclusions with respect to a QEF
under section 1293(f).

Schedule K-2, Part VIII (Partnership’s Interest in
Foreign Corporation Income (Section 960)); and
Schedule K-3, Part VIII (Partner’s Interest in
Foreign Corporation Income (Section 960))

Column (k). Total distributions from PFIC in preceding 3
tax years. Enter the total amount of distributions the partnership
received from the PFIC in the preceding 3 tax years, or, if shorter,
the total amount of distributions the partnership received during
its holding period of the PFIC stock. However, don’t enter any
amount in this column with respect to a PFIC for which the
partnership has made a pedigreed QEF election or section 1296

Reporting currency. Report all amounts in Part VIII in
functional currency.

Note: Certain partners will use the following information to figure
a deemed paid foreign tax credit on Form 1118.

The partnership must complete a separate Schedule K-2,
Part VIII, for each CFC with respect to which it has a direct or
indirect partner (through pass-through entities only) who is a

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

31

DRAFT

DRAFT

(a) Name of PFIC

TREASURY/IRS AND OMB USE ONLY DRAFT
U.S. shareholder of the CFC required to include in gross income
a subpart F income inclusion and/or section 951(a)(1)(B)
inclusion with respect to the CFC, or figure section 951A
inclusions by taking into account GILTI items of the CFC.
Schedule K-3, Part VIII, must be completed and provided to
direct or indirect partners who are U.S. shareholders of the CFC
required to include in gross income a subpart F income inclusion
and/or section 951(a)(1)(B) inclusion with respect to the CFC, or
figure section 951A inclusions by taking into account GILTI items
of the CFC.

In general, a domestic corporate U.S. shareholder of a CFC is
deemed to pay all or a portion of the foreign income taxes paid or
accrued by the CFC that are properly attributable to subpart F
income or tested income of the CFC that the U.S. shareholder
includes in its gross income as provided in sections 960(a) and
(d). See also section 1293(f) regarding QEF inclusions from a
PFIC. The domestic corporate U.S. shareholder may claim a
credit for such foreign taxes, subject to certain limitations.
Individuals, estates, and trusts may also claim a foreign tax
credit for foreign income taxes deemed paid with respect to a
CFC if they make an election under section 962.
To figure the foreign taxes deemed paid by a corporate U.S.
shareholder, the income, deductions, and taxes of the CFC must
be assigned to separate categories of income and then included
in income groups within those separate categories; see
Regulations section 1.960-1(c)(1). The applicable separate
categories of income are general category income, passive
category income, and section 901(j) income. The income groups
include the subpart F income groups, the tested income group,
and the residual income group. Each single item of foreign base
company income (as defined in Regulations section 1.954-1(c)
(1)(iii)) is a separate subpart F income group; see Regulations
section 1.960-1(d)(2)(ii)(B).
Line 1f allows the partnership to report foreign personal
holding company income under section 954(c)(1)(F) (income
from notional principal contracts), section 954(c)(1)(G)
(payments in lieu of dividends), and section 954(c)(1)(H)
(personal service contracts). A partnership must report a
separate line 1f for income with respect to each of sections
954(c)(1)(F), (G), and (H). Income within one of these income
groups may need to be further subdivided on separate lines to
the extent it’s attributable to more than one country, source of
income, passive grouping, etc. See the instructions for
Schedule Q (Form 5471).
The tested income group consists of tested income within a
section 904 category; see Regulations section 1.960-1(d)(2)(ii)
(C). The residual income group consists of any income not in the
other income groups or in a PTEP group; see Regulations
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)
(2) regarding the PTEP groups. The PTEP groups aren’t
reported on this Part VIII.
Lines 1 through 4. The partnership’s share of the CFC’s net
income in each of the subpart F income groups, tested income
32

Line A. On line A, enter the EIN or reference ID number of the
CFC as listed on Form 5471. Don’t enter "FOREIGNUS" or
"APPLIED FOR."
Line B. The partnership must file separate Schedules K-2 and
K-3, Part VIII, to report the net income or loss of the CFC in each
separate category. Use the applicable code from the table below.

Category of Income Codes
Code

Category of income

PAS

Passive category income

901j

Section 901(j) income

GEN

General category income

Line C. For passive category income, separate Schedules K-2
and K-3, Part VIII, must be completed for each applicable
grouping under Regulations section 1.904-4(c). This includes
the groups in Regulations section 1.904-4(c)(3) reported on
Schedule Q (Form 5471).

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

DRAFT

DRAFT

A partnership that doesn’t have or receive sufficient
information or notice regarding a direct or indirect partner must
presume the partner is a U.S. shareholder of the CFC required to
include in gross income a subpart F income inclusion and/or
section 951(a)(1)(B) inclusion with respect to the CFC, or figure
section 951A inclusions by taking into account GILTI items of the
CFC and must complete Schedules K-2 and K-3, Part VIII,
accordingly.
Exceptions. Part VIII isn’t required to be completed with
respect to the following.
• Dormant foreign corporations (as defined in section 3 of
Rev. Proc. 92-70).
• CFCs that didn’t pay or accrue any foreign income taxes.

group, and residual income group by unit is reported on lines 1
through 4. The CFC’s net income and taxes in each of these
groups are figured on Schedule Q (Form 5471), and then
included in columns (iii) and (iv), respectively, of Schedules K-2
and K-3, Part VIII. See the instructions for Schedule Q (Form
5471) for the meaning of unit.
However, don’t include on line 1 (including lines 1a through 1j
and any subset lines (1), (2), etc., under line 1) any amounts
excluded from subpart F income under the high-tax exception in
section 954(b)(4); these amounts are reported on line 4 (and on
subset lines (1), (2), etc., under line 4).
Also, don’t include on line 3 (or subset lines (1), (2), etc.,
under line 3) any amounts excluded under the GILTI high-tax
exclusion in Regulations section 1.951A-2(c)(7); these amounts
are reported on line 4 (including any subset lines (1), (2), etc.,
under line 4).
The PTEP groups aren’t reported in this Part VIII. Don’t report
by unit with respect to the following subpart F income groups: (a)
international boycott income; (b) bribes, kickbacks, and other
payments; and (c) section 901(j) income. Also don’t report by
unit for the recaptured subpart F income group.
On Schedule K-2, Part VIII, the partnership reports in column
(ii) its share of the CFC’s net income by income groups and by
units. In column (iii), the partnership reports the CFC’s total net
income by income groups and units as reported in column (xvi)
of Schedule Q (Form 5471). In column (iv) of Schedule K-2, Part
VIII, the partnership reports the CFC’s current year foreign taxes
for which credit is allowed by income groups and units as
reported in column (xii) of Schedule Q (Form 5471). In column (i)
of Schedule K-2, Part VIII, consistent with the reporting
requirement on Form 1118, enter the two-letter code (from the
list at IRS.gov/CountryCodes) of each foreign country and U.S.
territory within which income is sourced and/or to which taxes
were paid or accrued. Enter “US” for income sourced in the
United States. Don’t enter “various” or “OC” for the country code.
Don’t enter a country in column (i) of Schedule K-2, Part VIII,
line 5. See the instructions for line D for further information. See
also the instructions for box 13 of Part I, for information regarding
temporary relief provided by Notice 2023-55. If a partnership
applies temporary relief, include foreign taxes that are creditable
under temporary relief in column (iv) of Part VIII.
On Schedule K-3, Part VIII, the partnership reports each
partner’s share of the net income in the income group by unit and
country.
Enter “US” for income sourced in the United States.

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The partnership should use the following codes to report
each of these groupings for each unit.

Passive Group Codes
Code

Passive group

i

All passive income received during the tax year that is subject to a
withholding tax of 15% or greater must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(i).

ii

All passive income received during the tax year that is subject to a
withholding tax of less than 15% (but greater than zero) must be
treated as one item of income. See Regulations section 1.904-4(c)(3)
(ii).

iii

All passive income received during the tax year that is subject to no
withholding tax or other foreign tax must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(iii).

iv

All passive income received during the tax year that is subject to no
withholding tax but is subject to foreign tax other than a withholding
tax must be treated as one item of income. See Regulations section
1.904-4(c)(3)(iv).

Example 15—Part VIII: subpart F income group
reporting by unit. In Year 1, USP, a domestic partnership,
wholly owns foreign corporation CFC, with reference ID number
1234, and the CFC owns an FDE organized in Country X. CFC
has two separate units, the FDE and the CFC itself. See the
tables for Example 15.

Example 15. Foreign Source Income

Tax

Country code

Net income

Country X FDE passive interest income

20% withholding tax

AA

100u

CFC passive rental income

10% withholding tax

YY

50u

No tax

ZZ

300u

CFC general category tested income

DRAFT

DRAFT

For the Year 1 tax year, the separate units have the following foreign source income.

Example 15. Partnership USP’s First Schedule K-2, Part VIII
USP completes Schedule K-2, Part VIII, as shown below.
A
B
C

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).

1

. . . . . . . .
. . . . . . . .
. . . . . . . .

1234
PAS
i

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

AA

100u

100u

$20

Subpart F income groups
a Dividends, interest, rents, royalties, and
annuities (total) . . . . . . . . . . . . .
(1)

Unit:

Country X FDE

Example 15. Partnership USP’s Second Schedule K-2, Part VIII
USP completes another Schedule K-2, Part VIII, as shown below.
A
B
C

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).

1

. . . . . . . .
. . . . . . . .
. . . . . . . .

1234
PAS
ii

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

YY

50u

50u

$5

Subpart F income groups
a Dividends, interest, rents, royalties, and
annuities (total) . . . . . . . . . . . . .
(1)

Unit:

CFC

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

33

TREASURY/IRS AND OMB USE ONLY DRAFT
Example 15. Partnership USP’s Third Schedule K-2, Part VIII
USP completes another Schedule K-2, Part VIII, as shown below.
A
B

Enter EIN or reference ID number of CFC: . . . .
Separate category (enter code—see instructions)
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).
Tested income group (total)

3

(1)

Unit:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

ZZ

300u

300u

$0

. . . . . .

CFC

USP also completes Schedule K-3, Part VIII, with each
partner’s share of the partnership’s net income in each income
group. On Schedule K-3, Part VIII, USP also includes the CFC’s
total net income and the CFC’s current year foreign taxes for
which credit is allowed in each income group.
Line D. If net income in an income group is sourced from more
than one country, check the box on line D, and attach a
statement to indicate that you have expanded Part VIII to report
these additional countries on both Schedules K-2 and K-3.
Example 16—Part VIII: more than two source countries.
In Year 1, USP, a domestic partnership, wholly owns foreign
corporation CFC, with reference ID number 1234. USP has two
domestic corporate partners. CFC has only one unit, the CFC
itself, and no other separate units. CFC has general category

foreign source foreign base company sales income (FBCSI)
sourced in Country A of 100u and general category foreign
source FBCSI sourced in Country B of 50u and general category
foreign source FBCSI sourced in Country C of 30u. The country
code for Country A is AA, the country code for Country B is BB,
and the country code for Country C is CC. See the tables for
Example 16.
Example 16 Attachment (Expansion). USP also completes
Schedule K-3, Part VIII, with each partner’s share of the
partnership’s net income in each subpart F income group. USP
attaches to Schedule K-3 the same schedule it attaches to
Schedule K-2, however, with each partner’s share of the income
in each subpart F income group, by country.

DRAFT

DRAFT

1234
GEN

Example 16. Schedule K-2, Part VIII
USP completes Schedule K-2, Part VIII, as shown below.
A
B
D

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . .
Check the box and attach a statement if there is more than one source country for a line
Enter amounts in functional currency of the foreign
corporation (unless otherwise noted).

1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(i) Country code

1234
GEN

⻫

(ii) Partnership’s share of foreign corporation’s net
income (functional currency)

Subpart F income groups
g

Foreign base company sales income (total)

180u

. . .

(1)

Unit:

CFC

AA

100u

(2)

Unit:

CFC

BB

50u

Example 16. Attachment (Expansion)
USP attaches to Schedule K-2 the following schedule to expand line 1g to include another line.
A
B
D

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . .
Check the box and attach a statement if there is more than one source country for a line
Enter amounts in functional currency of the foreign
corporation (unless otherwise noted).

1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(i) Country code

1234
GEN

⻫

(ii) Partnership’s share of foreign corporation’s net
income (functional currency)

Subpart F income groups
g

Foreign base company sales income (total)
(3)

Unit:

180u

. . .

CFC

CC

Line E. The partnership should check the box and complete a
separate Part VIII for U.S. source income in each separate
category.
Line F. If the foreign corporation has foreign oil and gas
extraction income (FOGEI) or foreign oil related income (FORI),
the partnership should check the box and complete a separate
Part VIII indicating the amount of FOGEI and FORI in each
grouping. The partnership should check box 2 in Part I and
34

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30u

complete Schedule I (Form 1118). See the instructions for Part I,
box 2.
Line G. Enter the functional currency of the foreign corporation
as reported on Form 5471, line 1h.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Schedule K-2, Part IX (Partners’ Information for
Base Erosion and Anti-Abuse Tax (Section
59A)); and Schedule K-3, Part IX (Partner’s
Information for Base Erosion and Anti-Abuse
Tax (Section 59A))

The BEAT is generally levied on certain large corporations
that have deductions and certain other items paid or accrued to
foreign related parties (a base erosion payment) that are 3% of
their total deductions or higher (2% in the case of certain banks
or registered securities dealers), a determination referred to as
the “base erosion percentage test.” Partnerships aren’t subject to
the BEAT; however, corporate partners of a partnership that are
applicable taxpayers under Regulations section 1.59A-2 may be
subject to the BEAT. Except for purposes of determining a
partner’s base erosion tax benefits under Regulations section
1.59A-7(d)(1), and whether a taxpayer is a registered securities
dealer, BEAT determinations are made by the partner. See
Regulations section 1.59A-7 for further information regarding the
application of section 59A to partnerships, and the Instructions
for Form 8991 for additional information on whether a corporate
partner is an applicable taxpayer subject to the BEAT.
For the partnership to complete Schedules K-2 and K-3, Part
IX, the foreign related parties of each partner must be identified,
subject to the exception for small partners. It is expected that the
partnership will collaborate with its partners to identify the foreign
related parties of each partner. A foreign related party with
respect to the partner is a foreign person that is:
• Any 25% owner of the applicable taxpayer (as defined in
Regulations section 1.59A-1(b)(17)(ii)(A)),
• Any person who is related (within the meaning of section
267(b) or 707(b)(1)) to the applicable taxpayer or any 25%
owner of the applicable taxpayer, or
• Any other person who is related to the applicable taxpayer
within the meaning of Regulations section 1.59A-1(b)(17)(i)
(C).
Exception for small partners. Part IX of Schedule K-3 isn’t
required to be prepared by the partnership for small partners
meeting the following three requirements.
• The partner’s interest in the partnership represents less than
10% of the capital and profits of the partnership at all times
during the tax year.
• The partner is allocated less than 10% of each partnership
item of income, gain, loss, deduction, and credit for the tax
year.
• The partner’s interest in the partnership has an FMV of less
than $25 million on the last day of the partner’s tax year,
determined using a reasonable method.
See Regulations section 1.59A-7(d)(2) for further information
regarding the application of the exception for small partners.
Exception for certain other partners. The partnership
doesn’t need to complete Schedule K-3, Part IX, for a partner
that is an individual.
The partnership doesn’t need to complete Schedule K-3, Part
IX, for a corporate partner that is an S corporation.
The partnership should complete Schedule K-3, Part IX,
Section 1, lines 1 through 4, for partners that are RICs and REITs
but doesn’t need to complete Section 2 for these partners.

Lines 1 through 4, column (a). Enter the partnership’s total
gross receipts for the current year and each of the preceding 3
tax years. The determination of the partnership’s gross receipts
is made in accordance with Temporary Regulations section
1.448-1T(f)(2)(iv).
Lines 1 through 4, column (b). Complete column (b) of lines 1
through 4 if the partnership has a foreign partner or has reason
to know it has a foreign partner through a partner that is a
pass-through entity. Enter the partnership’s total gross ECI
receipts for the current year and each of the preceding 3 tax
years which the foreign partner(s) would take into account as
ECI. If the foreign partner(s) is subject to tax on a net basis
pursuant to an applicable income tax treaty of the United States,
enter the gross receipts that would be attributable to transactions
taken into account in determining its net taxable income.
Lines 1 through 4, column (c). Complete column (c) of lines 1
through 4 if the partnership has a foreign partner or has reason
to know it has a foreign partner through a partner that is a
pass-through entity. Enter the total non-ECI gross receipts as the
difference between column (a) and column (b).
Schedule K-3. For purposes of section 59A, each partner in
a partnership includes on its Schedule K-3, Part IX, the share of
partnership gross receipts in proportion to the partner’s
distributive share (as determined under sections 704(b) and (c))
of items of gross income that were taken into account by the
partnership under section 703 or 704(c) (such as curative or
remedial items under Regulations section 1.704-3(c) or (d)).
Line 5, column (a). Amounts included in the denominator
of the base erosion percentage as described in Regulations section 1.59A-2(e)(3). Enter the amount of deductions
and other items allocated to the partners from the partnership
that will be included in the denominator of the partners’ base
erosion percentage. For a description of deductions that aren’t
included in the denominator, see Regulations section 1.59A-2(e)
(3)(ii).

Section 2—Base Erosion Payments and Base
Erosion Tax Benefits
Column (b). Total base erosion payments. For purposes of
determining whether a payment or accrual by a partnership is a
base erosion payment, any amount paid or accrued by the
partnership is treated as paid or accrued by each partner based
on the partner’s distributive share of the item of deduction with
respect to that amount. A partner that is an applicable taxpayer
has a base erosion payment for any amount paid or accrued by
the partnership to a foreign person (as defined in Regulations
section 1.59A-1(b)(10)) that is a related party of the partner (as
defined in Regulations section 1.59A-1(b)(12)) with respect to
which a deduction is allowable under chapter 1 and for certain
other items on lines 13 and 15. See Regulations section 1.59A-3
and the Instructions for Form 8991 for more information on the
definition of a base erosion payment.
Column (c). Total base erosion tax benefits. A partner’s
distributive share of any deduction or reduction in gross receipts
attributable to a base erosion payment is the partner’s base
erosion tax benefit. A partner’s base erosion tax benefit is
determined separately for each asset, payment, or accrual, as
applicable, and isn’t netted with other items. A partner’s base
erosion tax benefit may be more than the partner’s base erosion
payment (for example, in the case of special allocations made by
the partnership). See the Instructions for Form 8991 and
Regulations section 1.59A-7(d) for further information
concerning a partner’s base erosion tax benefits.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

35

DRAFT

DRAFT

Certain partners will use the following information to complete
Form 8991. This Part IX of Schedules K-2 and K-3 must be
completed by a partnership to assist its corporate partners in
determining if they’re subject to the BEAT, and to figure their
BEAT, if any. This information includes the partner’s share of the
partnership’s gross receipts, the partner’s amount of base
erosion payments made through the partnership, and the
partner’s base erosion tax benefits.

Section 1—Applicable Taxpayer

TREASURY/IRS AND OMB USE ONLY DRAFT
General. Don’t include amounts that a partner doesn’t take into
account pursuant to the exception for certain small partners for:
• Line 7, columns (b) and (c);
• Line 8, columns (b) and (c);
• Line 9, columns (b) and (c);
• Line 10a, columns (b) and (c);
• Line 11, columns (b) and (c);
• Line 12, columns (b) and (c);
• Line 13, columns (b) and (c);
• Line 14a, columns (b) and (c);
• Line 15, columns (b) and (c); and
• Line 16, columns (b) and (c).

Line 7. Cost sharing transaction payments.
Column (a). Enter the amount paid or accrued as cost
sharing transaction payments as defined in Regulations section
1.482-7(b)(1)(i) by the partnership for the tax year.
Column (b). Enter the amount paid or accrued as cost
sharing transaction payments as defined in Regulations section
1.482-7(b)(1)(i) to all foreign persons that are related parties of
any of the partners.
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to amounts paid or accrued as cost
sharing transaction payments under Regulations section
1.482-7(b)(1)(i) to all foreign persons that are related parties of
any of the partners.
Line 8. Purchase or creation of property rights for intangibles (patents, trademarks, etc.).
Column (a). Enter the amount paid or accrued by the
partnership in connection with the acquisition or creation of
intangible property rights (patents, copyrights, trademarks, trade
secrets, etc.) that is subject to the allowance for depreciation (or
amortization in lieu of depreciation) for the tax year.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners in
connection with the acquisition or creation of intangible property
rights (patents, copyrights, trademarks, trade secrets, etc.) that
is subject to the allowance for depreciation (or amortization in
lieu of depreciation).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to deductions allowed under chapter 1
for the tax year for depreciation (or amortization in lieu of
depreciation) with respect to intangible property rights acquired
in the current year or prior years from all foreign persons that are
related parties of any of the partners.
Line 9. Rents, royalties, and license fees.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the use or right to use tangible or
intangible property resulting in rents, royalties, and/or license
fees.

36

Line 10a. Compensation/consideration paid for services
not excepted by section 59A(d)(5).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year as compensation or consideration for
services, excluding any amount that qualifies for the services
cost method exception in section 59A(d)(5).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners as
compensation or consideration for services, excluding any
amount that qualifies for the services cost method exception in
section 59A(d)(5).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners
representing compensation or consideration paid for services,
excluding amounts qualifying for the services cost method
exception in section 59A(d)(5).
Line 10b. Compensation/consideration paid for services
excepted by section 59A(d)(5).
Column (a). Enter the amounts paid or accrued by the
partnership to any foreign person that is a related party of any of
the partners for services qualifying for the services cost method
exception in section 59A(d)(5).
Line 11. Interest expense.
Column (a). Enter the amount of interest paid or accrued by
the partnership for the tax year (excluding interest paid or
accrued in a prior year treated as paid or accrued in the current
year under section 163(j) or similar provisions).
Column (b). Enter the amount of interest expense paid or
accrued to all foreign persons that are related parties of any of
the partners (excluding interest paid or accrued in a prior year
treated as paid or accrued in the current year under section
163(j) or similar provisions).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to interest expense paid or accrued by
the partnership that is allowed as a deduction in the current tax
year. If the partner is a foreign person, include the individual lines
from column (c) of Worksheet A, on the applicable
Schedule K-3.
Schedule K-3. When completing Schedule K-3, line 11, if the
partner is a foreign person, enter the total from column (a) of
Worksheet A in the partner’s column (a) of Schedule K-3, line 11;
enter the total from column (b) of Worksheet A, in column (b) of
Schedule K-3, line 11; and enter the total from column (c) of
Worksheet A, in column (c) of Schedule K-3, line 11.
The partnership is required to complete Worksheet A for all
partnership-related items and a separate Worksheet A for each
foreign partner’s share of the amounts reported on the
partnership’s Worksheet A. The partnership is also required to
attach a statement containing the partner’s share of the
information on Worksheet A to the partner’s Schedule K-3.

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See Regulations section 1.59A-7(d)(2) and Exception for small
partners, earlier. For Schedule K-2, Part IX, report the total
allocated to all partners, and for Schedule K-3, Part IX, report the
amount allocated to each individual partner.
Don’t complete section 2 if the partnership has determined
that no amounts were paid or accrued by the partnership to a
foreign person (as defined in Regulations section 1.59A-1(b)
(10)) that is a related party of any partner with respect to which a
deduction is allowable under chapter 1 and for certain other
items on Schedule K-2, Part IX, Section 2, lines 13 and 15. The
partnership’s determination that it hasn’t made any base erosion
payment should be based on its collaboration with its partners to
identify any foreign related parties.

Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property resulting in rents,
royalties, and/or license fees.
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property that results in rents,
royalties, and/or license fees.

TREASURY/IRS AND OMB USE ONLY DRAFT
Worksheet A
Interest Paid or Accrued by the Partnership
(a)

(b)

Total interest paid or accrued in the
current year

(c)

Interest paid or accrued to foreign
Interest expense paid or accrued to
related parties of the foreign partner foreign related parties of the foreign
in the current year
partner that is allowed as a
deduction in the current year

(1) Interest expense on liabilities described in
Regulations section 1.882-5(a)(1)(ii)(A) or (B)
(2) Interest paid on U.S.-booked liabilities under
Regulations section 1.882-5(d)(2)(vii)
(3) Interest paid on all other liabilities of the
partnership

Line 12. Payments for the purchase of tangible personal
property.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the purchase of tangible personal
property.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the
purchase of tangible personal property.
Column (c). Enter the amount of base erosion tax benefits
attributable to amounts paid or accrued to any foreign persons
that are related parties of any of the partners for the purchase of
tangible property.
Line 13. Premiums and/or other considerations paid or accrued for insurance and reinsurance as covered by sections 59A(d)(3) and 59A(c)(2)(A)(iii).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for reinsurance.
Column (b). Enter the amount of any premiums or other
consideration paid or accrued to all foreign persons that are
related parties of any of the partners for reinsurance taken into
account under section 803(a)(1)(B) (relating to return premiums
and premiums or other consideration arising out of indemnity
reinsurance that reduces life insurance gross income) or 832(b)
(4)(A) (relating to amounts deducted from gross premiums
written on insurance contracts for return premiums and
premiums paid for reinsurance).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to premiums or other consideration as
described in section 59A(c)(2)(A)(iii) paid or accrued to any
foreign person that is a related party of any of the partners for
reinsurance.
Line 14a. Nonqualified derivative payments.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year attributable to derivative contracts as
defined in section 59A(h)(4).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners with
respect to derivative contracts that aren’t eligible for the qualified
derivative payment exception under section 59A(h) and
Regulations section 1.59A-6. Don’t include any amount paid that
is a qualified derivative payment in column (b) of line 14a.
Column (c). Enter the amount of base erosion tax benefits
attributable to nonqualified derivative payments paid or accrued
to any foreign person that is a related party of any of the
partners.
Line 14b. Qualified derivative payments excepted by section 59A(h). Enter the total amount of qualified derivative
payments paid or accrued by the partnership. Generally, a
qualified derivative payment is any payment made by the

taxpayer pursuant to a derivative contract, provided that the
taxpayer (a) recognizes gain or loss on the derivative contract as
if it were sold for its FMV on the last business day of the tax year;
(b) treats the gain or loss as ordinary; and (c) treats the
character of all other items of income, deduction, gain, or loss
with respect to a payment pursuant to the derivative as ordinary.
A payment isn’t a qualified derivative payment if the payment
would be treated as a base erosion payment if it were not made
pursuant to a derivative (such as interest, royalty, or services
income). With respect to a contract with both derivative and
nonderivative components, a payment isn’t a qualified derivative
payment if it is properly allocable to the nonderivative
component.
Line 15. Payments reducing gross receipts made to surrogate foreign corporation.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year to certain expatriated entities
described in section 59A(d)(4)(C)(i).
Column (b). Enter the amount paid or accrued to certain
expatriated entities that results in a reduction of the gross
receipts of the partnership. This amount includes payments to a
surrogate foreign corporation that is a related party of the
partner, but only if the entity first became a surrogate foreign
corporation after November 9, 2017. The amount also includes
payments to a foreign person that is a member of the same
expanded affiliated group, as defined in section 7874(c)(1), as
the surrogate foreign corporation. A surrogate foreign
corporation is defined in section 7874(a)(2)(B) but doesn’t
include a foreign corporation that is treated as a domestic
corporation under section 7874(b).
Column (c). Enter the base erosion tax benefits attributable
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross receipts
of the partnership.
Line 16. Other payments—specify.
Column (a). Enter the amount paid or accrued for the tax
year by the partnership that hasn’t been included on lines 7
through 15.
Column (b). Enter the amount paid or accrued to any foreign
person that is a related party of any of the partners that is a base
erosion payment that hasn’t otherwise been included on lines 7
through 15.
Column (c). Enter the amount of the partners’ base erosion
tax benefits related to other specified base erosion payments not
listed in any of the categories on lines 7 through 15.
Attachment. For amounts reported on line 16, attach a
statement to both Schedules K-2 and K-3 (for distributive share)
describing the type and amount of other payments, using the
same column headings as specified in this schedule: Total base
erosion payment and Total base erosion tax benefits. For each

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37

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Totals. Combine lines (1) through (3)

TREASURY/IRS AND OMB USE ONLY DRAFT
type of payment, the attachment must identify the relationship of
a partner to the foreign related party consistent with the
categories and instructions for columns (b) and (c) of this
schedule.

withheld under section 1441 or 1442 at a reduced withholding rate pursuant to an income tax treaty or subject to
a reduced rate of tax under Regulations section 1.884-4(a)
(2)(ii). Multiply the amount of the base erosion tax benefit by a
fraction equal to the rate of tax imposed under the treaty over the
30% (0.30) statutory rate. The partnership is required to provide
the information in Worksheet B for all partnership-related items
and attach a statement containing the information in Worksheet
B to Schedule K-3 for each partner’s share of the amounts
reported on the partnership Worksheet B.
Complete Worksheet B to determine the portion of the base
erosion tax benefits reported on lines 6 through 16, on which,
pursuant to a U.S. income tax treaty, either (a) tax is imposed
under section 871(a) or 881 at a reduced rate, and with respect
to which tax has been deducted and withheld under section
1441 or 1442 at a reduced withholding tax rate; or (b) tax is
imposed under section 884(f) at a reduced rate and the tax is
reported and paid (at the reduced rate) under Regulations
section 1.884-4(a)(2)(iv). Keep a copy of the completed
Worksheet B for the partnership’s records.

Line 17, column (c)—Base erosion tax benefits related to
payments reported on lines 6 through 16, on which tax is
imposed by section 871, 881, or 884(f), with respect to
which tax has been withheld under section 1441 or 1442 at
the 30% statutory withholding tax rate or subject to tax under Regulations section 1.884-4(a)(2)(ii) at the 30% statutory rate. Enter the aggregate amount of the partners’ base
erosion tax benefits, reported on lines 6 through 16, on which
either (a) tax is imposed under section 871(a) or 881, and with
respect to which tax has been deducted and withheld under
section 1441 or 1442 at the 30% statutory withholding tax rate;
or (b) tax is imposed under section 884(f) at the 30% statutory
rate and the tax is reported and paid under Regulations section
1.884-4(a)(2)(iv).
Line 18, column (c)—Portion of base erosion tax benefits
reported on lines 6 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been

Worksheet B
A

B

C

D

E

Type of base erosion payment

Amount of base erosion tax
benefit

Treaty—reduced withholding
rate

Divide column C by 30% (0.30)
(round to 4 decimal places)

Multiply column B by
column D

%
%
%
%
%
Add the amounts in column E and enter the total in column (c) of line 18.

Schedule K-2, Part X (Foreign Partners’
Character and Source of Income and
Deductions); and Schedule K-3, Part X (Foreign
Partner’s Character and Source of Income and
Deductions)

Certain partners will use the following information to figure and
report their U.S. tax liability on Forms 1040-NR and 1120-F, or
other applicable forms.

In general, Schedules K-2 and K-3, Part X, must be filed by
every partnership that has a foreign partner, or if a foreign person
has a U.S. income tax reporting obligation with respect to any
item of partnership income, deduction, gain, or loss.
Exception. A domestic partnership that is required to file a
partnership return isn’t required to complete Schedules K-2 and
K-3, Part X, if it doesn’t have any ECI and the partnership (or
another withholding agent) has met its withholding and reporting
obligations under chapters 3 and 4 with respect to its income.
Note: A foreign partner doesn’t include an individual who is
treated as a U.S. resident under section 7701(b)(3).
A partnership may rely on an appropriate Form W-8 and Form
W-9, Request for Taxpayer Identification Number and
Certification, from its partners to determine whether it has a
foreign partner. For information about the types of Forms W-8,
see Pub. 515, Withholding of Tax on Nonresident Aliens and
Foreign Entities. If a partner is a pass-through entity, the partner,
or its authorized representative, may notify the partnership as to
38

whether or not there is a foreign person with a U.S. income tax
reporting obligation with respect to a partnership item.
A partnership that doesn’t have or receive sufficient
information or notice regarding a partner should presume the
partner is foreign or that a foreign person has a U.S. income tax
reporting obligation with respect to a partnership item and
complete Schedules K-2 and K-3, Part X, accordingly.
Example 17—pass-through partner; need to complete
Part X. A partnership doesn’t receive notice from a
pass-through partner regarding whether or not the pass-through
partner has any partners or owners that are foreign persons and
doesn’t otherwise have the information necessary to make this
determination. Because the partnership can’t determine whether
a foreign person has a U.S. income tax reporting obligation with
respect to a partnership item, it must complete Schedules K-2
and K-3, Part X, for the pass-through partner.
Any foreign person that earns ECI from U.S. or foreign
sources or U.S. source FDAP income may have a U.S. tax
obligation for its applicable tax year. Furthermore, the applicable
tax rates and reporting requirements are different for ECI and
U.S. source FDAP income. The partnership’s reporting on
Schedules K-2 and K-3, Part X, is necessary for a foreign person
with a direct or indirect interest in the partnership to properly
report and figure its U.S. income tax liability on any required U.S.
income tax returns (for example, Form 1040-NR, Form 1120-F,
and other applicable forms). Therefore, a partnership must
report to its partners, as needed, on Schedule K-3, Part X, their
distributive shares of any U.S. or foreign source partnership
effectively connected items, any U.S. source FDAP income, and
any income that isn’t effectively connected or FDAP of the

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Part IX, Section 2, Line 18, Column (c)

TREASURY/IRS AND OMB USE ONLY DRAFT
partnership but that may be effectively connected to the foreign
person’s conduct of a U.S. trade or business.
In addition, unless otherwise noted, the partnership must
complete Schedule K-3, Part X, to report each partner’s
distributive share of the amounts reported on Schedule K-2, Part
X.

Special rules for foreign partnerships. A foreign partnership
that doesn’t have ECI and files a partnership return under the
modified filing obligations under Regulations section
1.6031(a)-1(b)(3)(iii) is only required to complete Schedules K-2
and K-3, Part X, if (a) it has a domestic pass-through partner that
has a direct or indirect foreign owner, beneficiary, or partner; or
(b) it knows or has reason to know that another withholding
agent failed to meet its withholding and reporting obligations
under chapters 3 and 4 with respect to the income. An indirect
owner, beneficiary, or partner is one that owns an interest in the
domestic pass-through partner through a pass-through entity.
The foreign partnership should presume that a domestic
pass-through partner has a foreign owner, partner, or beneficiary
if it doesn’t have sufficient information or notice to make this
determination.

Section 1—Gross Income
The partnership uses Schedule K-2, Part X, Section 1, to report
each item of the partnership’s gross income as one of the
following.
• U.S. source ECI.
• Foreign source ECI.
• Income from U.S. sources that is FDAP and isn’t income
effectively connected with the partnership’s conduct of a
U.S. trade or business (non-ECI).
• Other U.S. source non-ECI.
• Foreign source non-ECI.
The partnership must generally report items of gross income
as either:
• U.S. source ECI in column (c),
• Foreign source ECI in column (d),
• U.S. source non-ECI (FDAP) in column (e),
• U.S. source (other) in column (f), or
• Foreign source non-ECI in column (g).
Each line in this section of the schedule corresponds to a line
on Form 1065, Schedule K, lines 1 through 11. However, unlike
the amounts on the lines on Form 1065, Schedule K, lines 1
through 11, the amounts in Section 1 are gross income amounts,
not net income amounts. For a more detailed description of the
types of income listed on each line, see the instructions for Form
1065, Schedule K.
FDAP. Amounts that are FDAP include the following.
• Interest (other than OID as defined in section 1273),
dividends, rents, royalties, salaries, wages, premiums,

•
•

•

For more information, see section 881(a) and Regulations
section 1.881-2.
Column (a). Total. For each line in Section 1, enter in column
(a) the total amount of the applicable gross income.
Column (b). Partner determination. For each line, enter in
column (b) the amount of the applicable gross income the
source of which must be determined by each partner individually.
This includes income from the sale of most personal property
other than inventory, depreciable property, and certain intangible
property.
The source of income is important in determining how to
report income on Part X of Schedules K-2 and K-3. Each type of
income has its own sourcing rules. For more information on
sourcing rules for particular items of income, see Pub. 514 and
section 865.
Schedule K-3. For each line in Section 1, enter in column (b)
the partner’s distributive share of the applicable gross income
the source of which needs to be determined by the partner. For
each item of income in column (b), attach a statement identifying
the column [(c), (e), or (f)] in which the income would be reported
by the partnership if it were U.S. source and the column [(d) or
(g)] in which the income would be reported by the partnership if it
were foreign source. For example, if you have income from the
sale of personal property the source of which is based on the tax
home of the partner under section 865, the statement should
indicate both how the income should be characterized (as ECI,
FDAP, or other) if it were U.S. source, and how it should be
characterized (as ECI or non-ECI) if it were foreign source.
Column (c). U.S. source ECI. For each line in Section 1, enter
the amounts of the applicable U.S. source gross income, as
determined by the partnership, that are, or are treated as,
effectively connected with the partnership’s conduct of a U.S.
trade or business.
If the partnership conducts a U.S. trade or business, report in
column (c) any U.S. source income other than FDAP or capital
gains.
Report U.S. source items of FDAP income or capital gains as
ECI in column (c) only if the asset-use test, the
business-activities test, or both tests (explained below) are met.
If neither test is met, such items are generally not ECI. For more
information, see section 864(c)(2) and Regulations section
1.864-4(c).
Note: See Regulations section 1.864-4(c)(5) for special rules
relating to banking, financing, or similar business activities. Such

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

39

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Note: Schedule K-3, Part X, doesn’t need to be completed and
provided to partners who are U.S. persons (as defined in section
7701(a)(30)) and not pass-through partners. A pass-through
partner is a partnership required to file a return under section
6031(a), an S corporation, a trust (other than a wholly owned
trust disregarded as separate from its owner for federal income
tax purposes), and a decedent’s estate. See Regulations section
301.6241-1(a)(5). Therefore, a partnership with one partner that
is a nonresident alien (as defined in section 7701(b)(1)(B)) and
another partner that is a U.S. citizen need only provide
Schedule K-3 to the nonresident alien partner. However, a
partnership must complete Schedule K-2 with all of the
partnership’s information and not just the total of the information
reported to the foreign partners on Schedule K-3.

•

annuities, compensation, and other passive gains, profits,
and income.
Gains described in section 631(b) or (c), relating to disposal
of timber, coal, or domestic iron ore with a retained
economic interest.
Gains on a sale or exchange of an OID obligation, the
amount of the OID accruing while the obligation was held
unless this amount was taken into account on a payment.
On a payment received on an OID obligation, the amount of
the OID accruing while the obligation was held, if such OID
wasn’t previously taken into account and if the tax imposed
on the OID doesn’t exceed the payment received less the
tax imposed on any interest included in the payment
received. This rule applies to payments received for OID
obligations issued after March 31, 1972. Certain OID isn’t
taxable for OID obligations issued after July 18, 1984. See
section 881(c) for more details. For rules that apply to other
OID obligations, see Pub. 515.
Gains from the sale or exchange of patents, copyrights, and
other intangible property if the gains are from payments that
are contingent on the productivity, use, or disposition of the
property or interest sold or exchanged.

TREASURY/IRS AND OMB USE ONLY DRAFT
rules apply to certain stocks and securities of a banking,
financing, or similar business in lieu of the asset-use and
business-activities tests.

•

Asset-use test. FDAP income and capital gains are ECI if such
items are derived from assets used in, or held for use in, the
conduct of a U.S. trade or business. For example, the following
items are ECI.
• Income earned on a trade or note receivable acquired in the
conduct of the U.S. trade or business.
• Interest income earned from the temporary investment of
funds needed in the U.S. trade or business.

Other income treated as U.S. source ECI. If a partnership
isn’t engaged in a U.S. trade or business during the tax year, it
will report amounts in column (c) if the partnership:
• Had current year income or gain from a sale or exchange of
property or from performing services (or any other
transaction) in any other tax year that would have been ECI if
received by a foreign person in that other tax year (see
section 864(c)(6)),
• Had current year income or gain from a disposition of
property that is no longer used or held for use in conducting
a U.S. trade or business within the 10-year period before the
disposition that would have been ECI immediately before
such cessation (see section 864(c)(7)), or
• Had gain or loss from disposing of a U.S. real property
interest as defined in section 897(c).
Note: Such amounts are always U.S. source ECI and should
never be reported in any other column.
If income is reported in column (c), see the Instructions for
Form 8804, Annual Return for Partnership Withholding Tax, for
any Form 8804 filing obligations.
Caution: Don’t include gross rental real estate income in
column (c) of Schedule K-2, Part X, that isn’t ECI to the
partnership. Even if a foreign partner elects to treat the income
as ECI, report these amounts in column (e) of Schedule K-2, Part
X. However, the partnership should report the partner’s
distributive share of income as ECI in column (c) of
Schedule K-3, Part X.
Schedule K-3. In addition to the partner’s distributive share of
the amounts reported in column (c) of Schedule K-2, Part X,
report in column (c) of Schedule K-3, Part X, any U.S. source
income that is subject to withholding under section 1446 based
on a partner’s Form W-8ECI, Certificate of Foreign Person’s
Claim That Income Is Effectively Connected With the Conduct of
a Trade or Business in the United States, including U.S. source
gross rental real estate income that the foreign partner elected to
treat as ECI.
Column (d). Foreign source ECI. Enter in this column the
amounts of the applicable gross income that are foreign source
ECI. Foreign source income is ECI only in limited circumstances.
If the partnership has an office or other fixed place of business in
the United States, the following types of foreign source income it
receives from that U.S. office are ECI.
• Rents or royalties received for the use outside the United
States of intangible personal property described in section
862(a)(4) if derived from the active conduct of a U.S. trade
or business.
• Gains or losses on the sale or exchange of intangible
personal property located outside the United States or from
any interest in such property if such gains or losses are

40

•

If income is reported in column (d), see the Instructions for Form
8804 for any Form 8804 filing obligation.
Column (e). U.S. source non-ECI (FDAP). For each line, enter
in column (e) amounts of the applicable gross income if all of the
following apply.
• The amount is FDAP (described earlier).
• The amount is includible in gross income. Therefore,
receipts that are excluded from income (for example, interest
income received on state and local bonds that is excluded
under section 103) wouldn’t be reported.
• The amount is received from U.S. sources.
• The amount received is non-ECI. Amounts that are ECI
should be reported in column (c) or (d).
• The amount received isn’t exempt (by the Code) from
taxation. For example, interest on deposits that are
exempted by section 881(d) wouldn’t be included as income
by a foreign partner. In addition, certain portfolio interest isn’t
taxable for obligations issued after July 18, 1984. See
section 881(c) for more details.
Caution: If the partnership had U.S. source rental real estate
income that wasn’t ECI to the partnership, include such amounts
in column (e) of Schedule K-2, Part X. Foreign partners that have
elected to treat any such amounts as ECI are required to report
and figure their U.S. income tax liabilities in accordance with
their ECI elections. Report this income in column (c) of
Schedule K-3, Part X, for such partners.
If income is reported in column (e), see the instructions for
Forms 1042 and 1042-S for any filing obligation.
Schedule K-3. For each line in Section 1, enter in column (e)
the partner’s distributive share of the applicable income that is
U.S source FDAP and not ECI. Don’t include income subject to
withholding under section 1446 based on a partner’s Form
W-8ECI or rental real estate income which a foreign partner has
elected to treat as ECI. That income should instead be reported
in column (c).
Column (f). U.S. source non-ECI (other). Include in this
column U.S. source gross income amounts that aren’t ECI and
wouldn’t be subject to tax in the hands of a foreign corporation
under section 881 or in the hands of a nonresident alien under
section 871(a). Such amounts include, for example, tax-exempt
portfolio interest or municipal bond interest, U.S. source capital

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Business-activities test. FDAP income and capital gains are
ECI if the activities of the U.S. trade or business were a material
factor in the realization of the passive income items.

•

derived in the active conduct of the trade or business in the
United States.
Dividends, interest, or amounts received for the provision of
a guarantee of indebtedness, issued after September 27,
2010, if derived from the active conduct of a U.S. banking,
financing, or similar business or if the principal business of
the partnership is trading in stocks or securities for its own
account.
Income from the sale or exchange of inventory outside the
United States through the U.S. office, unless the property is
sold or exchanged for use, consumption, or disposition
outside the United States and an office of the partnership in
a foreign country materially participated in the sale. See
section 865 for additional information regarding the source
of this income.
Any income or gain that is equivalent to any item of income
or gain listed above must be treated in the same manner as
such item for purposes of determining whether that income
is foreign source ECI. See section 864(c)(5)(A) and
Regulations section 1.864-7 for the definition of office or
other fixed place of business in the United States. See
sections 864(c)(5)(B) and (C) and Regulations section
1.864-6 for special rules for determining when foreign
source income is from an office or other fixed place of
business in the United States.

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gains, and transportation income subject to tax under section
887.
Schedule K-3. Report the partner’s distributive share of the
amounts in column (f) of Schedule K-2, Part X. For any amount
that is transportation income subject to tax under section 887,
also provide the partner the statement described in the
instructions for Form 1040-NR, line 23c. See also chapter 4 of
Pub. 519, U.S. Tax Guide for Aliens.

OID payments or gains taxable on a gross basis to a foreign partner. When the partnership receives payments on the
OID instrument or gain on the sale or exchange of the OID
instrument that are taxable on a gross basis to foreign partners
under section 881(a)(3)(B) or section 871(a)(1)(C)(ii) (as
applicable), these amounts should be reported in column (e) of
Schedule K-2, Part X, as interest income or gain, as appropriate.
These amounts should also be entered as a negative adjustment
in column (f) to ensure that the total OID reported on Part X
reconciles with OID reported on Form 1065, Schedule K. Attach
a statement explaining that the negative adjustment in column (f)
is for reconciliation purposes only and isn’t relevant to the foreign
partner’s tax liability and therefore doesn’t need to be reported
on the foreign partner’s tax return. The partnership should take a
similar approach for reporting distributive share amounts to a
foreign partner on Schedule K-3.
Example 18—Part X; OID. In addition to other income and
expense items, a partnership accrues $100 OID in Year 1
reported on Form 1065, Schedule K. On Schedule K-2, Part X,
for Year 1, the partnership should report this amount as interest
in column (f) (such amount is also included in column (a) for the
total). In Year 2, the partnership receives a payment of $50 on
the same instrument taxable to its foreign partners under section
881(a)(3)(B) or 871(a)(1)(C)(ii) (as applicable). On its
Schedule K-2, Part X, for Year 2, the partnership should report
$50 as interest in column (e) and ($50) as a reconciliation
adjustment in column (f). The partnership should take the same
approach for reporting a foreign partner’s distributive share of
OID amounts on Schedule K-3 in both Years 1 and 2.
Column (g). Foreign source non-ECI. For each line, enter
amounts of gross income which are neither U.S. source nor ECI.
Line 8. Dividend equivalents. Except as provided in the next
sentence, the partnership must report its dividend equivalents in
columns (a) and (e). The partnership shouldn’t report dividend
equivalents with respect to any partnership interest that the
partnership knows is held directly and indirectly (including
through one or more pass-through entities) by a partner that isn’t
subject to section 871(m). In such a case, the partnership should
report dividend equivalents in columns (a) and (e) only with
respect to its other partnership interests.
Schedule K-3. Except as provided in the next sentence, the
partnership must report its dividend equivalents in columns (a)
and (e) of Schedule K-3, Part X, Section 1, line 8, with respect to
its partnership interests. To the extent the partnership knows a
partnership interest is held directly and indirectly (including
through one or more pass-through entities) by a partner that isn’t
subject to section 871(m), it doesn’t have to report allocations
with respect to that partnership interest in columns (a) and (e).
Line 11. Net long-term capital gain. Don’t include gains
reported on lines 12, 13, and 14 on line 11.

Line 13. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 13 and not on line 11. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 13 and not on line 14, but
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.
Line 14. Net section 1231 gain. Report net section 1231 gain
on line 14 and not on line 11 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 13.
Lines 15 and 16. Other gain. Include other types of gain not
included on other lines. If there are more than two other types of
gain, attach a statement identifying the other types of gain and
the amount.
Lines 19 and 20. Other income. Include other types of income
not included on other lines. If there are more than two other
types of income, attach a statement identifying the other types of
income and the amount.

Section 2—Deductions, Losses, and Net Income
In computing a foreign corporation’s or nonresident alien’s ECI,
deductions are allowed only if they’re allocated and apportioned
to income that is effectively connected with a U.S. trade or
business; see sections 861(b), 873, and 882(c). To determine
ECI, a foreign corporation and nonresident alien individual must
allocate and apportion deductions and losses to gross income in
the ECI statutory grouping and to gross income in the non-ECI
residual grouping; see Regulations section 1.861-8(f)(1)(iv). For
additional guidance for foreign corporations, see Schedule H
(Form 1120-F) and Schedule I (Form 1120-F). For additional
guidance for nonresident aliens, see the Instructions for Form
1040-NR.
Use Section 2 to report the partnership’s deductions and
losses that will be utilized to determine the foreign partner’s ECI.
The line items in Section 2 generally correspond to the
deductions separately reported on Form 1065, Schedule K. On
Schedule K-3, Part X, report the partner’s share of the amounts
reported by the partnership on Schedule K-2, Part X.
Column (b). Partner determination. Certain deductions and
losses must be allocated and apportioned by the partner, for
example, R&E expenses and interest expense.
Columns (c) and (d). Partnership determination—ECI.
Enter deductions definitely related and allocated to ECI under,
for example, Regulations sections 1.861-8 through -20 and
Temporary Regulations sections 1.861-8T and -9T.
Caution: Don’t include deductions attributable to gross rental
real estate income in column (c) of Schedule K-2, Part X, that
isn’t ECI to the partnership. Even if a foreign partner elects to
treat the income as ECI, report these deductions in column (e) of
Schedule K-2, Part X. However, the partnership should report
the partner’s distributive share of deductions in column (c) of
Schedule K-3, Part X.
Columns (e) through (g). Partnership determination—non-ECI. Enter deductions definitely related and
allocated to non-ECI under, for example, Regulations sections
1.861-8 through -20 and Temporary Regulations sections
1.861-8T and -9T.
Line 2. R&E expenses. In general, R&E expenses are
allocated and apportioned by the partner and reported in column
(b). See Regulations section 1.861-17.

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Accrued OID reported on Form 1065. The amount of accrued
OID reported on Form 1065, Schedule K, that isn’t taxable to
foreign partners should be reported as interest income in column
(f) of Schedule K-2, Part X. Attach a statement to Form 1065 for
Part X clarifying that these amounts aren’t taxable to foreign
partners and don’t need to be reported on the foreign partner’s
tax return. The partnership should take a similar approach for
reporting a foreign partner’s distributive share of OID amounts on
Schedule K-3.

Line 12. Collectibles (28%) gain. Report collectibles gain on
line 12 and not on line 11.

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Line 7. Interest expense on U.S.-booked liabilities. The
partnership reports its interest expense on U.S.-booked liabilities
as described in Regulations section 1.882-5(d)(2)(vii). This is
relevant for determining the foreign corporation’s interest
expense allocable to ECI.
Line 10. Section 59(e)(2) expenditures. Don’t include R&E
expenses on this line. Instead, include R&E expenses that are
also section 59(e)(2) expenditures on line 2.
Line 12. Net long-term capital loss. Don’t include losses
reported on line 13.
Line 13. Collectibles loss. Report collectibles loss on line 13
and not on line 12.

Line 16. Charitable contributions. Charitable contributions
may be deducted whether or not they’re effectively connected
with a U.S. trade or business; see sections 873(b)(2) and 882(c)
(1)(B), and Regulations section 1.882-4(b) for more information.
Charitable contribution deductions are apportioned solely to U.S.
source gross income; see Regulations section 1.861-8(e)(12).
Include amounts reported on line 16 in column (c).
Lines 17 and 18. Other deductions. Enter other types of
deductions not described in the prior line items. If the partnership
has more than one other type of deduction, separately identify
each type of deduction on lines 17 and 18. If there are more than
two types of other deductions, attach a statement to both
Schedules K-2 and K-3 to expand the schedules to include
information in Section 2 identifying the amount and type of
deduction.

Section 3—Allocation and Apportionment
Methods for Deductions
Section 3 provides information a partner may use to apportion
deductions to ECI or non-ECI. See Regulations sections 1.861-8
through -20 and Temporary Regulations sections 1.861-8T
and -9T for more detailed information. The ratios listed below
generally correspond to the ratios on Schedule H (Form 1120-F),
Part III.
On Schedule K-3, Part X, report the partner’s share of the
amounts reported by the partnership on Schedule K-2, Part X.
Line 1a. Gross ECI. Enter the partnership’s gross ECI from
Section 1, line 21, sum of columns (c) and (d).
Line 1b. Worldwide gross income. Enter the partnership’s
worldwide gross income from column (a) of Section 1, line 21.
Line 2a. Average U.S. assets (inside basis). Report the
partnership’s basis in its average U.S. assets for purposes of
applying the asset method as defined in Regulations section
1.884-1(d)(3)(ii) to calculate interest expense under Regulations
section 1.882-5(b).
Line 2b. Worldwide assets. Report the partnership’s basis in
its average worldwide assets for purposes of Regulations section
1.882-5(b) and the asset method as defined in Regulations
section 1.884-1(d)(3)(ii). If the partnership doesn’t report an
amount on line 2a because there aren’t any U.S. assets, then the
partnership doesn’t need to report an amount on line 2b.
Line 3a. U.S.-booked liabilities of the partnership. Enter the
partnership’s average U.S.-booked liabilities as defined in

42

Line 3b. Directly allocated partnership indebtedness. Enter
the portion of the principal amount of the partnership’s
indebtedness outstanding at year end that meets the
requirements of Temporary Regulations section 1.861-10T(b) or
(c), as limited by Temporary Regulations section 1.861-10T(d)
(1), as described in Regulations section 1.882-5(a)(1)(ii)(B). See
Temporary Regulations section 1.861-10T(d)(2).
Line 4a. Personnel of U.S. trade or business. Enter on
line 4a the number of personnel who worked in the partnership’s
U.S. trade or business during the tax year. The partnership may
use any reasonable method to determine the number of
personnel, including data that is already prepared and used by
the partnership for a non-tax business purpose. For example, if
the partnership maintains headcount data (such as weighted
average headcount data) in its personnel records or for other
purposes such as budgeting, planning, and control, such
numbers may be used in the numerator.
Line 5. Gross receipts from sales or services by SIC code.
A partnership isn’t required to complete this line 5 unless either
(a) the partnership incurs R&E expenses; or (b) the partner is
expected to license, sell, or transfer its intangible property to the
partnership (as provided in Regulations section 1.861-17(f)(3)).
For purposes of determining ECI, R&E expenses are definitely
related to gross intangible income reasonably connected with
relevant broad product categories of the taxpayer and are
allocable to gross intangible income as a class related to such
product categories. The product categories are determined by
reference to the three-digit classification of the SIC code. In
general, the R&E expenses are apportioned based on gross
receipts. See Regulations section 1.861-17. Because R&E
expenses are allocated and apportioned by the partner, the
partnership reports to its partners the gross receipts generating
ECI by SIC code.
For each SIC code, in column (ii) of line 5, enter the gross
receipts that resulted in ECI, and in column (iii) of line 5, enter
the worldwide gross receipts. Such gross receipts include both
the partnership’s gross receipts and certain other controlled or
uncontrolled parties’ gross receipts. See Regulations sections
1.861-17(d)(3) and (d)(4).
If there are more than two SIC codes, attach a statement to
Schedules K-2 and K-3 to expand the schedule to include
information on line 5 for the additional SIC codes.
Lines 7 and 8. Other allocation and apportionment key.
Report other apportionment keys than those identified on lines 1
through 5, as applicable. See Regulations sections 1.861-8
through -20 and Temporary Regulations sections 1.861-8T
and -9T for more detailed information.
For example, a partnership might enter ECI COGS in column
(i) of line a, and total COGS in column (i) of line b. If ECI COGS
is $100, the partnership would enter $100 in column (ii) of line a,
and if COGS is $200, the partnership would enter $200 in
column (ii) of line b. As another example, a partnership might
enter average ECI assets in column (i) of line a, and the average
total assets in column (i) of line b. The average ECI assets are
the partnership’s basis in its assets that generate ECI for
purposes of Temporary Regulations section 1.861-9T(e)(7)
using the average tax book value as defined in Regulations
section 1.861-9(g). The average total assets are the
partnership’s basis in all of its assets for purposes of Temporary
Regulations section 1.861-9T(e) using the average tax book
value as defined in Regulations section 1.861-9(g). If the
partnership doesn’t have assets that generate ECI, then a
partnership doesn’t need to report an amount on line 7b, unless
the partner has requested this amount. If there are more than
two other types of apportionment keys, attach a statement to

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Line 15. Other losses. Each loss must be separately reported
and shouldn’t be combined on line 15. Instead, if there are more
than two other losses during the year, attach a statement to both
Schedules K-2 and K-3 to expand the lines to report the amount
of each additional loss.

Regulations section 1.882-5(d)(2) using the average defined in
Regulations section 1.882-5(d)(3).

TREASURY/IRS AND OMB USE ONLY DRAFT
Schedules K-2 and K-3 to expand the schedules to include all of
the information for those apportionment keys.

Section 4—Reserved for Future Use

Schedule K-2, Part XI (Section 871(m) Covered
Partnerships); and Schedule K-3, Part XI
(Section 871(m) Covered Partnerships)
Note: Certain partners that enter into section 871(m)
transactions referencing units in the partnership will use the
information in this part to determine their U.S. withholding tax
and reporting obligations with respect to those transactions
under section 871(m) and related rules.

Line 1. If the partnership is a PTP and (a) a covered
partnership, or (b) directly or indirectly holds an interest in a
lower-tier partnership that is a covered partnership, check the
box on Part XI, line 1, of both Schedules K-2 and K-3. A covered
partnership is a partnership that carries on a trade or business of
dealing or trading in securities or holds significant investments in
securities. A partnership holds a significant investment in
securities for this purpose if either (a) 25% or more of the value
of the partnership’s assets consist of underlying securities or
potential section 871(m) transactions, or (b) the value of the
underlying securities or potential section 871(m) transactions
equals or exceeds $25 million.
Generally, an underlying security is any interest in an entity
that could give rise to a U.S. source dividend (such as shares of
stock of a domestic corporation), and a potential section 871(m)
transaction is a securities lending or sale-repurchase
transaction, a notional principal contract, or any other financial
transaction that references one or more underlying securities.
See Regulations section 1.871-15 for additional information,
including the definitions of underlying securities and potential
section 871(m) transactions.
Line 2. On Schedule K-2, specify the total number of units the
partnership has issued and outstanding. On Schedule K-3,
specify the number of units of the partnership held by the
partner.
Line 3. On both Schedules K-2 and K-3, for each allocation
period, specify when the allocation period begins and ends, as
well as the dividends, the dividend equivalents, and the total of
the dividends and dividend equivalents for the applicable period.
On Schedule K-2, the information is for all the issued and
outstanding units of the partnership. On Schedule K-3, the
information is for the units of the partner to which the
Schedule K-3 relates.
The allocation period should be determined in accordance
with section 706 and the regulations thereunder. The value of a
partnership’s assets is equal to their FMV, except that the value
of any notional principal contract, futures contract, forward
contract, option, and any similar financial instrument held by the
partnership is deemed to be the value of the notional securities
referenced by the transaction. See Regulations section 1.871-15
for additional information regarding dividend equivalents. You
can add additional lines if needed. The amounts for the
dividends, dividend equivalents, and total in columns (c), (d),
and (e) should be reported to the fourth decimal point, rounding
up for any excess amount. For example, if the amount of a
dividend was 0.12344, the reported amount should be 0.1235.

Note: Certain partners in QDD partnerships will use the
information in this part to determine their U.S. tax and/or
withholding tax and reporting obligations for the QDD’s activities.
Schedules K-2 and K-3, Part XII, must be completed if you’re
a QDD partnership during the tax year. The partnership must
complete Schedules K-2 and K-3, Part XII, even if the partners
have zero tax liability. A separate schedule must be completed
for each QDD, and if the partnership has a fiscal year instead of
a calendar year, the partnership must provide a separate
schedule for each QDD for each portion of the calendar year that
falls within the fiscal year.
Example. A QDD partnership with a fiscal year beginning
September 1 and ending August 31 and only one QDD would
complete two schedules (one for the period of September 1,
2025, through December 31, 2025, and one for the period of
January 1, 2026, through August 31, 2026).
Name of QDD. The name of the QDD should follow the naming
protocol used for applying to be a QDD.
Number of schedules filed. A QDD partnership may be
required to file multiple schedules under Part XII, for example, if it
has multiple branches that are QDDs or if it’s a fiscal year
taxpayer (as explained above). For each Schedule K-2 or K-3,
indicate the number of each Part XII filed, as well as the total
number of Parts XII being filed by the partnership for that
schedule in the entry spaces provided.
Column (b). Withholding tax rate. Complete this column for
Schedule K-2 reflecting the weighted average applicable
withholding tax rate of the partners. Complete this column for
Schedule K-3 reflecting the applicable withholding tax rate of the
partner, and if the partner isn’t an individual or corporation, use
the weighted average applicable withholding tax rate of that
partner. The weighted average applicable withholding tax rate of
the partners is determined by adding the product of each
partner’s percentage of the allocations of the applicable item by
that partner’s applicable withholding tax rate. The withholding tax
rate of a U.S. partner is zero, unless it is a partnership with direct
or indirect foreign partners.
Column (c). Amount of tax liability. Complete this column for
Schedule K-2 reflecting the total tax liability of the partners.
Complete this column for the Schedule K-3 reflecting the tax
liability of the applicable partner. Except as provided in the Note
immediately below, the amount in column (c) is determined by
multiplying column (a) by column (b). This column isn’t reduced
by any withholding that has occurred.
Note: For calendar year 2025, certain information isn’t required,
as indicated in the line instructions below. However, if the
taxpayer has a fiscal year that begins in 2025 and ends in 2026,
information is required for any amounts paid or accrued on or
after January 1, 2026.
Line 1. Total section 871(m) amount. For Schedule K-2, enter
in column (a) the sum of each section 871(m) amount for the
QDD for the relevant period. For Schedule K-3, enter in column
(a) the sum of each section 871(m) amount of the QDD for the
relevant period that is allocated to the applicable partner.
Note: For calendar year 2025, this information isn’t required.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Schedules K-2 and K-3, Part XI, must be completed if you’re a
PTP that (a) is a covered partnership as defined in Regulations
section 1.871-15(m)(1); or (b) directly or indirectly holds an
interest in a lower-tier partnership that is a covered partnership,
in each case regardless of whether your partners are domestic
or foreign.

Schedule K-2, Part XII (Section 871(m) Tax
Liability of a Qualified Derivatives Dealer
(QDD)); and Schedule K-3, Part XII (Section
871(m) Tax Liability of a Qualified Derivatives
Dealer (QDD))

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Line 2. Total dividends received in equity derivatives dealer
capacity. For calendar year 2025, only the gross amount
(column (a)) and tax rate (column (b)) are required.
Line 3. Total QDD tax liability pursuant to section 3.09(A) of
the Qualified Intermediary Agreement (QIA). Column (c) is
the sum of each section 3.09(A) amount for the QDD for the
relevant period.
Note: For calendar year 2025, this information isn’t required.
Line 4. Total QDD tax liability pursuant to section 3.09(B) of
the QIA. Enter the information requested in columns (a), (b),
and (c).
Line 5. Total QDD tax liability pursuant to section 3.09(C) of
the QIA. In addition to specifying the type of income (for
example, dividends or interest), enter the information requested
in columns (a), (b), and (c) separately for each income type. For
dividends, include all dividends, including dividends separately
stated on line 2.

Schedule K-3, Part XIII (Foreign Partner’s
Distributive Share of Deemed Sale Items on
Transfer of Partnership Interest)
Note: Schedule K-2 doesn’t have a corresponding Part XIII. This
part provides the information for a foreign partner to use to
determine the gain or loss it reports on its return from the transfer
of an interest in the partnership.
Partners will use this information as follows. A partner that:
• Is a nonresident alien individual, foreign trust, or foreign
estate completes Schedule P (Form 1040-NR);
• Is a foreign corporation completes Schedule P (Form
1120-F), Parts IV and V;
• Is a foreign partnership completes Forms 4797 and 8949, as
needed; or
• Had an installment sale, see Form 6252.
This part generally applies to a partnership that is directly or
indirectly engaged in the conduct of a trade or business in the
United States (U.S. trade or business) and had a foreign partner
if:
• The foreign partner transferred an interest in the partnership
(including a distribution that results in the recognition of gain
or loss to a partner (see Regulations section 1.731-1(a)), or
• The partnership directly or indirectly transferred an interest
in a partnership that engaged in a U.S. trade or business.
The partnership must complete lines 1 through 3 of this part if it
is notified or otherwise knows that a transfer subject to section
864(c)(8) has occurred. A partnership that makes a distribution
is treated as having actual knowledge of the transfer. See
Regulations section 1.864(c)(8)-2(a)(1) and Pub. 541 for the
rules regarding foreign transferor notifications.
If the transfer was a section 751(a) exchange, the partnership
must also file Form 8308, Report of a Sale or Exchange of
Certain Partnership Interests. See Regulations section
1.6050K-1.
Tiered partnerships. If a foreign transferor transferred an
interest in an upper-tier partnership that holds, directly or
indirectly through one or more partnerships, an interest in a
lower-tier partnership engaged in a U.S. trade or business, then
the upper-tier partnership must include in the foreign transferor’s
aggregate deemed sale ECI items the items derived from the
lower-tier partnership; see Regulations section 1.864(c)(8)-2(b)
(2)(i). Therefore, to complete this part, the upper-tier partnership
will need to obtain the amount of the upper-tier partnership’s
44

Item A. Date of transfer of the partnership interest. Enter
the date that the foreign partner transferred an interest in the
partnership or the date that the partnership transferred an
interest in a partnership that engaged in a U.S. trade or
business. The partner’s notification should provide this date to
you. If there are multiple transfers during the tax year with
respect to a foreign partner, complete a separate schedule for
each transfer.
Item B. Identify the number of units or the percentage interest in the partnership transferred. Enter either the
percentage interest in the partnership or the number of units in
the partnership that the partner transferred in item B1 or B2,
respectively.
Enter zero for items B1 and B2 if a partnership is completing
this part for a partner that is treated as transferring an interest in
the partnership because it received a distribution but whose
ownership interest in the partnership remains unchanged.
Item C. Check the box in item C that identifies the type of
interest the partner transferred in the partnership. Complete a
separate schedule for each type of partnership interest (such as
capital or preferred) transferred, and complete each schedule
based on the portion of the type of interest transferred. If there
are multiple classes of the same type of partnership interest,
complete a separate schedule for each class of interest
transferred. If the categories in item C aren’t narrow enough to
distinguish between different classes, then check “Other” and
explain in an attached statement.
Line 1. Total ordinary gain or (loss) that would be recognized on the deemed sale of section 751 property. Enter the
amount of income or loss from section 751(a) property that
would have been allocated to the foreign partner with respect to
the interest transferred if the partnership had sold all of its
property in a fully taxable transaction for cash in an amount
equal to the FMV of the property immediately before the
partner’s transfer of the interest in the partnership. See
Regulations section 1.751-1(a).
Lines 2 and 3. Aggregate effectively connected ordinary
gain or (loss) that would be recognized on the deemed
sale of section 751 property, and Aggregate effectively
connected capital gain or (loss) that would be recognized
on the deemed sale of non-section 751 property.
Determining the amount to report on line 2 and line 3 requires a
three-step process. These instructions provide an overview of
that process below. For more information, see Regulations
section 1.864(c)(8)-1.
Step 1. With respect to each asset the partnership holds,
determine the amount of gain or loss that the partnership would
recognize in connection with a deemed sale to an unrelated
party in a fully taxable transaction for cash equal to the asset’s
FMV immediately before the partner’s transfer of its partnership
interest.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

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Note: For calendar year 2025, don’t include dividends included
on line 2.

distributive share of deemed sale effectively connected gain or
loss from the lower-tier partnership. Under these circumstances,
the lower-tier partnership may provide that information to the
upper-tier partnership using Part XIII even though the upper-tier
partnership didn’t actually transfer its interest in the lower-tier
partnership. A lower-tier partnership that uses Part XIII should
complete it as though the upper-tier partnership transferred its
entire interest in the lower-tier partnership. Part XIII may be used
by each tier of partnerships until it reaches the uppermost tier
whose interest was transferred. To indicate that there was no
actual transfer by an upper-tier partnership of its interest in a
lower-tier partnership, the lower-tier partnership should leave
item A blank. When the upper-tier partnership receives the
information from the lower-tier partnership, whether reported on
Part XIII or in some other manner, it should use this information
to complete the Part XIII it issues to its foreign transferor.

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Lines 4 and 5. Aggregate effectively connected gain that
would be recognized on the deemed sale of section 1(h)(5)
collectible assets, and Aggregate effectively connected
gain that would be recognized on the deemed sale of section 1(h)(6) unrecaptured section 1250 gain assets. Lines 4
and 5 don’t apply to a foreign transferor that is a corporation.
These amounts are subsets of the amount of the aggregate
effectively connected capital gain (loss) that would be
recognized on the deemed sale of non-section 751 property
reported on line 3.
Enter on line 4 the foreign transferor’s distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(5) collectible assets.
Enter on line 5 the foreign transferor’s distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(6) unrecaptured section 1250 gain
assets.
Line 6. Check this box if any amount on lines 2 through 5 is
determined (in whole or in part) under Regulations section
1.864(c)(8)-1(c)(2)(ii)(E) (material change in circumstances
rule for a deemed sale of the partnership’s inventory property or intangibles). As part of the three-step process for

determining the amount to report on lines 2 and 3, Regulations
section 1.864(c)(8)-1 provides certain look-back rules that apply
for purposes of sourcing the deemed sale gain or loss with
respect to inventory property and intangibles held by a
partnership. However, if a material change in circumstances
during the look-back period causes these rules to reach an
inappropriate sourcing result, Regulations section 1.864(c)
(8)-1(c)(2)(ii)(E) allows, in certain cases, the relevant look-back
rule for inventory property or intangibles to be applied by
reference to the date on which the material change in
circumstances occurs. The partnership must check the box
provided on line 6 if the material change in circumstances rule is
used to determine the amount provided on line 2 or 3.
Line 7. Capital gain or (loss) that would be recognized under section 897(g) on the deemed sale of U.S. real property
interests. Section 897(a) treats gain or loss from the
disposition of a U.S. real property interest (as defined in section
897(c)) by a nonresident alien or foreign corporation as gain or
loss that is effectively connected to a trade or business within the
United States. Section 897(g) generally provides that, under
regulations prescribed by the Secretary, the amount of any
money, and the FMV of any property, received by a nonresident
alien individual or foreign corporation in exchange for all or part
of its interest in a partnership, trust, or estate shall, to the extent
attributable to U.S. real property interests, be considered as an
amount received from the sale or exchange in the United States
of such property. A partnership must complete line 7 if it holds
U.S. real property interests and the transfer of an interest in the
partnership isn’t subject to section 864(c)(8). Under these
circumstances, the partnership must enter on line 7 for purposes
of section 897(g) the foreign transferor’s distributive share of the
partnership’s gain or loss on the deemed sale of the U.S. real
property interests and should not complete lines 1 through 6. A
partnership that has this type of income and is also engaged in a
U.S. trade or business should instead include this income on
line 3 and should not complete line 7.

Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025)

45

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Step 2. Determine the amount of that gain or loss that would
be treated as effectively connected gain or loss (deemed sale
effectively connected gain and deemed sale effectively
connected loss).
Step 3. Determine the partner’s distributive share of these
deemed sale gain or loss amounts.
Enter on line 2 the foreign transferor’s distributive share of
deemed sale effectively connected ordinary gain or loss
recognized on the transfer of section 751(a) property.
Enter on line 3 the foreign transferor’s distributive share of
deemed sale effectively connected capital gain or loss
recognized on the transfer of non-section 751(a) property.

TREASURY/IRS AND OMB USE ONLY DRAFT
Index

A
Allocation and apportionment
methods for deductions 42

B
Base erosion and anti-abuse tax
(Section 59A) 35
Base erosion payments and base
erosion tax benefits 35
Capital gains and losses 14
Category of income codes 32
Charitable contributions 15, 42
Codes for categories of income 27
Codes for classes of PFIC shares 28
Codes for types of tax 18
Compensation/consideration paid for
services excepted by section
59A(d)(5) 36
Compensation/consideration paid for
services not excepted by section
59A(d)(5) 36
Computer-generated Schedules
K-2 4
Cost of goods sold (COGS):
Deduction eligible income (DEI) 21
Effectively connected income
(ECI) 42
Foreign-derived deduction eligible
income (FDDEI) 23
In general 12
Country codes 6, 13
Currency 4

D
Deductions 15
Deductions, other 15
DEI and QBAI on Form 8993 21
Distributions from foreign corps. to
partnership 24
Dividends, ordinary and qualified 14
Domestic filing exception 2
Downstream loans 8
Dual consolidated loss 9

E
EIN 5
Examples:
Example 01—Part IX required to
determine base erosion
payments 2
Example 02—domestic filing
exception met; issuance of
Schedule K-3 not required 3
Example 03—domestic filing
exception not met 3
Example 04—domestic filing
exception met; Schedule K-3
issuance still required 3
Example 05—Part I, box 5; high-taxed
income 7

46

F
FDII deduction apportionment
factors 18
Foreign branch category income 12
Foreign oil and gas taxes 6
Foreign partner’s distributive share of
deemed sale items 44
Foreign partners’ character and
source of income and
deductions 38
Foreign tax translation 6
Foreign taxes 15
Foreign taxes deductible but not
creditable 19
Foreign taxes paid or accrued to
sanctioned countries 18
Foreign taxes related to PTEP
re-sourced by treaty 18
Foreign-derived DEI on Form 8993 22
Foreign-derived gross receipts 22
Form 1116 exemption exception 10
Form 5471 information 8
Form 8621, information for 27

G
Gains on sales personal property 5
General filing instructions 12
General property 23
Gross income 13
Gross receipts 23

H
High-taxed income 7
How to complete Schs. K-2 and K-3 4

I
Identifying info., partners 5
Identifying info., partnership 5
Income re-sourced by treaty 13
Interest expense apportionment
factors 16
Interest expense on U.S.-booked
liabilities 42
Interest expense specifically
allocable under Reg. 1.861–10
and -10T 15

N
Name of partnership 5
Net income (loss):
Controlled foreign corporation
(CFC) 32
Deduction eligible income (DEI) 21
Effectively connected income
(ECI) 41

O
Other forms 8
Other income 15
Other information for preparation of
Form 8993 23
Other international transactions 5, 9
Other tax information 20

P
Part applicability 5
Partner determination 13
Partner loan transactions 8
Partners eligible to claim credit 10
Partnership determination 12
Partnership election codes 29
Partnership QBAI 22
Partnership’s interest in foreign
corporation 31
Partnerships with no foreign partners
and limited or no foreign
activity 11
Parts of Sch. K-2 and Sch. K-3, in
general 4
Passive group codes 33
PFIC, QEF general information 28
Purchase or creation of property
rights for intangibles 36

Q
Qualified derivatives dealer (QDD) 5,
43

R
R&E expenses:
Apportionment factors 15, 24
By SIC code 24

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C

Example 06—Form 1116
exemption 10
Example 07—Parts II and III required
for partnership with no foreign
activity 11
Example 08—Part II, not Part III,
required for partnership with no
foreign activity 12
Example 09—Part II: multiple country
sources: gross income 14
Example 10—Parts II and III: capital
gains and losses 14
Example 11—Parts II and III: asset
method apportionment of interest
expense 17
Example 12—Part III, Section 4:
multiple country sources: foreign
taxes 19
Example 13—partners’ reporting of
DEI and QBAI 21
Example 14—domestic corporate
partner; specified tangible
property 22
Example 15—Part VIII: subpart F
income group reporting by unit 33
Example 16—Part VIII: more than two
source countries 34
Example 17—pass-through partner;
need to complete Part X 38
Example 18—Part X; OID 41
Exception for Form 8621 8
Excluded foreign source income 32

R&E expenses (Cont.)

TREASURY/IRS AND OMB USE ONLY DRAFT

Effectively connected income
(ECI) 41
Foreign tax credit 15
Rental income 14
Rents, royalties, and license fees 36

S

T
Tables:
Table 1. Information on personal
property sold 6
Table 2. Downstream loans 9
Table 3. Upstream loans 9
Table 4. Top-up tax 10
Table 5. Temporary relief 10
Table 6. Additional information for Part
VII, Section 1 29
Table 7. Additional information for Part
VII, Section 2 31
Taxes assigned to section 951A
category 18
Tiered partnerships 44

Total deductions (Part IX) 35
Total gross income 15

U
Upstream loans 9

W
When to file 4
Withholding foreign partnership 5
Worksheet 1. For Schedule K-2, Part I,
Box 5 7
Worksheet 2. For Schedule K-2, Part I,
Box 5 7
Worksheet 3 25
Worksheet 4 25
Worksheet A 37
Worksheet B 38

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Section 1291 and other
Information 30
Section 250 deduction re FDII 20
Section 267A disallowed deduction 8
Section 59(e)(2) expenditures 42
Section 871(m) covered
partnerships 43
Section 901(j) income 12
Section 951(a)(1) and section 951A
inclusions 26
Section 951A category income 13
Section 986(c) gain and loss 14
Section 987 gain and loss 14

Section 988 gain and loss 15
Small partnership filing exception 3
Splitter arrangements 6
Stewardship expenses 16

47