1. No or limited foreign activity.

During the domestic partnership’s tax year 2023, 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.

2. U.S. citizen/resident alien partners.

During tax year 2023, all the direct partners in the domestic partnership are (a) individuals that are U.S. citizens; (b) individuals that are resident aliens (as defined in section 7701(b)(1)(A) and the regulations thereunder); (c) domestic decedents’ estates (that is, decedents’ estates that aren't foreign estates as defined in section 7701(a)(31)(A)), with solely U.S. citizen and/or resident alien individual beneficiaries; (d) domestic grantor trusts (that is, trusts described under sections 671 through 678) that aren't foreign trusts as defined in section 7701(a)(31)(B)) and that have solely U.S. citizen and/or resident alien individual grantors and solely U.S. citizen and/or resident alien individual beneficiaries; (e) domestic non-grantor trusts (that is, trusts subject to tax under section 641 that aren't foreign trusts as defined in section 7701(a)(31)(B)) with solely U.S. citizen and/or resident alien individual beneficiaries; (f) S corporations with a sole shareholder; or (g) single-member limited liability companies (LLCs), where the LLC’s sole member is one of the persons in subparagraphs (a) through (f), and the LLC is disregarded as an entity separate from its owner (as defined in Regulations section 301.7701-3).

3. Partner notification.

With respect to a partnership that satisfies criteria 1 and 2, partners receive a notification from the partnership at the latest when the partnership furnishes the Schedule K-1 to the partner. The notice can be provided as an attachment to Schedule K-1. The notification must state that partners won't receive Schedule K-3 from the partnership unless the partners request the schedule.

4. No 2023 Schedule K-3 requests by the 1-month date.

The partnership doesn't receive a request from any partner for Schedule K-3 information on or before the 1-month date. The 1-month date is 1 month before the date the partnership files the Form 1065. For tax year 2023 calendar year partnerships, the latest 1-month date is August 15, 2024, if the partnership files an extension. Any request from a partner for Schedule K-3 information for a year prior to tax year 2023 will be considered a request for a tax year 2023 Schedule K-3 as well.

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 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 a schedule with the information required on Schedule K-2, Part II, and Schedule 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.

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, for example, from the same country. Line 24 should sum each country’s total income reported on Part II, regardless of the line on which such income is reported, whether A, B, C, etc.

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 that, for example, the IRS may initially evaluate whether taxpayers are claiming credits for compulsory payments to foreign governments.

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. See the instructions for line 19 for when a partnership might have an income inclusion with respect to a foreign corporation.

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.

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.

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.

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. Total section 986(c) gains for the year are reported on line 16. Total section 986(c) losses for the year are reported on line 46.

Lines 17 and 47. Section 987 gain and loss.

The source of section 987 gain or loss is generally determined by reference to the source of the income or asset giving rise to such gain or loss. A partnership may also obtain section 987 gain or loss information from Form 8858. This isn't reported as a net amount but rather separate items. Total section 987 gains for the year are reported on line 17. Total section 987 losses for the year are reported on line 47.

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, the section 988 gain and loss would be reported in column (f).

Line 19. Section 951(a) inclusions.

Report section 951(a) inclusions if the domestic partnership takes into account such income. A domestic partnership doesn't have a section 951(a) inclusion with respect to a foreign corporation for tax years of the foreign corporation that begin on or after January 25, 2022. A domestic partnership may not have a section 951(a) inclusion with respect to a foreign corporation for tax years of the foreign corporation that begin before January 25, 2022, if, pursuant to Regulations section 1.958-1(d)(4), it applies Regulations sections 1.958-1(d)(1) through (3) to be treated as not owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951, and for purposes of any other provision that applies by reference to section 951.

Line 20. Other income.

Attach a statement to both Schedules K-2 and K-3 describing the amount and type of other income. 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.

Line 32. R&E expenses.

In general, R&E expenses are allocated and apportioned by the partner and reported in column (f); see 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); see osha.gov/data/sic-manual.

Line 38. Charitable contributions.

Charitable contribution deductions are apportioned solely to U.S. source gross income; see Regulations section 1.861-8(e)(12). Therefore, this deduction should be reported in column (a).

Lines 39 and 40. Interest expense specifically allocable under Regulations section 1.861-10 and -10T.

Apart from interest expense entered on line 39, enter on line 40 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).

Column (e).

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.

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 expense 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 expense.

Line 2.

Report the amount of R&E expense related to activity performed in the United States and the amount of R&E expense 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 on Schedule K-3, Part III, Section 1, line 2, must equal Schedule K-3, Part II, line 32.

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 instructions with respect to Part III, Section 2, for interest expense apportionment factors apply generally to the partner’s stewardship expense apportionment.

Column (b).

The partnership characterizes its pro rata 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.

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). On Schedule K-3, report the partner’s distributive share of the assets reported on Schedule K-2. Include on line 1 assets without directly identifiable yield referred to in Regulations section 1.861-9T(g)(3)(iii).

Line 2.

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.

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 asset values reported on Schedule K-2.

Line 5.

On Schedule K-2, report the average value of partnership assets excluded from the apportionment formula; see section 864(e)(3). On Schedule K-3, report the partner’s distributive share of the excluded assets reported on Schedule K-2. Include on line 5 assets without directly identifiable yield referred to in Regulations section 1.861-9T(g)(3)(iii).

Line 6.

Individual partners who are general partners or who are limited partners with an interest in the partnership of 10% or more 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 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, lines 6b through 6d; or Schedule K-3, Part III, Section 2, lines 6b through 6d. The partnership includes the total amount on line 6a.

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).

Lines 7 and 8.

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.

With respect to a partnership-owned specified 10% foreign corporation that isn't a CFC, the partnership will report on line 7, columns (a) through (e), 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.

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.

With respect to partnership-owned CFCs, the partnership will report on line 8, column (f), 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.

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).

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.

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 in lines 1 through 3, attach to the Schedules K-2 and K-3 a statement reporting the following information.

Column (a).

Enter the code for the type of tax.

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.

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.

Line 1.

Enter in U.S. dollars the total foreign taxes (described in section 901 or section 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 the partnership uses the cash method of accounting, check the "Paid" box and enter foreign 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 taxes accrued on line 1. Report each partner's share on Schedule K-3, Part III, Section 4, line 1.

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.

Line 2.

Enter on line 2, as negative number, the sum of the taxes in the following categories.

There isn’t a need to report the amounts on line 2 by country.

Line 3.

Enter in U.S. dollars the change in foreign tax as a result of a foreign tax redetermination; see 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.

Report the U.S. tax year to which the foreign tax relates. This is the U.S. tax year that includes the close of the foreign tax year to which the tax relates. 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.

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 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.

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 share 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.

Column (b).

Don't report any amounts in this column.

Column (f).

As of the date of these instructions, this column will only include the section 901(j) category 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 with respect to a tax described in section 901(j).

Line 1.

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 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.

For partnerships other than PTPs, report the total of all partners' shares of the net negative income adjustment 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.

Line 1. Net income (loss).

This amount may equal line 1 of Analysis of Net Income (Loss) on Form 1065, page 5.

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 expense. 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.

Line 3. Section 951(a) inclusions.

Enter any amounts included in the partnership’s gross income under section 951(a)(1). Include the section 78 gross-up with respect to the inclusion under section 951(a)(1). A domestic partnership doesn't have a section 951(a) inclusion with respect to a foreign corporation for tax years of the foreign corporation that begin on or after January 25, 2022. A domestic partnership may not have a section 951(a) inclusion with respect to a foreign corporation for tax years of the foreign corporation that begin before January 25, 2022, if, pursuant to Regulations section 1.958-1(d)(4)(i), it applies Regulations sections 1.958-1(d)(1) through (3) to such tax years, which treats a domestic partnership as not owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951, and for purposes of any other provision that applies by reference to section 951.

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 959(d).

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 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 “outside the United States.”

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 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.

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 costs of goods sold 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.

Column (c). Services.

Enter the amount of the deductions that are allocated and apportioned to gross FDDEI from all services.

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.

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 sections 1.861-10(e) and -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 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 section 1.861-9(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 -9(e)(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 proposed, 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).

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).

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).

Lines 14C and 14D. Assets attracting directly allocable interest expense under Regulations sections 1.861-10(e) and -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).

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).

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 expense for FDII purposes. A partnership isn't required to complete lines 15 and 16 unless either (a) the partnership incurs R&E expense; 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 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, DEI, FDDEI, and then total gross receipts. Note that the Total column isn't a sum of DEI and FDDEI but rather 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 expense by SIC code.

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).

Enter the beginning and end of the PFIC's tax year using the format YYYYMMDD.

Column (f).

Enter each class of shares in the PFIC owned by the partnership using the following codes.

Column (g).

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.

Column (h).

Enter the total number of all classes of shares of the PFIC the partnership owned at the end of its tax year.

Column (i).

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).

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.

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 Schedules K-2 and K-3, Part VII, with respect to the PFIC/CFC.

Column (n).

Complete column (n) in the following manner.

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 should provide the partnership 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 annual PFIC 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 if it has received an annual information statement with respect to 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.

Columns (e) and (f).

Enter the fair market value (FMV) of the PFIC stock at the beginning and end of the partnership’s tax year in 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 is 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.

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 5.

Column (g).

Enter the date(s) on which the partnership initially acquired each block of stock in the PFIC using the format YYYYMMDD.

Column (h).

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.

Column (i).

Enter the date(s) of distribution of the amounts entered in column (h) using the format YYYYMMDD.

Column (j).

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.

Column (k).

Enter the total amount of distributions the partnership received from the PFIC in the 3 preceding 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 MTM election (other than a non-initial section 1296 MTM election) and for which the partnership doesn't file Form 8621.

Column (l).

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).

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).

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.

Column (o).

Enter the partnership's gain or loss on the disposition of PFIC shares. This equals column (m) minus column (n).

Lines 1 through 4, column (a).

Enter the partnership's total gross receipts for the current year and each of the 3 preceding tax years. The determination of the partnership's gross receipts is made in accordance with Regulations section 1.448-1T(f)(2)(iv).

Lines 1 through 4, column (b).

Complete lines 1 through 4, column (b), 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 3 preceding 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 lines 1 through 4, column (c), 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).

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 1.59-2(e)(3)(ii).

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 to 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 benefits are determined separately for each asset, payment, or accrual, as applicable, and aren'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.

General.

Don’t include amounts that a partner doesn't take into account pursuant to the exception for certain small partners for:

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 to any partner with respect to which a deduction is allowable under chapter 1 and for certain other items on 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.

Line 8. Purchase or creation of property rights for intangibles (patents, trademarks, etc.).

Line 9. Rents, royalties, and license fees.

Line 10a. Compensation/consideration paid for services not excepted by section 59A(d)(5).

Line 10b. Compensation/consideration paid for services excepted by section 59A(d)(5).

Line 11. Interest expense.

The partnership is required to complete Worksheet A for all partnership-related items and complete Worksheet A for each foreign partner’s share of the amounts reported on the partnership Worksheet A and attach a statement containing the partner’s share of the information in Worksheet A to the partner’s Schedule K-3.

Line 12. Payments for the purchase of tangible personal property.

Line 13. Premiums and/or other considerations paid or accrued for reinsurance as covered by section 59A(d)(3) and section 59A(c)(2)(A)(iii).

Line 14a. Nonqualified derivative payments.

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 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; treats the gain or loss as ordinary; and 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.

Line 16. Other payments—specify.

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 or 881, with respect to which tax has been withheld under section 1441 or 1442 at 30% (0.30) statutory withholding tax rate.

Enter the aggregate amount of the partners’ base erosion tax benefits, reported on lines 8 through 16, on which tax is imposed under section 871 or 881 and with respect to which tax has been deducted and withheld under section 1441 or 1442 at a 30% statutory withholding tax rate.

Line 18, column (c)—Portion of base erosion tax benefits reported on lines 8 through 16, on which tax is imposed by section 871 or 881, with respect to which tax has been withheld under section 1441 or 1442 at a reduced withholding rate pursuant to an income tax treaty. Multiply ratio of percentage withheld divided by 30% (0.30) times base erosion tax benefit.

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 8 through 16, on which tax is imposed under section 871 or 881 and with respect to which tax has been deducted and withheld at a reduced withholding tax rate (but not exempt from tax) pursuant to a U.S. income tax treaty. Keep a copy of the completed Worksheet B for the partnership’s records.

Column (a). Total.

For each line in Section 1, enter in column (a) the total amount of the applicable gross income. For instance, if the partnership had $100 of Other income (loss) on Form 1065, Schedule K, line 11, enter $100 in line 20, column (a).

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.

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).

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.

Don't include gross rental real estate income in Schedule K-2, Part X, column (c), that isn't ECI to the partnership. Even if a foreign partner elects to treat the income as ECI, report these amounts in Schedule K-2, Part X, column (e). However, the partnership should report the income as ECI in Schedule K-3, Part X, column (c).

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.

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.

Amounts that are FDAP include the following.

If the partnership had U.S. source rental real estate income that wasn't ECI to the partnership, include such amounts in Schedule K-2, Part X, column (e). 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. This income is reported in Schedule K-3, Part X, column (c), for such partners.

If income is reported in column (e), see the instructions for Forms 1042 and 1042-S for any filing obligation.

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 gains, and transportation income subject to tax under section 887.

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 Schedule K-2, Part X, column (f). Attach a statement to Form 1065 with respect to Part X clarifying that these amounts aren't taxable to foreign partners and doesn’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.

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)(8) or section 871(a)(1)(C)(ii) (as applicable), these amounts should be reported in Schedule K-2, Part X, column (e), 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.

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.

Line 11. Net long-term capital gain.

Don't include gains reported on lines 12, 13, and 14 on line 11.

Line 12. Collectibles (28%) gain.

Report collectibles gain on line 12 and not 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.

Line 20. Other income (loss) not included on lines 1 through 19.

Determine other income (loss) without regard to any amount reported on line 8.

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 1.861-20 and Temporary Regulations sections 1.861-8T and -9T.

Don't include deductions attributable to gross rental real estate income in Schedule K-2, Part X, column (c), that isn't ECI to the partnership. Even if a foreign partner elects to treat the income as ECI, report these deductions in Schedule K-2, Part X, column (e). However, the partnership should report the deductions in Schedule K-3, Part X, column (c).

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 1.861-20 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).

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 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.

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 on Section 2 identifying the amount and type of deduction.

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 Section 1, line 21, column (a).

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

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 Regulations section 1.861-10T(b) or (c), as limited by Regulations section 1.861-10T(d)(1), as described in Regulations section 1.882-5(a)(1)(ii)(B). See 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 expense; 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 line 5, column (ii), enter the gross receipts that resulted in ECI, and in line 5, column (iii), 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 section 1.861-8 through -20 and Temporary Regulations section 1.861-8T and -9T for more detailed information.

For example, a partnership might enter ECI COGS on line a, column (i), and total COGS on line b, column (i). If ECI COGS is $100, the partnership would enter $100 in line a, column (ii), and if COGS is $200, the partnership would enter $200 in line b, column (ii). As another example, a partnership might enter average ECI assets in line a, column (i), and the average total assets in line b, column (i). The average ECI assets are the partnership’s basis in its assets that generate ECI for purposes of 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 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 Schedules K-2 and K-3 to expand the schedules to include all of the information for those apportionment keys.