S-Corp K-2 and K-3 Domestic Filing Exception
Domestic Filing Exception
The Domestic Filing Exception is an exclusion that allows an S corporation to be exempt from filing Schedules K-2 and K-3 with the IRS and providing Schedule K-3 to a shareholder if certain criteria are met. Let’s go through them step-by-step:
Little or no foreign activity: If the S corporation has very little or no foreign activity during the tax year 2022, it is eligible for this exception. Foreign activity can include things like foreign income taxes, income or loss from a foreign source, or ownership of a foreign partnership or corporation.
Notification to shareholders: If the S corporation meets the above criteria, it must inform shareholders as soon as they receive their Schedule K-1. This notice should state that shareholders will not receive a Schedule K-3 from the S corporation unless they request it.
No Schedule K-3 requests by the one-month deadline: If no shareholder has requested a Schedule K-3 by the one-month deadline, which is one month before the date the S corporation files Form 1120-S, the S corporation does not need to file Schedules K-2 and K-3 with the IRS or provide Schedule K-3 to shareholders who did not request it. If a shareholder requests a Schedule K-3 after the one-month deadline, the S corporation must provide it within one month of the request or by the date the S corporation files Form 1120-S, whichever comes first.
If an S corporation does not meet criterion 3 but meets criteria 1 and 2, it must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting shareholder if a shareholder requests it before the one-month deadline. However, only the sections of Schedules K-2 and K-3 relevant to the requesting shareholder must be completed.
Summary:
f an S corporation has very little or no foreign activity during the tax year 2022, it may be exempt from completing and filing Schedules K-2 and K-3 with the IRS and providing Schedule K-3 to shareholders, with certain conditions. The shareholders must be notified of this exemption, and no shareholder can request Schedule K-3 information after the one-month deadline in 2022. However, if a shareholder requests Schedule K-3 information after the one-month deadline, the S corporation must provide it to that shareholder within a month of the request or on the date the S corporation files Form 1120-S, whichever comes first.