Schedule K-2

Schedule K-2 is an IRS form introduced in tax year 2021 that reports items of international tax relevance for partnerships (Form 1065) and S-Corporations (Form 1120-S) at the entity level. It replaced the previous practice of reporting foreign tax credits, foreign-source income, and treaty benefits through footnotes or supplemental statements attached to Schedule K-1. Schedule K-2 contains 13 parts covering foreign tax credit limitation categories, income re-sourcing under tax treaties, foreign partner withholding, GILTI (Global Intangible Low-Taxed Income) inclusions, Subpart F income, PFIC (Passive Foreign Investment Company) reporting, and Section 250 deductions for Foreign-Derived Intangible Income (FDII). The form is required for any partnership or S-Corporation that has foreign activities, foreign partners/shareholders, claims foreign tax credits, or has partners/shareholders who need international tax information for their individual returns. Even domestic-only entities may be required to file K-2 if any partner requests international tax information or if the entity fails to meet the domestic filing exception's strict criteria — which requires that all partners are U.S. citizens/residents, the entity has no foreign-source income exceeding $300, and no foreign taxes were paid or accrued. The penalty for failing to file a complete and accurate K-2 is embedded within the broader partnership late-filing penalty structure — $235 per partner per month (2026 rate), up to 12 months. For a 10-member LLC with international investors, this represents potential penalties of $28,200 annually. doola ensures LLCs with foreign members receive properly prepared K-2 schedules alongside K-1 packages.