Tax Filing Update – Partnerships and Sub S Corporations

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Tax Filing Update – Partnerships and Sub S Corporations

February 11, 2022

Tax Filing Update – Partnerships and Sub S Corporations

The IRS recently issued new instructions for partnership (LLC) and Subchapter S income tax filings that expand the 2021 reporting requirements to include the new and lengthy foreign reporting forms (Forms K-2 and K-3), even in cases where the pass-through entity has no foreign activities to report.

The new rules do provide for an exception to the reporting requirement for pass-through entities. To be exempt, pass-through entities need to receive confirmation from every owner (i.e. recipients of the K-1s) certifying the owner does not need the additional forms for the preparation of their personal tax returns. Individual K-1 recipients with foreign tax credits over $300 (single filers) or $600 (married/joint filers) or other foreign tax reporting requirements DO need the additional information and cannot make this certification.  At present, we are awaiting guidance as to what specific language this certification must include.

What this means for our Partnership, LLC, and Sub S client is: unless the entity meets the exception and obtains written certification from all owners, indicating that NONE of your owners needs the additional information in the new forms, the new forms are required.   Significant penalties for non-filing could apply, so filing without the new forms when the forms are required is not a practical option.

Adding insult to injury, the IRS has not shared software coding with the industry to allow the new forms to be populated, and this is not expected until a time range from late March to June.  At present, the consensus in the industry is that if the IRS does not delay this implementation until next year, the vast majority of 2021 partnership and S corporation tax filings will need to be extended – possibly to a timeline in June or later.

This disruption, as well as the additional effort to obtain certifications or prepare the new forms will likely result in a significant increase in the time needed to prepare and finalize 2021 business tax returns. We are working with industry trade groups and advisors to develop and roll-out strategies for complying with the new reporting requirements, and to minimize both the delays and increased time and cost that result from these changes. We will advise you as soon as possible on next steps.

In the meantime, we are working diligently on the preparation of all 2021 returns and want to continue to do so. Please get your tax information to us as usual so we can work to complete the return as much as possible. You may have payments due or want draft K-1s that we need to work on now to meet your needs.

Please reach out to us if you should have any immediate questions or concerns.