Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462
Your monthly news & updates
- Do You Need to File Schedules K-2 & K-3? A Look at Requirements, Exceptions/Relief, Filing Issues
- How to Write a Refund Policy
- May Days
- Office Hours
Do You Need to File Schedules K-2 & K-3?
A Look at Requirements, Exceptions/Relief, Filing Issues
Starting with the 2021 tax year, IRS forms K-2 and K-3 are new schedules that may need to be included with 1065 (Partnerships), 1120S (S Corporations), or 8865 (Certain Foreign Partnerships) filings. These are all pass-through entity filings that include Schedule K-1, which reports a partner’s or shareholder’s share of the entity’s profits, losses, deductions, and credits for the year, and the K-2/K-3 schedules are an extension of that.
Specifically, these forms go into greater detail regarding items of international relevance that may impact foreign reporting at the individual member or shareholder level. These schedules were created to accommodate international provisions enacted as part of the Tax Cuts and Jobs Act in 2017, which increased the amount and type of information needed to calculate items of foreign tax relevance (for example, calculating the foreign tax credit).
Who Must File?
The general guidance from the IRS states that a pass-through entity “with items of international tax relevance” would be subject to these new reporting requirements. However, there has been a great deal of confusion about what this means. The basic interpretation might be that if a pass-through entity has no international activities and no foreign members or shareholders, the K-2/K-3 filing requirement won’t apply – however, that is not necessarily the case.
IRS updated its instructions to state that an entity “with 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.” The most common example of this would be for partners/shareholders who claim a foreign tax credit on their individual returns – they may need information from the K-2 and K-3 filings to complete the associated form and calculate the credit.
Your tax professional will ask you and all of your partners and shareholders about your foreign activity, so please be patient with the extra questions this year. (It’s not us; it’s the IRS!) Also, any one partner could ask for Schedules K2 and K3, and this would mean that they need to be completed regardless of whether any partner/shareholder had foreign activity. Simply by the partner’s asking, it triggers the requirement.
The big takeaway here is that items of international tax relevance and the K2/K3 requirement should be determined at the partner/shareholder level, not just the entity level.
IRS released initial information regarding transitional relief, knowing that there would be an adjustment period for entities to achieve compliance. Per Notice 2021-39, certain transitional penalty relief could be granted to those filers who made a good faith effort to comply with the new reporting requirements.
However, after significant pushback, the IRS announced that it would provide additional relief for 2021. S corps and partnerships that have no foreign activities, no foreign partners or shareholders, and no knowledge of partners’ or shareholders’ need for information on international items of relevance will not be subject to the K-2/K-3 filing requirements for tax year 2021. There is no indication at this point that the relief will extend beyond the 2021 tax year, so these entities should be prepared to complete the filings for 2022 and beyond.
Because Schedules K-2 and K-3 are new for 2021, it has taken/will take some time for tax software programs to have electronic filing capability for these forms. If a tax return was or will be electronically filed prior to the availability dates listed below, the schedules much be submitted as separate PDF files attached to the return (most tax programs should be able to accommodate electronic attachment of miscellaneous PDF forms).
Per IRS, here are the availability dates for electronic filing of the K-2/K-3 forms:
With Form 1065: March 20, 2022
With Form 1120-S: mid-June 2022
With Form 8865: January 2023
Although IRS expects that all of these will be available for e-filing for the upcoming (2022) tax year, the ability to file via PDF attachment will still be available, if preferred.
Frequently Asked Questions/Questions or Feedback for IRS
IRS has created a K-2 and K-3 Frequently Asked Questions (FAQ) page, which it has been keeping updated as new information comes to light. Be sure to monitor this page for any new updates:
How to Write a Refund Policy
A refund policy defines the processes and rules for when customers want their money back and want to return the products or services they purchased from you. It’s often required by your credit card or shopping cart company as part of maintaining PCI (Payment Card Industry) compliance. Plus, it’s just a good, fair business practice to post one.
As a business owner, you can set your own refund rules. The important thing is that they are communicated clearly to the customer in advance of their purchase.
A good refund policy answers the questions that customers have when the item they purchased from you does not work out. It reduces conflict and ambiguity, and improves customer service. It also helps your employees work with customers’ expectations, by allowing them to refer to the posted policy that a customer can see with their own eyes.
Here are some of the components you’ll want to address in your refund policy:
Items to be returned:
Which items can be returned and which can’t? Some products, after opening, like food, simply can’t be returned safely. You might still honor a refund of money even if the item can’t be returned or re-sold.
Condition of items:
You may want to stipulate for some returned items that they are in a condition to be re-sold. That means the customer may need to return packaging as well as the item in order to qualify for a refund.
How long from the date of purchase do customers have to return the item and ask for a refund? Common time limits range from 7 to 30 days.
If shipping cost is involved, who will pay it?
How long will it take to receive a refund once the item is returned?
How will the money be returned? Will it be on the credit card used? What if it is cash or a check? Or will you give store credit only?
Will customers need to fill out a form, request refund approval, or use a specific shipping return label? What instructions do you need to provide them for proper return requests and processing?
Will there be a re-stocking fee, cancellation fee, return processing fee, or any other fee that reduces the amount of the refund?
The first step is to decide the answers to all of the above questions. You might be tempted to have a “no returns, no refunds” policy, and this could be the right thing in many cases. However, the refund policy is a chance to build trust with the customer, and a rigid one could cause lost sales. Often a “no questions asked” refund policy can increase sales in the long term. Only a very tiny percentage of people will take advantage of it.
Once you have determined the answers to your refund policy, you can write up the policy. Post it on your website and near your cash register or checkout areas of your store.
Next, make sure you have a smooth process in place for handling returns on a timely basis. Most stores have a separate checkout area or customer service desk to process returns so that they don’t slow down the regular check-out lines. Employees should be trained on how to talk with the customers, how to accept the returned items back into inventory for resale or return back to the vendor, and how to use the cash register or shopping cart system to process the returns.
You can even turn returns into a positive experience for everyone. If an item is the wrong size, it may be able to be converted into an exchange for a different size so the sale is not lost. A great sales person can also provide upsell opportunities for new or similar items to the returned item. Proactively, your store can sell warranties at the time of purchase for selected items.
The more customers you have, the more chances there are of having a customer who asks for a refund. Be prepared with a clear, fair, well-documented refund policy.
Here are some Days to Celebrate in May!
May 4th – National Star Wars Day
“May the Fourth be with you” is a play on the famous Star Wars catchphrase “May the Force be with you”. Take the day to enjoy your favorite Star Wars Movies or Shows!
May 8th – Mother’s Day
Don’t forget to treat the maternal figure in your life and show her how much you appreciate everything she does!
May 21st – Armed Forces Day
First established in 1949, Armed Forces Day is a day to celebrate and thank the men and women who serve in the U.S. Military.
May 23rd – World Turtle Day
Did you know Turtles can live up to the age of 40, and have mostly flat shells, while Tortoises can live up to 300 years and have a more domed shell!
May 25th – National Wine Day
Pour a glass of your favorite wine, or try something new, to celebrate the day!
May 30th – Memorial Day
Originally called Decoration Day, Memorial Day is a day to honor the brave people who have fallen while serving in the U.S. Military.
May 31st – QuickBooks Desktop 2019 Discontinued
QuickBooks Desktop 2019 software will be discontinued after May 31, 2022, which means you will no longer be able to use your QuickBooks Payroll unless you upgrade your software.
Office Hours: May 2, 2022 – December 2, 2022
Monday – Thursday
8 AM to 5 PM
Coronavirus Disease (COVID-19)
Stephen Merritt, CPA, P.C. understands the challenge the impact COVID-19 has on our community.
Fully-Vaccinated individuals are not required to wear a mask while in our office.
Unvaccinated or not Fully-Vaccinated individuals must wear masks and follow COVID-19 protocol, such as social distancing, while in our office to stop the spread of COVID-19.
Tax documents may be mailed, FAXed, emailed, uploaded to client portal, or dropped off.
Final Returns can be picked up or mailed out.
As always, please call, we are happy to assist.
Stay safe and healthy!