1120-S Schedule K- Shareholder's Instructions for Schedule K-3 (Form 1120-S

2022

Shareholder's Instructions
for Schedule K-3
(Form 1120-S)

Department of the Treasury
Internal Revenue Service

Shareholder's Share of Income, Deductions, Credits, etc.—International
(For Shareholder's Use Only)
Section references are to the Internal Revenue Code unless
otherwise noted.
Contents

General Instructions . . . . . . . . . . . . . . . . . . . . .
Purpose of Schedule K-3 . . . . . . . . . . . . . .
How To Use Schedule K-3 . . . . . . . . . . . . .
Specific Instructions . . . . . . . . . . . . . . . . . . . . .
Part I. Shareholder's Share of Corporation’s
Other Current Year International
Information . . . . . . . . . . . . . . . . . . . . . . .
Part II. Foreign Tax Credit Limitation . . . . . . .
Part III. Other Information for Preparation of
Form 1116 . . . . . . . . . . . . . . . . . . . . . . .
Part IV. Distributions From Foreign
Corporations to S Corporation . . . . . . . . .
Part V. Information on Shareholder’s Section
951(a)(1) and Section 951A Inclusions . . .
Part VI. Information To Complete Form 8621 .
Part VII. Shareholder's Share of S
Corporation's Interest in Foreign
Corporation Income (Section 960) . . . . . .

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Future Developments

For the latest information about developments related to
Schedule K-3 (Form 1120-S) and the Shareholder's
Instructions for Schedule K-3 (Form 1120-S), such as
legislation enacted after they were published, go to IRS.gov/
Form1120S.

General Instructions
The Shareholder’s Instructions for Schedule K-1 (Form
1120-S) generally apply to the Schedule K-3, including
instructions under Inconsistent Treatment of Items and
Errors. These instructions provide additional instructions with
respect to Schedule K-3 for tax years beginning in 2022.

Purpose of Schedule K-3

Schedule K-3 reports items of international tax relevance
from the operation of an S corporation. You must include this
information on your tax or information returns, if applicable.
See separate parts for specific instructions. You only need to
use the schedules that are applicable to you.
See the Purpose of Schedule K-1, Inconsistent Treatment
of Items, and Errors sections of the instructions for the
Schedule K-1 (Form 1120-S) for instructions that are equally
applicable with respect to the Schedule K-3. The S
Dec 13, 2022

corporation reported items based on the information known
to it, and the actual treatment of the items with respect to the
shareholder may differ if any assumptions made by the S
corporation are incorrect (such as ownership threshold levels
and relatedness determinations). In such cases, the
shareholder must treat the items according to the
shareholder's actual facts and file a Form 8082, Notice of
Inconsistent Treatment or Administrative Adjustment
Request (AAR), to identify and explain the inconsistency.
S corporations with no or limited foreign activity. An S
corporation with no foreign source income, no assets
generating foreign source income, and no foreign taxes paid
or accrued may be reporting information to you on
Schedule K-3. For example, if you claim a credit for foreign
taxes paid and/or accrued separately from your S corporation
interest, you may need certain information from the S
corporation to complete Form 1116.

How To Use Schedule K-3
Reporting currency. All amounts are reported in U.S.
dollars except where otherwise specified.
References to other forms. References in these
instructions to Form 1040, U.S. Individual Income Tax
Return, are intended, if applicable, to include Form 1040-SR,
U.S. Tax Return for Seniors, as well as other tax returns for
other shareholders such as Form 1041, U.S. Income Tax
Return for Estates and Trusts.
Uses of the parts of Schedule K-3, in general. The
following are brief descriptions of each part of Schedule K-3.
Detailed information is provided in Specific Instructions.
Part I. Used to determine any international tax items not
reported elsewhere on Schedule K-3 (Form 1120-S).
Part II. Used to determine your share of S corporation
income and loss by source and separate category of income
for purposes of the foreign tax credit limitation. Shareholders
will use the information to figure a foreign tax credit on Form
1116, Foreign Tax Credit (Individual, Estate, or Trust) or
Form 1118, Foreign Tax Credit—Corporations.
Part III. Used to determine the allocation and
apportionment of research and experimental (R&E) expense
and interest expense for purposes of the foreign tax credit
limitation. Also use this part to determine your share of the S
corporation’s creditable foreign taxes paid or accrued.
Shareholders will use the information to figure a foreign tax
credit on Form 1116.
Part IV. Used, in combination with other information
known to you, such as information reported on Schedule P

Cat. No. 74752V

(Form 5471), Previously Taxed Earnings and Profits of U.S.
Shareholder of Certain Foreign Corporations, to determine
your share of distributions by foreign corporations to the S
corporation that are attributable to previously taxed earnings
and profits (PTEP) in your annual PTEP accounts with
respect to the foreign corporations (which are excluded from
your gross income) or non-previously taxed earnings and
profits (E&P), and the amount of foreign currency gain or loss
on the PTEP that you are required to recognize under section
986(c). Use the information to figure and report the dividends
and foreign currency gain or loss on Form 1040.
Part V. Used to determine your income inclusions under
sections 951(a) and 951A if you are a U.S. shareholder of
any of the listed CFCs. Shareholders will use the information
to complete Form 8992, U.S. Shareholder Calculation of
Global Intangible Low-Taxed Income (GILTI), and Form 1040
with respect to subpart F income inclusions, section 951(a)
(1)(B) inclusions, and section 951A inclusions.
Part VI. Used to complete Form 8621, Information Return
by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund, and to provide information
required to determine your inclusion with respect to the
passive foreign investment company (PFIC).
Part VII. Used to determine your deemed paid taxes on
inclusions under section 951A or 951(a)(1). Shareholders
making a section 962 election will use the information to
figure a deemed paid foreign tax credit on Form 1118.

gain from each sale. If so, and you have a tax home in a
foreign country, such gain is foreign source income and
reported on Form 1116. For more information, see Column
(f). Sourced by shareholder, later.
Box 2. Foreign oil and gas taxes. A separate foreign tax
credit limitation is applied with respect to foreign oil and gas
taxes. See section 907(a) and Regulations section
1.907(a)-1 for details. If the S corporation had such taxes, it
checked box 2 and attached a partially completed Schedule I
(Form 1118), Reduction of Foreign Oil and Gas Taxes, to
Schedule K-3. You are not required to complete Form 1118;
rather, use the partially completed Schedule I and the
associated instructions to complete Form 1116, Part III,
line 12, for the applicable reduction for individuals.
Box 3. Splitter arrangements. Foreign taxes with respect
to a foreign tax credit splitting event are suspended until the
related income is taken into account by the taxpayer. See
section 909. There is a foreign tax credit splitting event with
respect to foreign taxes of a payor if in connection with a
splitter arrangement the income is, or will be, taken into
account by a covered person. See Regulations section
1.909-2(a). A covered person, as defined in Regulations
section 1.909-1(a)(4), includes, for example, any entity in
which the payor holds, directly or indirectly, at least a 10%
ownership interest (determined by vote or value). A payor, as
defined in Regulations section 1.909-1(a)(3), includes, for
example, a person that takes foreign income taxes paid or
accrued by a partnership into account pursuant to section
702(a)(6).
If the S corporation checked box 3 in Part I, it attached a
statement that separately identifies any arrangement, along
with your share of the taxes paid or accrued in connection
with the arrangement in which the S corporation participates
that would qualify as a splitter arrangement under section
909. The box should be checked only if the S corporation
knows, or has reason to know, that an entity that took into
account related income from the arrangement is a covered
person with respect to one or more shareholders. For
example, you are a payor of a foreign tax if you take into
account the foreign taxes paid or accrued by the S
corporation under section 1366(a)(1)(A). If the S corporation
wholly owns a reverse hybrid (as defined in Regulations
section 1.909-2(b)(1)(iv)) and you own 10% or more
(determined by vote or value) of the interest in the S
corporation, the reverse hybrid is a covered person with
respect to you. You cannot credit the foreign taxes paid or
accrued by the S corporation with respect to the reverse
hybrid until you or the S corporation takes into account the
related income of the reverse hybrid. Until then, the taxes are
suspended. The S corporation reported your share of the
potentially suspended taxes as a result of the application of
section 909 on Part III, Section 3, line 2E. Include on Form
1116, Part III, line 12, taxes suspended under section 909. If
you are required to complete Form 5471, Information Return
of U.S. Persons With Respect to Certain Foreign
Corporations, for a controlled foreign corporation (CFC),
include in Schedule E-1, column (d), line 3b, taxes
suspended under section 909.
If the S corporation checked box 3, and the statement
indicates that the S corporation took into account the related
income from the splitter arrangement, the taxes are partially
or fully unsuspended depending on the amount of related

Specific Instructions
Identifying Information
Item E—Part applicability. The S corporation checked the
“Yes” box to indicate the applicable parts of Schedule K-3.
The S corporation checked the “No” box to indicate the
inapplicable parts of Schedule K-3.

Part I. Shareholder's Share of
Corporation’s Other Current Year
International Information

This part reports your information for international tax items
not reported elsewhere on the Schedule K-3.

Box 1. Gain on personal property sale. In general,
income from the sale of personal property is sourced
according to the residence of the seller. See section 865. If
the S corporation sells non-depreciable personal property
(other than inventory and certain intangible property), you,
the shareholder, are treated as the seller. Therefore, you will
need to determine the source of the gain reported in Part II,
line 1, column (f). In general, if you are a U.S. citizen or
resident alien individual, the gain is U.S. source. However, a
U.S. citizen or resident alien individual with a tax home
(section 911(d)(3)) in a foreign country is treated as a
nonresident if an income tax of at least 10% is imposed by
and paid to a foreign country regarding such sale. See
section 865(g)(2). See also section 865(e)(1) and 865(h) for
other sourcing provisions for which the information provided
in box 1 may be helpful.
If the S corporation checked box 1 in Part I, use the
information attached to Schedule K-3 to determine if a
foreign country imposed a tax of at least 10% or more on the
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Instructions for Schedule K-3 (Form 1120-S) (2022)

income taken into account. Even though the taxes are
unsuspended, in certain cases you might not be eligible to
claim a credit for those taxes. To the extent you are eligible to
claim a credit for unsuspended taxes, these amounts may be
claimed on Form 1118 or 1116, as applicable. If you are
required to complete Form 5471, for a CFC, report the
unsuspended taxes on Form 5471, Schedule E-1, column
(d), line 3a.
In some cases, you may take into account related income
directly that allows you to partially or fully unsuspend taxes,
for example, by way of a subpart F or GILTI inclusion with
respect to related income.

Box 6 and the accompanying statement describe
only interest or royalty paid or accrued by the S
CAUTION corporation for which the S corporation knows, or
has reason to know, that you are disallowed a deduction
under section 267A.

!

For information about section 267A, see FAQs for section
267A, FAQs for Form 1065, Schedule B, Other Information,
question 22.
Boxes 7 through 9. If applicable, the S corporation should
have attached to the Schedule K-1 or Schedule K-3 the
relevant portions of Form 5471; Form 5713, International
Boycott Report; and other relevant international tax forms.
With respect to Forms 8858, Information Return of U.S.
Persons With Respect to Foreign Disregarded Entities
(FDEs) and Foreign Branches (FBs); and/or 8621, the S
corporation checked box 7 and/or 9, respectively, if the S
corporation attached the Forms 8858 and/or 8621 to the
Form 1120-S. If you need information from the Form 8858
and/or 8621, request such information from the S
corporation.

There might be a splitter arrangement with respect to
the shareholder even if the S corporation did not
CAUTION identify one, given that the S corporation did not
have the information available to the shareholder. Therefore,
you must identify such arrangement even if box 3 is not
checked.

!

Box 4. Foreign tax translation. If the S corporation
checked box 4, it will attach a statement described in the
instructions for Part III, Section 3.

Box 10. Shareholder loan transactions. If this box is
checked, the S corporation identified upstream or
downstream S corporation loan transactions. See
Regulations section 1.861-9(e)(8) and (9) for purposes of
determining special rules regarding interest expense
allocation and apportionment if you have such loan
transactions with the S corporation.

Box 5. High-taxed income. If the S corporation checked
box 5, you must determine if the passive income reported to
you by the S corporation is treated as income in another
separate category. Income received or accrued by a U.S.
person that would otherwise be passive income is not treated
as passive income if the income is determined to be
high-taxed income. See section 904(d)(2)(B)(iii)(II). You must
group your shares of passive income from an S corporation
according to the rules in Regulations section 1.904-4(c)(3).
However, the portion, if any, of the share of income
attributable to income earned by an S corporation through a
foreign qualified business unit (QBU) is separately grouped
under the rules of Regulations section 1.904-4(c)(4). See
Regulations section 1.904-4(c)(5)(ii). The S corporation
should have attached Attachments 1 and/or 2. Use the
attachments and your taxes on your other passive income
(that is, passive income that is not attributable to your share
of the S corporation’s income) to determine if you need to
assign passive income and the associated taxes to another
separate category of income. You must allocate and
apportion the shareholder's expenses to this passive income
to determine if the income is treated as income in another
separate category. This includes both your share of S
corporation expenses and expenses incurred by you directly.
See the Instructions for Form 1116 for how to report your
income and taxes reclassified under the high-taxed income
rule.

!

CAUTION

Box 11. Entity treatment for certain S corporations. If
this box is checked, the S corporation has made an election
under Proposed Regulations section 1.958-1(e)(2), to be
treated as owning stock of a CFC within the meaning of
section 958(a), and, therefore, the S corporation may have
an income inclusion under sections 951(a) and 951A that it
reports on Schedule K-1, line 10, Other income (loss), and
does not report in Schedule K-3, Part V.
Box 12. Form 8865 information. This box alerts you that
the S corporation attached Form(s) 8865, Return of U.S.
Persons With Respect to Certain Foreign Partnerships, to the
Form 1120-S. The S corporation is not required to attach a
copy of the form to your Schedule K-3.
Box 13. Other international items. If the S corporation has
transactions, income, deductions, payments, or anything else
that implicates the international tax provisions of the Internal
Revenue Code and such items are not otherwise reported in
this part or other parts of Schedules K-2 and K-3, the S
corporation reported that information on an attachment and
checked box 13.

Box 6. Section 267A disallowed deductions. If the S
corporation checked box 6 in Part I and attached a statement
titled “Section 267A Disallowed Deduction,” prepare your tax
return by taking into account that you are not allowed a
deduction for any of the amounts listed in the statement.
Thus, for example, do not claim as a deduction any amount
reported on lines 41 through 43 of Schedule K-3, Part II,
Section 2, to the extent listed in the statement as an amount
for which a deduction is disallowed under section 267A.

Instructions for Schedule K-3 (Form 1120-S) (2022)

The shareholder may have additional shareholder
loan transactions not identified by the S corporation
due to information not known to the S corporation.

Parts II and III

Parts II and III report information you use to figure the foreign
tax credit. In general, a U.S. individual, or a U.S. citizen or
U.S. resident individual beneficiary of certain domestic
estates and trusts, may claim a credit for taxes paid or
accrued, and in some cases deemed paid, to foreign
countries or U.S. possessions. The amount of foreign tax
credit in a tax year is generally limited to the lesser of foreign
taxes paid or accrued or U.S. tax on foreign source income.
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The limitation is figured by separate categories of foreign
source income, including foreign branch category, passive
category, and general category. A shareholder will use Form
1116 to figure its foreign tax credit, but, if the shareholder
makes a section 962 election, it must also complete Form
1118 solely with respect to its computation of deemed paid
credits for section 951(a) or section 951A inclusions. See the
instructions for Forms 1116 and 1118, as well as Pub. 514,
Foreign Tax Credit for Individuals, for a summary of the rules
for determining the source and separate categories of
income.

Because of this shareholder determination, it is not
possible for the shareholder to assume that all income of the
S corporation is U.S. source and all expenses of the S
corporation reduce U.S. source income. Also, the allocation
and apportionment of certain shareholder expenses take into
account shares of assets and income of the S corporation
that are not otherwise reported on the Schedule K-1.
For example, for sourcing purposes, personal property
sold by the S corporation is treated as sold by the
shareholders. See section 865(i)(5). Generally, income from
the sale of certain personal property (excluding inventory) is
sourced according to the residence of the seller. In cases in
which the shareholder is a pass-through entity, the S
corporation might not know the ultimate residence of the first
non-pass-through shareholder. The share of the S
corporation’s gain on the sale of personal property is not
separately stated on Schedule K-1, but is reported in
Schedule K-3, Part II.

S corporation with solely domestic activity. In many
instances, an S corporation with no foreign source income,
no assets generating foreign source income, and no foreign
taxes paid or accrued may have reported information on
Schedule K-3. For example, if you claim the foreign tax
credit, you generally need certain information from the S
corporation in Schedule K-3, Parts II and III, to complete
Form 1116. This information should have been reported to
you in prior years, including before the Tax Cuts and Jobs
Act, with or attached to the Schedules K-1, and is information
you need to figure the foreign tax credit limitation, which
determines the amount of foreign tax credit available to you.
Exceptions. You may not have received Schedule K-3 if
the S corporation was eligible for an exception. See
Domestic Filing Exception in the Instructions for Schedules
K-2 and K-3 (Form 1120-S). Also, if you (or, if you are a
pass-through trust, your beneficiary), are eligible to claim a
foreign tax credit, you did not need Schedule K-3, Parts II
and III, if you or your beneficiaries are not required to
complete Form 1116. This could be the case, for example,
because you (or if you are a pass-through trust, your
beneficiary) qualify for an exception to filing the Form 1116.
See section 904(j) and Form 1116 Exemption in the
Instructions for Schedules K-2 and K-3 (Form 1120-S).
However, see reasons below for requesting the
Schedule K-3 when you are required to file Form 1116.

As another example, the shareholder’s R&E expense
(which includes the share of the S corporation’s R&E
expense) is allocated and apportioned by the shareholder.
See Regulations section 1.861-17(f). R&E expense is
allocated and apportioned based on the gross receipts by
SIC code. The share of the R&E expense by SIC code is not
separately stated on Schedule K-1, but is reported in
Schedule K-3, Part II. Also, the shareholder needs
Schedule K-3, Part III, Section 1, for the shareholder’s share
of the S corporation’s gross receipts by SIC code for
purposes of allocating and apportioning R&E expense.
In some cases, the shareholder will be able to use the
information reported in Parts II and III to increase the foreign
tax credit limitation, and the amount of available foreign tax
credit to the shareholder. For example, Schedule K-3, Part III,
Section 2, provides the shareholder with the tax book value
of the assets of the S corporation. In general, a shareholder
apportions interest expense to reduce U.S. source gross
income or foreign source gross income based on the tax
book value of its assets, including the shareholder's share of
the S corporation’s interest expense and assets. See section
864(e)(2) and Regulations section 1.861-9(e). Taking into
account the assets of an S corporation generating solely U.S.
source income would result in more expense allocated to
U.S. source gross income and less expense allocated to
reduce foreign source gross income. Additional foreign
source income increases the shareholder’s foreign tax credit
limitation, and the ability of the shareholder to claim foreign
tax credits. Schedule K-1 does not separately state the share
of the S corporation’s interest expense, or the tax book value
of the assets. See Regulations section 1.861-9(e). See later
instructions for further guidance.

Example 1. Husband and wife, U.S. citizens, each own a
50% interest in SC, an S corporation. SC invests in a
regulated investment company. SC receives a Form 1099
from the regulated investment company reporting $100 of
creditable foreign taxes paid or accrued on passive category
foreign source income. SC does not have any foreign activity
aside from that of the regulated investment company. SC
notifies husband and wife on an attachment to the
Schedule K-1 that they will not receive the Schedule K-3
unless they so request. Husband and wife do not request
Schedule K-3 from SC for tax year 2022. Because SC
qualified for the Domestic Filing Exception, SC did not
complete Schedule K-3 for husband and wife.
Reasons to request Schedule K-3 from S corporations
with limited or no foreign activity. Section 904 generally
limits the foreign tax credit to the portion of U.S. tax liability
attributable to foreign source taxable income. Foreign source
taxable income is foreign source gross income less allocable
expenses. In general, the S corporation completed the
Schedule K-3, Parts II and III, because the S corporation’s
gross income, gross receipts, expenses, assets, and foreign
taxes paid may affect the foreign tax credit available to the
shareholder. The source of certain gross income is
determined by the shareholder. In addition, some expenses
of the S corporation are allocated and apportioned by the
shareholder.

Example 2. U.S. citizens A and B own equal interests in
SC, an S corporation. SC has no foreign activity. In Year 1, A
pays $2,000 of foreign income taxes on passive category
income other than capital gains reported to A on a payee
statement. A has interest expense of $5,000 and SC does
not have interest expense. None of A’s interest expense is
directly allocable. A does not have an overall domestic loss in
tax year 2022.
Because A must complete Form 1116 to claim a foreign
tax credit, A requests a Schedule K-3 by the 1-month date,
and therefore the Domestic Filing Exception does not apply
to SC with respect to A. SC provided Parts II and III of
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Instructions for Schedule K-3 (Form 1120-S) (2022)

Schedule K-3 to A. In Schedule K-3, Part III, Section 2,
column (a), A’s share of the tax book value of SC’s assets is
$50,000. Not including A’s share of the assets of SC, the tax
book value of A’s assets is $50,000. Of A’s assets, $10,000
generates passive category foreign source income and
$40,000 generates U.S. source income. A has passive
category foreign source taxable income before interest
expense of $8,000. A’s U.S. tax rate is 25%. A’s interest
expense and SC’s assets are characterized in the same
category under sections 163 and 469 for purposes of
Temporary Regulations section 1.861-9T(d). A uses the tax
book value (as opposed to the alternative tax book value) to
allocate and apportion interest expense.

the $2,000 of foreign taxes—an additional foreign tax credit
amount of $62.50 after taking into account A’s share of the
gross income of SC.
Because A and SC do not have R&E expense or interest
expense, and because SC did not pay or accrue any foreign
taxes, SC did not provide Schedule K-3, Part III to A.
Note. A shareholder may need the share of the S
corporation’s gross income for purposes of allocating and
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9).

Part II. Foreign Tax Credit Limitation
Column (a). U.S. source. Do not report amounts in this
column on Form 1116 or 1118 unless you elect to resource
such income under an applicable U.S. income tax treaty. See
section 904(d)(6) and section 865(h). See the instructions for
Forms 1116 and 1118 for income resourced by treaty
reported as a separate category of income.

A’s interest expense is apportioned between U.S. source
and foreign source income ratably based on the tax book
value of A’s U.S. source and foreign source assets. Without
taking into account the share of SC’s assets, the amount of
A’s interest expense that would reduce foreign source gross
income is $1,000 ($5,000 x $10,000 / $50,000). Therefore,
A’s foreign source taxable income would be $7,000 ($8,000 $1,000). At a 25% U.S. tax rate, A may only use $1,750 (25%
x $7,000) of the $2,000 of foreign taxes. See section 904.

Columns (b) through (e). Foreign source. Add the
amounts reported in these columns to your other income
earned or received directly or through other pass-through
entities in these separate categories and report the total
amounts in the applicable Form 1116, Part I, or Form 1118,
Schedule A.

Taking into account the share of SC’s assets, the amount
of A’s interest expense that reduces passive category foreign
source gross income is $500 ($5,000 x $10,000 / $100,000).
Therefore, A’s passive category foreign source taxable
income would be $7,500 ($8,000 - $500). At a 25% U.S. tax
rate, A may use $1,875 (25% x $7,500) of the $2,000 of
foreign taxes—an additional foreign tax credit amount of
$125 after taking into account A’s share of the tax book value
of the S corporation assets.

Column (f). Sourced by shareholder. You must determine
the source and separate category of the income reported in
this column. The income in this column will generally be with
respect to sale of personal property other than inventory,
depreciable property, and certain intangible property sourced
under section 865. This column might also include foreign
currency gain on a section 988 transaction. If you are a U.S.
citizen or resident, sales and gains reported in this column
will generally be U.S. source income and not reported on
Form 1116 or 1118 unless you elect to resource such income
under an applicable income tax treaty. Also, the source of
foreign currency gain or loss on section 988 transactions may
be determined by reference to the residence of the QBU on
whose books the asset, liability, or item of income or expense
is properly reflected. See the Instructions for Form 1116 or
1118 and Pub. 514 for additional details.

B does not request a Schedule K-3 from SC for tax year
2022. Under the Domestic Filing Exception, SC did not
complete Schedule K-3 for B.
Example 3. The facts are the same as in Example 2
except that A has $5,000 of expenses described in
Regulations section 1.861-8(e)(9), and A and SC have no
other expenses. Further, A’s share of SC’s gross income is
$50,000. Not including A’s share of the income of SC, A’s
gross income is $50,000. Of A’s gross income, $5,000 is
passive category foreign source gross income and $45,000
is U.S. source gross income. SC does not have any gross
income the source of which is determined by the
shareholder.

Section 1. Gross Income

A’s expenses must be ratably apportioned based on A’s
gross income (including A’s share of the income of SC). See
Regulations section 1.861-8(c)(3). Therefore, SC provided
Schedule K-3, Part II to A. Before taking into account the
share of SC’s gross income, the amount of A’s expenses
described in Regulations section 1.861-8(e)(9) that reduce
foreign source gross income is $500 ($5,000 x $5,000 /
$50,000). Therefore, A’s foreign source taxable income
would be $4,500 ($5,000 – $500). At a 25% U.S. tax rate, A
may only use $1,125 (25% x $4,500) of the $2,000 of foreign
taxes. See section 904.

Lines 1 through 24. Form 1118, Schedule A, requires a
corporation to separately report certain types of gross
income by source and separate category. Schedule K-3, Part
II, lines 1 through 23, generally follow the separately reported
types of gross income on Schedule A. Individuals must follow
the same sourcing rules, but Form 1116 only requires
reporting of total gross income from foreign sources by
separate category. Therefore, those required to file Form
1116 would report line 24, taking into account section 904(b)
(2) and PTEP adjustments, by country on their Form 1116,
Part I, line 1a. Because all gross income is reported on one
line on the Form 1116, there is no need to specify other
reporting lines for gross income below.

Taking into account the share of SC’s gross income, the
amount of A’s expenses described in Regulations section
1.861-8(e)(9) that reduce foreign source gross income is
$250 ($5,000 x $5,000 / $100,000). Therefore, A’s foreign
source taxable income would be $4,750 ($5,000 – $250). At
a 25% U.S. tax rate, A may use $1,187.50 (25% x $4,750) of

Country code. Forms 1116 and 1118 require the taxpayer
to report the foreign country or U.S. possession with respect
to which the gross income is sourced. Lines 1 through 24
report for each gross income item, 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. possession

Instructions for Schedule K-3 (Form 1120-S) (2022)

-5-

within which the gross income is sourced. If a type of income
is sourced from more than three countries, a statement is
attached to expand Schedules K-2 and K-3, Part II, for that
type of income to report the additional countries.

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 the S corporation’s annual PTEP
accounts. You will need to determine your foreign currency
gain or loss under section 986(c) with respect to distributed
PTEP sourced from annual PTEP accounts that you have
with respect to a foreign corporation, using Part IV of the
Schedule K-3.
The amount of foreign currency gain and loss that you
report on Form 1040 will include your share of the S
corporation’s foreign currency gain or loss under section
986(c) and your own foreign currency gain or loss under
section 986(c).

Note. For Part II, column (f), the S corporation entered the
code “XX” because it could not determine the country or U.S.
possession with respect to which the gross income is
sourced because the source is determined by your
residence, or if you are a pass-through trust, the residence of
the beneficiary of the trust.
The S corporation entered for column (f) the foreign
country to which the S corporation paid tax of at least 10% of
the gain. See sections 865(e) and 865(g).

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 of
the foreign currency gain or loss is determined by reference
to the residence of the taxpayer, the foreign currency gain
and loss will be reported in column (f). For example, if you
are a U.S. resident, such gain or loss is U.S. source and
would not be reported on Form 1116.

Each gross income item (for example, sales vs. interest
income) may have different countries listed on rows A, B, C,
etc., given that the S corporation might not have sales
income and interest income, for example, from the same
country. Line 24 should sum each country’s total income
reported in Part II, regardless of the line on which such
income is reported, whether A, B, C, etc.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross
income by foreign country or U.S. possession with respect to
regulated investment companies and section 863(b). See the
instructions to the Forms 1116 and 1118 for these exceptions
that apply.

Line 19. Section 951(a) inclusions. If you make a section
962 election, on Form 1118, add the amount reported on
line 19 to your other section 951(a) inclusions and report the
total on the Form 1118, Schedule A, column 3(a), by
separate category.

Note. Schedule K-3 reports gross income by country or U.S.
possession because such information is requested on Forms
1116 and 1118. Income and taxes are reported by country on
the Forms 1116 and 1118 so that the IRS may, for example,
initially evaluate whether taxpayers are claiming credits for
compulsory payments to foreign governments.

Line 21. Section 951A(a) inclusions. If you make a
section 962 election, on Form 1118, add the amount reported
on line 21 to your other section 951A(a) inclusions and report
the total on the Form 1118, Schedule A, column 3(a), by
separate category.

Lines 7 and 8. Ordinary dividends and qualified dividends. Some of the amounts reported on these lines may
be attributable to PTEP in annual PTEP accounts that you
have with respect to a foreign corporation and thus
excludable from your gross income. See the Instructions for
Form 1116 for additional information with respect to rules
regarding capital gain rate differentials (as defined in section
904(b)(3)(D)) for qualified dividends.

Line 24. Total gross income. Add the amounts reported in
rows A, B, and C (and additional rows, if applicable) to your
other foreign source gross income from those countries, and
enter the totals on Form 1116, Part I, line 1a, taking into
account any section 904(b) adjustments for capital gains, as
described above for lines 11 through 15 and 27 through 30,
or PTEP adjustments, as described above for lines 7, 8, 16,
and 46.

Lines 11 through 15 and 27 through 30. Capital gains
and losses. 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. These rules
apply to individuals and may require adjustments to the
amounts on lines 11 through 15, which in turn affects the total
amount on line 24. See the Instructions for Form 1116 for
additional information. Report lines 27 through 30 on Form
1116, Part I, line 5, by separate category.

Section 2. Deductions
Lines 25 through 54. Form 1116 requires a taxpayer to
separately report certain types of deductions and losses by
source and separate category. Separate reporting is required
because each type of deduction may be allocated and
apportioned according to a different methodology. See
Regulations sections 1.861-8 through -20. For purposes of
allocating and apportioning expenses, in general, a
shareholder adds their share of the S corporation's
deductions with other deductions incurred directly by the
shareholder or through other pass-through entities. See
Regulations section 1.861-8(e)(15). Individuals must
generally follow the same expense allocation and
apportionment rules, but Form 1116 only requires separate
reporting of certain deductions. See Form 1116, Part I, lines
2 through 5.

Line 12. Net long-term capital gain. Line 12 does not
include gains reported on lines 13, 14, and 15.
Line 14. Unrecaptured section 1250 gain. If gain is both
unrecaptured section 1250 gain and net section 1231 gain,
the gain was reported on line 14 and not on line 15, but the S
corporation included an attachment indicating the amount of
unrecaptured section 1250 gain that is also net section 1231
gain.

Line 28. Net long-term capital loss. Line 28 does not
include losses reported on line 29.

Lines 16 and 46. Section 986(c) gain and loss. These
lines report the S corporation’s share of a lower-tier
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Instructions for Schedule K-3 (Form 1120-S) (2022)

Line 32. R&E expenses. Add the R&E expenses reported
in column (f) to your other R&E expenses. After determining
the portion of such expenses that are allocable to U.S.
source income or foreign source income because they are
performed predominantly in a particular geographic area,
report the remaining R&E expense on Form 1116. See
Regulations section 1.861-17(f).

Line 1. Add the amounts reported on line 1 by standard
industrial classification (SIC) code to your other gross
receipts to apportion your R&E expense.
Line 2. Add the amounts reported on line 2 to the
shareholder's other 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. See the Instructions for Form 1116 to
determine the exclusive apportionment of the R&E expenses.

Line 38. Charitable contributions. Charitable contribution
deductions should not be reported on Form 1116 because
such deductions are allocable to U.S. source income.

Section 2. Interest Expense Apportionment
Factors

Lines 39 and 40. Interest expense specifically allocable
under Regulations sections 1.861-10 and -10T. Report
interest expense directly allocated under Regulations section
1.861-10 and Temporary Regulations section 1.861-10T on
Part I, line 2, on Form 1116.

This section includes the information you need to allocate
and apportion your interest expense for foreign tax credit
limitation purposes. Use this Section 2 to determine the
interest expense reported on Form 1116, Part I, line 4b. See
the Instructions for Form 1116. Because the interest expense
is reported on one line on the Form 1116, there is no need to
specify additional reporting on the lines below.

Lines 41 through 43. Other interest expense. On Form
1116, allocate and apportion the sum of the interest expense
included on lines 41 through 43 in column (f) and report the
allocated and apportioned amounts on the applicable
separate category Form 1116, Part I, line 4b. Interest
expense incurred by certain individuals, estates, and trusts is
allocated and apportioned based on the categories of
interest expense in sections 163 and 469: active trade or
business interest, investment interest, or passive activity
interest, adjusted for any interest expense directly allocated
under Temporary Regulations section 1.861-10T. See
Regulations section 1.861-9(e)(3) and Temporary
Regulations section 1.861-9T(d)(1) and (3).
Exception. See Regulations section 1.861-9(e)(8) and (9)
for special rules concerning downstream and upstream S
corporation loans that require a matching of related interest
income to interest expense allocations.
Exception. See Temporary Regulations section
1.861-9T(d)(1) for an exception to the apportionment of
interest expense when an individual’s foreign source income
(including income excluded under section 911) does not
exceed $5,000. Such interest expense may be allocated
entirely to U.S. source income.

Stewardship expenses. In the case of the shareholder’s
stewardship expenses incurred to oversee the S corporation,
the S corporation's value is determined and characterized
under the asset method in Regulations section 1.861-9. See
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the
reporting in Part III, Section 2, generally applies to the
shareholder’s stewardship expense apportionment.
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.
Example 4. A, a U.S. citizen, owns a 10% interest in SC,
an S corporation. SC is engaged in the active conduct of a
U.S. trade or business. SC’s business generates only
domestic source income. SC separately has an investment
portfolio consisting of several less-than-10% stock
investments. SC has a bank loan. The proceeds of the bank
loan were divided equally between the business and the
investment portfolio. A’s only business assets and
investment assets are A’s share of those owned by SC. A’s
only interest expense is that from A’s pro rata share of the SC
loan.

Line 45. Foreign taxes deductible, but not creditable.
See the Instructions for Form 1116 for examples of foreign
taxes deductible, but not creditable.

A’s share of the interest expense for SC’s business is
$2,000. It is apportioned on the basis of business assets.
Because all business income is domestic source, the
business assets are domestic assets and reported on
Schedule K-3, Part III, Section 2, column (a), line 6b. A’s
$2,000 share of the interest expense is reported on
Schedule K-3, Part II, column (f), line 41. It is apportioned to
U.S. source gross income by the shareholder, and need not
be reported on Form 1116.

Note. Foreign taxes that are creditable (even if a
shareholder chooses to deduct such taxes) are not reported
as expenses in Part II. Do not claim a foreign tax credit on
Form 1116 for amounts reported on line 45. However, you
may claim a deduction for such taxes on the applicable form,
including the Form 1040.
Creditable foreign taxes are reported in Part III, Section 3.

Part III. Other Information for
Preparation of Form 1116

The interest expense for A’s share of SC’s investments is
$2,000 and is reported on Schedule K-3, Part II, column (f),
line 42. The investment interest must be apportioned on the
basis of investment assets. A’s share of the adjusted basis in
SC’s stock is $8,000 with respect to the stock generating
domestic source income and $12,000 with respect to the
stock generating foreign source passive income. Such
amounts are reported on Schedule K-3, Part III, Section 2,
line 6c, columns (a) and (c), respectively. $800 ($8,000 /
$20,000 x $2,000) is apportioned to domestic source income
and $1,200 ($12,000 / $20,000 x $2,000) is apportioned to
foreign source passive income. The amount apportioned to

Section 1. R&E Expenses Apportionment
Factors

This section reports the information you need to allocate and
apportion your R&E expense for foreign tax credit limitation
purposes. R&E expenses are allocated and apportioned by
the shareholder. See Regulations section 1.861-17(f)(1). Use
this Section 1 to determine the R&E expense reported in
Form 1116, Part I. See the Instructions for Form 1116.
Instructions for Schedule K-3 (Form 1120-S) (2022)

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foreign source passive income is reported on the passive
category Form 1116, line 4b.

Note. If you are an accrual method taxpayer, generally you
may not claim a credit for additional taxes reported on line 3
by the S corporation unless those taxes have been paid. See
section 905(c)(2) and Regulations section 1.905-3(a).

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 S corporation in certain foreign
corporations.
The amount reported on line 7 is the value of stock of the
S corporation-owned specified 10%-owned foreign
corporation that is not a CFC.
The amount reported on line 8 is the value of the stock in
S corporation-owned CFCs.

Part IV. Distributions From Foreign
Corporations to S Corporation

Use Part IV to determine your share of distributions by
foreign corporations to the S corporation (with your share
being reported in this Part IV) that are attributable to PTEP in
your annual PTEP accounts with respect to the foreign
corporations (which you exclude from your gross income) or
non-previously taxed E&P, and the amount of foreign
currency gain or loss on distributed PTEP that you are
required to recognize under section 986(c). The amount of
foreign currency gain or loss on distributed PTEP that you are
required to recognize under section 986(c) is equal to the
excess of the U.S. dollar amount of the PTEP over your U.S.
dollar basis in the PTEP. If the distributed PTEP was
maintained in a functional currency other than the U.S. dollar,
the U.S. dollar amount of the distributed PTEP is determined
by translating the distributed PTEP into U.S. dollars using the
spot rate on the date that the PTEP was distributed. See
section 989(b)(1). Your U.S. dollar basis in the distributed
PTEP is generally equal to the U.S. dollar amount of E&P that
you previously included in gross income. See section 989(b)
(1) and (3).

Section 3. Foreign Taxes

Section 3 reports your share of the foreign taxes paid or
accrued by the S corporation by separate category and
source.

Line 1. Report the taxes on line 1 in the applicable portions
of Form 1116, Part II, for the applicable separate category of
income. To complete these portions, refer to the statement
attached to Schedule K-3, referred to earlier in the
instructions with respect to Part I, box 4, with the following
information.
• The dates on which the taxes were paid or accrued.
• The exchange rates used.
• The amounts in both foreign currency and U.S. dollars.
See section 986(a).
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).

Also use Part IV, in combination with other information
known to you, to claim and figure a foreign tax credit on Form
1116.
Include the U.S. dollar amount of E&P distributions from
qualified foreign corporations in determining the amount of
qualified dividends you report on line 3a of Form 1040. A
foreign corporation identified as a qualified foreign
corporation in column (j) that is a PFIC (as defined in section
1297) as to you for the tax year of the foreign corporation in
which the distribution was made, or the preceding tax year, is
not a qualified foreign corporation, regardless of whether it is
indicated as such in column (j). See section 1(h)(11)(C)(iii)(I)
and Notice 2004-70, 2004-44 I.R.B. 724.

Note. The shareholder takes the shareholder's share of the
S corporation’s foreign taxes into account in the
shareholder’s tax year with or within which the S
corporation’s tax year ends, regardless of whether the
shareholder or S corporation takes foreign taxes into account
on the cash or accrual basis.
Line 2. Report the total reduction of taxes for each separate
category of income on line 2 on Form 1116, Part III, line 12.
Line 3. Report the redetermined foreign taxes reported on
line 3 on the Foreign Tax Redetermination Schedule of the
Form 1116, and on an amended return, if required. See the
Instructions for Form 1116 and Regulations sections 1.905-3
through -5 for additional information.
Use the information in the attachment provided by the S
corporation to complete Schedule C (Form 1116), Foreign
Tax Redeterminations.
If the S corporation checked the “Contested tax” box and
reported information about the contested tax on line 3, the S
corporation has remitted a contested foreign income tax
liability to a foreign country, and you as the shareholder may
elect to claim a provisional foreign tax credit for your pro rata
share of such contested foreign income tax liability. See
Regulations section 1.905-1(f)(2). To make the election to
claim the provisional foreign tax credit, file Form 7204,
Consent To Extend the Time To Assess Tax Related To
Contested Foreign Income Taxes—Provisional Foreign Tax
Credit Agreement. See the instructions for Form 1116 or
Form 1118, and the instructions for Form 7204, for additional
information.

Include the U.S. dollar amount of E&P distributions from a
non-qualified foreign corporation in determining the amount
of ordinary dividends you report on line 3b of Form 1040.
However, do not include the U.S. dollar amount of E&P
distributions from a foreign corporation in determining the
amount you report on line 3a or 3b of Form 1040 to the extent
the distributions are attributable to PTEP in annual PTEP
accounts that you have with respect to the foreign
corporation, or attributable to E&P that are excludable from
your gross income under section 1293(c). See Notice
2019-01, 2019-02 I.R.B. 275.
Include the amount of foreign currency gain or loss that
you are required to recognize under section 986(c) in
determining the amount to report on Form 1040.
If the S corporation received a distribution that is
attributable to PTEP in an annual PTEP account of the S
corporation, or attributable to E&P that are excludable from
the S corporation’s gross income under section 1293(c), that
is treated as a dividend for purposes of section 1411 (that is,
for purposes of the net investment income tax) and,
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Instructions for Schedule K-3 (Form 1120-S) (2022)

therefore, may be net investment income (“NII PTEP”), it will
attach an attachment to the Schedule K-3 regarding your
share of the S corporation’s NII PTEP. If you are an individual
who is a U.S. citizen or resident, or a domestic trust or estate,
use the U.S. dollar amounts of NII PTEP reported on the
statement, and follow the Instructions for Form 8960, Net
Investment Income Tax— Individuals, Estates, and Trusts, to
figure and report your net investment income. See
Regulations sections 1.1411-1 through -10 for details. Note
that your share of a distribution received by the S corporation
that is attributable to PTEP in your annual PTEP accounts, or
attributable to E&P that are excludable from your gross
income under section 1293(c), may also be treated as a
dividend for purposes of section 1411 and, therefore, may be
NII PTEP.

you generally include in gross income a share. In such a
case, your share of the S corporation’s GILTI inclusion is
reported on Schedule K-1, line 10, Other income (loss), and
is not reported in Part V.
For each CFC listed in column (a) of which you are a U.S.
shareholder, include the amounts of subpart F income and
section 951(a)(1)(B) inclusion reported in Part V in
determining the amount you report on Schedule 1 (Form
1040), Additional Income and Adjustments to Income.
For each CFC listed in column (a) of which you are a U.S.
shareholder, report the tested income and tested loss for
each CFC on Form 8992, Schedule A, columns (c) and (d),
respectively, and include your share of each CFC's items
described in columns (i) through (n) in determining the
amount to report on Form 8992, Schedule A, columns (e)
through (j), respectively.

Note. Columns (e) and (f) are reported in the foreign
corporation’s functional currency.

Part VI. Information To Complete
Form 8621

Part V. Information on Shareholder’s
Section 951(a)(1) and Section 951A
Inclusions

U.S. persons may be required to complete and file Form
8621 and/or include amounts in income with respect to
PFICs owned through an S corporation. This includes PFICs
with respect to which no qualified electing fund (QEF) or
section 1296 mark-to-market (MTM) election has been made
and unpedigreed QEFs (section 1291 funds), as well as
PFICs with respect to which a pedigreed QEF, section 1296
MTM, or other election has been, or may be, made. For
information regarding the requirement to file Form 8621, as
well as certain filing exceptions, see Regulations section
1.1298-1 and the Form 8621 instructions.

Use Part V to determine your subpart F income inclusions
and section 951(a)(1)(B) inclusions, or your share of the S
corporation's subpart F income inclusions and section 951(a)
(1)(B) inclusions, and to complete Form 8992.
If the S corporation has made an election to be treated as
owning stock of a foreign corporation within the meaning of
section 958(a) under Proposed Regulations section
1.958-1(e)(2), and is a U.S. shareholder of the foreign
corporation during a tax year of the foreign corporation, then
any subpart F income inclusions and section 951(a)(1)(B)
inclusions with respect to the foreign corporation for such tax
year are inclusions of the S corporation, of which you
generally include in gross income a share. In such a case,
your share of the S corporation’s subpart F income inclusions
and section 951(a)(1)(B) inclusions are reported on
Schedule K-1, line 10, Other income (loss), and are not
reported in Part V.

Use the information provided in this Schedule K-3, Part VI
(including any supplemental Attachments 5 and 6, if
applicable), as instructed below to complete Form 8621 with
respect to each PFIC for which you have a filing obligation.
Additionally, for any PFIC that you own through your interest
in the S corporation, use the information provided in this
Schedule K-3, Part VI (including any supplemental
Attachments 5 and 6, if applicable), to determine your
income inclusion with respect to the PFIC (if any) and
complete your U.S. federal income tax return.

If the S corporation (i) has not made an election to be
treated as owning stock of a foreign corporation within the
meaning of section 958(a) under Proposed Regulations
section 1.958-1(e)(2); (ii) does not, pursuant to Regulations
section 1.958-1(d)(4)(i), apply Regulations section
1.958-1(d)(1) through (3) to a tax year of the foreign
corporation beginning before January 25, 2022; and (iii) is a
U.S. shareholder of the foreign corporation during such tax
year, then any subpart F income inclusions and section
951(a)(1)(B) inclusions with respect to a foreign corporation
for such a tax year are inclusions of the S corporation, of
which you generally include in gross income a share. In such
case, your share of the S corporation’s subpart F income
inclusions and section 951(a)(1)(B) inclusions are reported
on Schedule K-1, line 10, Other income (loss), and are not
reported in Part V.

If a PFIC reported on this Schedule K-3 also constitutes a
CFC within the meaning of section 957 (PFIC/CFC) and you
are a U.S. shareholder (within the meaning of section 951(b))
with respect to such PFIC/CFC, the information on this
schedule with respect to such PFIC/CFC may not be relevant
to you. The box in Section 1, column (m), will be checked if
the PFIC also constitutes a CFC. See section 1297(d) for
additional information.

Section 1. General Information on Passive
Foreign Investment Company (PFIC), Qualified
Electing Fund (QEF), or Qualifying Insurance
Corporation (QIC)
Columns (a) through (e). If you are required to complete
Form 8621 with respect to a PFIC reported on this schedule,
use this information to complete the Form 8621 background
information.

If the S corporation elected to be treated as owning stock
of a foreign corporation within the meaning of section 958(a)
under Proposed Regulations section 1.958-1(e)(2), and the S
corporation is a U.S. shareholder of the foreign corporation
during a tax year of the foreign corporation, the S corporation
determines its GILTI inclusion for its tax year in which or with
which such tax year of the foreign corporation ends, of which
Instructions for Schedule K-3 (Form 1120-S) (2022)

Columns (f) through (i). If you are required to complete
Form 8621 with respect to a PFIC reported on this schedule,
enter this information on Form 8621, Part I, lines 1 through 4.
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Note. If you are making an election under Regulations
sections 1.1291-10, 1.1297-3, or 1.1298-3 with respect to a
PFIC reported in this Schedule K-3, Part VI, you may need
additional information from the S corporation regarding the
value of the PFIC shares reported in column (i) that is not
reported here.

or a PFIC that is a “former PFIC” within the meaning of
Regulations section 1.1291-9(j)(2)(iv), you may need
additional information from the S corporation that is not
reported in this Schedule K-3, Part VI, including information
regarding the PFIC’s E&P.

Section 2. Additional Information on PFIC or
QEF

Column (j). This column will indicate to you (using the
codes below) whether the S corporation has made an
election with respect to the PFIC that binds the shareholders.

Note. The S corporation will complete Section 2 with respect
to each PFIC reported on Section 1, and each line completed
for a PFIC in Section 1 corresponds to the same line on
Section 2. If the PFIC has no current year activity, or has no
other information for the corporation to report in columns (c)
through (o), the S corporation will only include the name and
EIN of the PFIC or QEF in columns (a) and (b) and will leave
columns (c) through (o) blank with respect to that PFIC.

S Corporation Election Codes
Code

Election Type

QEF

Qualified Electing Fund Election

MTM

Section 1296 Mark-to-Market Election

QEF Information

Note. In general, if the S corporation has made a pedigreed
QEF or section 1296 MTM election with respect to a PFIC,
the S corporation is not required to complete Schedule K-3,
Part VI, with respect to that PFIC if the S corporation files
Form 8621 for that PFIC. In that case, you may not be
required to file Form 8621 with respect to that PFIC and
income inclusions with respect to the PFIC, if any, will be
figured by the S corporation and reported to you in
Schedule K-1, Part III. However, if the S corporation has
made a pedigreed QEF or section 1296 MTM election with
respect to a PFIC for which the S corporation does not file
Form 8621, if the S corporation owns stock of an
unpedigreed QEF, or if the S corporation is making a section
1296 MTM election with respect to stock in a PFIC in the
current tax year if the current tax year is not the first year of
the S corporation’s holding period in such stock (“non-initial
section 1296 MTM election”), it is required to complete
Schedule K-3, Part VI, with that PFIC’s information, and you
may be required to file Form 8621 with respect to that PFIC.
See Regulations section 1.1298-1(b)(2) and the Form 8621
instructions for additional information.
Additionally, if the S corporation marks to market stock of
a PFIC as described in Regulations section 1.1291-1(c)(4),
the S corporation generally does not need to report
information about the PFIC in Schedules K-2 and K-3, Part
VI. In such a case, the S corporation should report its MTM
gain or loss on Schedule K and report your share of such
amounts in Part III of Schedule K-1. Note, however, in such a
case there may be instances in which you will need
additional information from the S corporation to meet your tax
obligations with respect to a PFIC for which the S corporation
has marked to market the stock as described in Regulations
section 1.1291-1(c)(4), such as when section 1291 rules
apply to you because the stock was not marked by the S
corporation in the first year of its holding period. In such
instances, the S corporation should provide you with the
needed information and may use Schedule K-3, Part VI, to do
so.

Columns (c) and (d). This information is to assist you in
determining your income inclusions from certain PFICs with
respect to which a QEF election has been made.
If the S corporation has made a pedigreed QEF election
with respect to a PFIC, and the S corporation files Form 8621
for that PFIC, such PFIC will not be reported in Schedule K-3,
Part VI. In that case, your share of the S corporation’s QEF
inclusions, if any, will be reported to you in Schedule K-1,
Part III. However, in the event the S corporation does not file
Form 8621 for a PFIC with respect to which the S corporation
has made a pedigreed QEF election, or if the S corporation
owns stock of an unpedigreed QEF, you may be required to
file Form 8621 for that PFIC. See Regulations section
1.1298-1(b)(2) for additional information.
If you are required to file Form 8621 with respect to a PFIC
reported in Schedule K-3, Part VI, enter your share of the S
corporation’s QEF ordinary earnings and net capital gain
inclusions from columns (c) and (d) on Form 8621, Part III,
lines 6a and 7a, respectively, and include these amounts in
gross income on your U.S. federal income tax return unless
you are making an election under section 1294 with respect
to the QEF for the current tax year. If you are making a
section 1294 election with respect to the QEF for the current
tax year, use the rest of Form 8621, Part III, lines 8 and 9, to
determine the amount of deferred tax with respect to the QEF
for the current tax year.

Mark-to-Market Information
Columns (e) and (f). This information is to assist you in
determining your gain or loss from certain PFICs with respect
to which an MTM election under section 1296 has been
made (MTM PFIC), including PFICs with respect to which the
S corporation is making a non-initial section 1296 MTM
election.
If the S corporation has made an MTM election under
section 1296 with respect to a PFIC (other than a non-initial
section 1296 MTM election), and the S corporation files Form
8621 for that MTM PFIC, such MTM PFIC will not be reported
in Schedule K-3, Part VI. In that case, your share of the S
corporation’s MTM gain or loss, if any, will be reported to you
in Schedule K-1, Part III. However, in the event the S
corporation does not file Form 8621 for an MTM PFIC or if
the S corporation is making a non-initial section 1296 MTM

Columns (k) through (n). Use the information provided in
these columns to make certain elections with respect to a
PFIC in Form 8621, Part II. If you do not intend to make any
election with respect to a PFIC reported in this Schedule K-3,
Part VI, you may generally ignore these boxes for such PFIC.
If you are making an election under Regulations sections
1.1291-9, 1.1297-3, or 1.1298-3 with respect to a PFIC/CFC,
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Instructions for Schedule K-3 (Form 1120-S) (2022)

election with respect to a PFIC, the shareholder may have a
reporting obligation with respect to such PFIC. See
Regulations section 1.1298-1(b)(2) for additional information.
The S corporation is also not required to complete
Schedule K-3, Part VI, with respect to a PFIC if it has marked
stock of a PFIC to market as described in Regulations
section 1.1291-1(c)(4), though it may provide you with certain
information in Schedule K-3, Part VI, if the PFIC stock is not
marked to market in the first year of the S corporation's
holding period.
If you are required to file Form 8621 with respect to an
MTM PFIC reported in Schedule K-3, Part VI, enter the
amount in column (f) on Form 8621, Part IV, line 10a. You
may need additional information from the S corporation
regarding your share of its adjusted tax basis in the MTM
PFIC stock to complete the rest of Form 8621, Part IV. Your
share of the S corporation’s adjusted tax basis in the MTM
PFIC stock may be equal to your share of the fair market
value of the stock at the beginning of the prior tax year
reported in column (e). However, your share of the S
corporation’s adjusted tax basis in the MTM PFIC stock may
not be equal to the fair market value of the stock at the
beginning of the prior tax year, depending on the amounts of
the S corporation’s prior year income inclusions and the
amounts for which the S corporation was allowed a
deduction with respect to the MTM PFIC. Once you
determine your share of the S corporation’s adjusted tax
basis in the MTM PFIC shares, enter this amount on Form
8621, Part IV, line 10b, and use the rest of Form 8621, Part
IV, lines 10c through 12, to determine your MTM gain or loss
to include in your U.S. federal income tax return.
Additionally, if the S corporation is making a non-initial
section 1296 MTM election with respect to a PFIC, you
should use the information for that PFIC in columns (g)
through (o) and the corresponding instructions described
below to determine whether you have received an excess
distribution with respect to the PFIC stock, or whether your
pro rata share of the S corporation’s section 1296(a) gain for
the tax year (if any) is treated as an excess distribution. This
will help you determine any corresponding other income,
additional tax, and interest charges under section 1291.

listed with respect to a PFIC, you may have a different
holding period with respect to such PFIC stock.

Section 1291 and Other Information

Column (i). This information is to help you assess any
information related to the date of a distribution from a PFIC.
You do not need to enter these dates on Form 8621 or on
your U.S. federal income tax return.

Column (h). Your share of the amount of cash and fair
market value of property distributed by the PFIC during the
tax year may be reported in different parts of Form 8621, or
not reported at all on Form 8621.

Where on Form 8621 To Report Distributions
From PFICs
IF you are a shareholder of a...

Section 1291 fund, PFIC with respect to which enter this amount on
the S corporation is making a non-initial section Form 8621, Part V,
1296 MTM election, or a PFIC that now may be line 15a.
treated as a QIC, and for which you are
required to file Form 8621,
QEF for which you are not making a section
1294 election for the current tax year,

you do not need to
enter this on Form 8621.

QEF for which you are making a section 1294
election for the current tax year,

enter this amount on
Form 8621, Part III,
line 8b.

MTM PFIC (other than a PFIC with respect to
which the S corporation is making a non-initial
section 1296 MTM election),

you do not need to
enter this on Form 8621.

Note. Deemed distributions by QEFs are not reported in
Schedule K-3, Part VI. If you make, or have made, an
election under section 1294 and are deemed to have
received a distribution from the QEF, this information is
required to complete Form 8621. See section 1294(f) and
Temporary Regulations section 1.1294-1T for additional
information.
Note. If you have made a section 1294 election with respect
to a QEF owned by the S corporation, a distribution of
earnings by the QEF will terminate the section 1294 election
to the extent the election is attributable to the earnings
distributed. In such a case, enter the amount of such
distribution on Form 8621, Part VI, line 22. See Temporary
Regulations section 1.1294-1T(e) and the Form 8621, Part
VI, instructions for additional information.

Note. Generally, this information is to assist you in satisfying
any information reporting obligations for, and in figuring
income inclusions with respect to, section 1291 funds.
However, except as otherwise provided, this information may
be relevant to PFICs with respect to which a pedigreed QEF
election, section 1296 MTM election (including a non-initial
section 1296 MTM election), or other election has been
made by you or the S corporation.

Column (j). This information is to help you assess any
available foreign tax credit attributable to an excess
distribution from a section 1291 fund or PFIC with respect to
which the S corporation is making a non-initial section 1296
MTM election in which you are a shareholder through your
ownership in the S corporation. If you are required to file
Form 8621 with respect to such a PFIC owned by the S
corporation, use this amount to determine your foreign tax
credit to include on Part V, line 16d. See section 1291(g) for
additional information on creditable foreign taxes.

Column (g). This information is provided to help you assess
your holding period in the PFIC stock through your ownership
in the S corporation. Unless also provided in Section 1,
column (g), with respect to an acquisition of stock in the PFIC
during the S corporation’s tax year, these dates do not need
to be entered on Form 8621 or on your U.S. federal income
tax return.

Column (k). This information is to help you assess your
excess distribution and resulting other income, additional tax,
and interest charge with respect to each section 1291 fund in
which you are a shareholder through your ownership in the S
corporation or for a PFIC with respect to which the S
corporation is making a non-initial section 1296 MTM

Note. The dates entered in this column (g) will be the dates
on which the S corporation acquired the PFIC stock. If you
acquired your interest in the S corporation after the date
Instructions for Schedule K-3 (Form 1120-S) (2022)

THEN...

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election. If you are required to file Form 8621 with respect to
such a PFIC owned by the S corporation, use this amount to
determine the amount to include on Part V, line 15b, and use
the rest of Form 8621, Part V, lines 15 and 16, to determine
the amount of any excess distribution and resulting other
income, additional tax, and interest charge to include on your
U.S. federal income tax return with respect to the section
1291 fund.

Individuals, estates, and trusts may claim a foreign tax
credit for foreign income taxes deemed paid with respect to a
CFC if they make an election under section 962.
To figure the foreign taxes deemed paid by a shareholder
that is U.S. shareholder of a CFC owned by an S corporation,
the income, deductions, and taxes of the CFC must be
assigned to separate categories of income and then to
income groups in those separate categories. See
Regulations section 1.960-1(c)(1). This is completed on
Schedule Q (Form 5471), CFC Income by CFC Income
Groups. The income groups include the subpart F income
group, the tested income group, and the residual income
group. Each single item of foreign base company income as
defined in Regulations section 1.954-1(c)(1)(iii) is a separate
subpart F income group. See Regulations section 1.960-1(d)
(2)(ii)(B). The tested income group consists of tested income
within a section 904 category. See Regulations section
1.960-1(d)(2)(ii)(C). The residual income group consists of
any income not in the other income groups or in a PTEP
group. See Regulations section 1.960-1(d)(2)(ii)(D). See
Regulations section 1.960-3(c)(3) with respect to the PTEP
groups. The PTEP groups are not reported in this
Schedule K-3, Part VII.

Note. The information in column (k) is only relevant with
respect to section 1291 funds and PFICs with respect to
which the S corporation is making a non-initial section 1296
MTM election and is not relevant for any PFIC with respect to
which a pedigreed QEF election or other section 1296 MTM
election has been, or may be, made.
Column (l). This information is provided to help you assess
the treatment to you on any disposition by the S corporation
of stock in a PFIC in combination with column (g). These
dates do not need to be entered on Form 8621.
Note. Your holding period of the PFIC stock may have
begun on a different date than the S corporation’s holding
period.
Columns (m) through (o). This information is to assist you
in figuring any gain or loss on the S corporation’s disposition
of PFIC stock.
For each section 1291 fund in which you are a
shareholder through your ownership in the S corporation or
for any PFIC with respect to which the S corporation is
making a non-initial section 1296 MTM election for which you
are required to file Form 8621, enter the amount in column
(o) on Form 8621, Part V, line 15f, and use the rest of Form
8621, Part V, line 16, to determine the amount of any
resulting other income, additional tax, and interest charge to
include on your U.S. federal income tax return with respect to
the PFIC.
For each MTM PFIC in which you are a shareholder
through your ownership in the S corporation (including PFICs
with respect to which the S corporation is making a non-initial
section 1296 MTM election), and with respect to which you
are required to file Form 8621, enter the amounts in columns
(m) and (n) on lines 13a and 13b, respectively, of Form 8621,
Part IV. Complete the rest of Form 8621, Part IV, lines 13 and
14, to determine your MTM gain or loss to include on your
U.S. federal income tax return.
For each QEF in which you are a shareholder through
your ownership in the S corporation with respect to which you
have previously made a section 1294 election, and for which
you are required to file Form 8621, if amounts are reported in
columns (m) through (o) with respect to such QEF, the
disposition may have partially or completely terminated your
election, and you may need to complete Form 8621, Part VI,
lines 22 through 24. See Temporary Regulations section
1.1294-1T and the Form 8621 instructions for additional
information.

Schedule K-3, Part VII, reports your share of the CFC's net
income in each income group in functional currency. An
elector under section 962 will report the elector’s share of the
net income in the subpart F income groups by CFC in column
8(a) of Form 1118, Schedule C (section 960(a)). The
shareholder must also complete column 5 of Form 1118,
Schedule C, with information from Schedule K-3, Part VII. An
individual electing under section 962 will report the electing
individual's share of the net income in the tested income
group by CFC on Form 1118, Schedule D (section 960(d)).
Note. The amount entered in column 8(a) will not equal the
share of the net income in the subpart F income group if
there is a qualified deficit. See Regulations section
1.960-2(b)(3)(ii).
The S corporation must attach a Schedule Q (Form 5471)
to each Schedule K-3. The shareholder will use Schedule Q
(Form 5471) to determine the total net income in the subpart
F income groups of the CFC to report on column 6 of Form
1118, Schedule C, and the total current year taxes by
subpart F income groups of the CFC, to report on column 7
of Form 1118, Schedule C. This will allow the shareholder to
figure the taxes deemed paid with respect to section 951(a)
(1) inclusions by subpart F income group on Form 1118,
Schedule C. Similarly, the shareholder will use Schedule Q
(Form 5471) to determine the total tested taxes in that group
to determine the pro rata share of tested foreign income
taxes to report on Form 1118, Schedule D, column 8.
Example 5. In Year 1, USC, an S corporation, has two
U.S. citizen shareholders with equal interests in the S
corporation. Both shareholders make elections under section
962. USC wholly owns CFC. CFC earns passive category
interest income sourced from Country X of 100u and pays a
withholding tax of $20 to a foreign country. USC completes
Form 5471, including Schedule Q, for CFC. The code for
Country X is “X.” On Schedule Q (Form 5471), USC reports
the following.

Part VII. Shareholder's Share of S
Corporation's Interest in Foreign
Corporation Income (Section 960)
Note. Amounts in this part are reported in foreign currency
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Instructions for Schedule K-3 (Form 1120-S) (2022)

On Form 1118, Schedule C, with respect to the passive
category each shareholder reports with respect to the
information received on Schedule K-3 (including the attached
Schedule Q (Form 5471)) as follows.

Example 5, USC’s Schedule Q (Form 5471) for
CFC
A

PAS

B

i
(i)

(xii)

Example 5, Shareholder’s Form 1118, Schedule C

(xvi)

1
a (1)

CFC

XX

$20

100u

In Schedule K-3, Part VII, USC reports the following to
each of its shareholders.

PAS

C

i
(i)

(ii)

X

50u

1
a (1)

CFC

Instructions for Schedule K-3 (Form 1120-S) (2022)

5a

5b

5c

6

7

8a

9

10

CFC

DIRRA

i

CFC

100u

$20

50u

0.500

$10

Note. If an S corporation reported information with respect to
a PFIC in this Part VII, it may have attached a statement that
includes all of the information on Schedule Q (Form 5471),
with respect to the PFIC. See section 1293(f) with respect to
QEF inclusions from a PFIC.

Example 5, USC’s Schedule K-3, Part VII for
Shareholders
A

1a

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