As you start analyzing your borrower’s 2021 tax returns, you may find the new Schedule K-2 and Schedule K-3 included with your borrower’s business tax returns and associated Schedule K-1s. These new schedules may look daunting as they can include a ton of information, but we’re here for you to breakdown what these new schedules actually tell us.  

The Schedule K-2 is included with your borrower’s Form 1065 or Form 1120-S and reports the items of international tax relevance from the operation of the partnership or S corporation. The Schedule K-3 is an extension of the Schedule K-1 that will report a partner’s or shareholder’s respective share of their items included on the Schedule K-2. In other words, these new schedules are simply providing detail regarding a business’ foreign income and foreign transactions in a standardized format. The 2020 1065 Schedule K-1 captured the majority of this information under Part III Line 16. Now the IRS has created the Schedule K-2 and Schedule K-3 to provide a standardized and uniform format for reporting this information.  
 
The important question is how does this affect our cash flow analysis? The simple answer is it doesn’t. The key items of cash flow that we capture from our borrower’s K-1s like capital contributions, distributions, and guaranteed payments are not affected by these new schedules. You may find the Schedule K-3 included with your borrower’s Schedule K-1 if the business had items of international tax relevance and you can disregard the Schedule K-3 from your cash flow analysis. As our borrower’s tax returns continue to change year over year, we are here at Bukers updating our Bukers software and training materials to accurately capture all tax law and tax form changes.  

If you have any questions, please reach out to our Bukers Hotline at 503-520-1303.