Schedule K-3 Example
Gross Income
For each line 24 (Total gross income) country entry on Schedule K-3, Part II, Section 1, add a separate row for the country and select
Total gross income(sum of lines 1 - 23)
. Enter amount(s) in the row in the appropriate columns. (ONESOURCE Trust Tax uses entries in only the Foreign Branch Category Income
, Passive Category Income
, General Category Income
and Other Income
columns.) Gross income from a country is not included on Form 1116 or the beneficiary output unless an entry is made in the Total gross income (sum of lines 1 - 23)
row.For each line 8 (Qualified dividends) country entry on your Schedule K-3, Part II, Section 1, add a separate row for the country and select
Qualified dividends
. Enter amount(s) on the row in the appropriate columns. (ONESOURCE Trust Tax uses entries made in only the Foreign Branch Category Income
, Passive Category Income
, General Category Income
and Other Income
columns.)note
Other than the ones listed above, entries do not need to be made in other columns or rows.
When entering a country, enter a valid foreign country.
UNITED STATES OF AMERICA
, NO COUNTRY SELECTED
and UNKNOWN COUNTRY
are not valid foreign country entries. Information entered for the UNITED STATES OF AMERICA
country is not considered in ONESOURCE Trust Tax foreign tax computations.Foreign Taxes
For each line 1 (Direct foreign taxes) country entry on Schedule K-3, Part III, Section 4 (Section 3 for an 1120-S Schedule K-3), line 1, add a separate row for the country and enter the amount of foreign tax paid on foreign source income in the
Foreign
column of the appropriate income category(or categories). The Type of Tax
entry determines whether column q, r, s or t is populated on Form 1116, Part II.Entries made in other columns (the columns for
U.S.
, Partner
, and Total
) are not currently used in ONESOURCE Trust Tax computations. Entries do not need to be made in these columns.When entering a country, enter a valid foreign country.
UNITED STATES OF AMERICA
, NO COUNTRY SELECTED
and UNKNOWN COUNTRY
are not valid foreign country entries.Deductions
Deductions are not entered by country but rather as totals for the partnership or S-Corporation.
Only entries related to Schedule K-3, Part II, Section 2 lines 25 through 38 and 44 through 50 are currently used by ONESOURCE Trust Tax. Enter these amounts in the
Foreign Branch Category Income
, Passive Category Income
, General Category Income
and Other Income
columns.Entries made in other columns (the columns for
U.S.
, Partner
, and Total
) are not currently used in ONESOURCE Trust Tax computations. Entries do not need to be made in these columns.Foreign Tax Output
ONESOURCE Trust Tax computations and output are similar to that provided in past years. Foreign tax information is allocated between the trust or estate and the beneficiaries (both charitable and non-charitable) based on how foreign taxable income was distributed (unless an option was indicated to retain or distribute all foreign taxes was made). Typically, this results in the foreign tax information allocation being based on the distribution of DNI.
For example, if DNI is positive and 90 percent of the DNI is distributed, then 90 percent of the foreign tax information is included on each beneficiary K-1 (and any underlying statements) and 10 percent is reported on Form 1116.
In this Schedule K-3 example, assume that 90 percent of the DNI was distributed to one beneficiary and there is no other foreign tax information in the account.
Austria
$6,000 of foreign income (passive) was from Austria, all of which was comprised of qualified dividends. $800 of foreign tax was paid on this income.
Belgium
$10,000 of foreign income (passive) was from Belgium, none of which was qualified dividends. $2,000 of foreign tax was paid on this income.
Deductions
$1,600 of deductions related to foreign source passive income ($1,200 for Other losses and $400 for Allocable rental expense other than depreciation, depletion and amortization) was reported on Schedule K-3. Form 1116 instructions indicate that the expense reported on these lines of the Schedule K-3 (lines 31 and 34, respectively) are considered expenses definitely related to foreign source income. Based on the relative gross foreign income in the account, these deductions are allocated between Austria ($600 = $1,600 x $6,000/$16,000) and Belgium ($1,000 = $1,600 x $10,000/$16,000).
Beneficiary Output
In this example, the beneficiary received 90 percent of the DNI. As a result, 90 percent of the foreign tax information was reported on Schedule K-1 and the accompanying statement.
Schedule K-3 applies to only partnerships (1065) and S-Corporations (1120-S), not to trusts or estates (1041). The beneficiary output format is the same as in past years.
Form 1116 (Trust or Estate's Share of Foreign Tax Information)
In this example, 10 percent of the DNI was trapped in the trust. As a result, 10 percent of the foreign tax information was used in the Form 1116 computations.
Other Form 1116 Comments
Form 1116 computations are basically the same as those available in prior years with exception to the computation of line 2 as previously discussed and the reporting of high-taxed income. Note the following:
- Part I, line 1- These amounts are often adjusted as a result of qualified dividends. If adjusted, a separate statement is generated to support the computation.
- Part I, lines 3 through 5- These lines are computed only if theAllocate expenses against foreign income on Form 1116Compute-Federal option is set toYes.
- Line 3a- Unless overridden, this line is computed as equal to Form 1041, line 16 (total deductions) less line 13 (charitable deductions).
- Line 3d- This line equals Form 1116, line 1a without regard to any qualified dividend adjustment.
- Line 3e- This line equals gross income. Gross gains are included in this computation.
- Form 1116, Schedule B (Foreign Tax Carryover Reconciliation Schedule)- This form was made available for 2022 processing in the 23.01 release. It is generated when there is foreign tax carryover from a prior year or where all or part of the current year foreign tax is carried over. The form is only included in e-filing if there is a foreign tax carryover from a prior year. If there are foreign taxes carried over from a prior year but no current year foreign tax retained in the trust or estate, then Form 1116, Schedule B is generated even though Form 1116 is not generated.