A partnership should report its accrued original issue discount (OID) and OID income taxable on a gross basis to a foreign partner on Section 1 of Part X of Schedules K-2 and K-3 (Form 1065) as follows:
- Accrued OID:
- Report the accrued OID on Schedule K-2, Part X, column (f) as interest income. This amount should also be included in column (a) for the total.
- Attach a statement to Form 1065 with respect to Part X clarifying that these amounts are not taxable to foreign partners and do not need to be reported on the foreign partner’s tax return.
- OID Payments or Gains Taxable on a Gross Basis:
- When the partnership receives payments on the OID instrument or gains on the sale or exchange of the OID instrument that are taxable on a gross basis to foreign partners, these amounts should be reported in Schedule K-2, Part X, column (e), as interest income or gain, as appropriate.
- These amounts should also be entered as a negative adjustment in column (f) to ensure that the total OID reported on Part X reconciles with OID reported on Form 1065, Schedule K.
- Attach a statement explaining that the negative adjustment in column (f) is for reconciliation purposes only and is not relevant to the foreign partner’s tax liability and therefore does not need to be reported on the foreign partner’s tax return.
- Schedule K-3 Reporting:
- On Schedule K-3, Part X, report the foreign partner’s distributive share of the accrued OID amounts in column (f) for the total and in column (e) for the amounts taxable on a gross basis.
- Ensure that the negative adjustment for reconciliation purposes is also reflected on Schedule K-3, Part X, column (f).
By following these steps, the partnership ensures accurate reporting of OID income and compliance with the requirements for foreign partners.
Sources:
Instructions for Form 1065 (2023)
Publication 515 (2024)
Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2023)
Partner’s Instructions for Schedule K-3 (Form 1065) (2023)
Instructions for Schedules K-2 and K-3 (Form 8865) (2023)
Partner's Instructions for Schedule K-1 (Form 1065-B) (2017)
Instructions for Form 1118 (12/2023)
