Form 8865 Checklist: 2021 Tax Year Return of U.S. Persons With Respect to Certain Foreign Partnerships
Purpose
U.S. persons use Form 8865 to report ownership interests, transactions, and income related to foreign partnerships for the 2021 tax year. The form continues to implement the Tax Cuts and Jobs Act (TCJA) provisions and introduces Schedule K-2 (Form 8865) for reporting items of international tax relevance.
For 2021, the IRS provided transition penalty relief under Notice 2021-39 for Schedule K-2 reporting. Filers who made a reasonable faith effort to comply with the new requirements would not be penalized for incorrect or incomplete Schedule K-2 disclosures during this first year of implementation.
Key reporting areas for 2021 include:
● Section 250 foreign-derived intangible income (FDII)
● Section 267A disallowed interest and royalty deductions
● Section 721(c) partnerships
● Section 864(c)(8) foreign partner tracking
● International tax items reported on Schedule K-2
Filer Categories (2021)
Before completing Form 8865, determine all applicable filer categories. A filer may qualify under more than one category and must check all applicable boxes in Part A.
● Category 1: U.S. persons who controlled the foreign partnership at any time during the tax year. Control means more than 50% ownership of capital, profits, or deductions/losses, including direct and constructive ownership under IRC section 267(c).
● Category 2: U.S. persons who owned at least 10% of the partnership while the partnership was controlled by U.S. persons, each owning at least 10%.
Important: If a Category 1 filer exists for the partnership during the tax year, no Category 2 filer is required.
● Category 3: U.S. persons who contributed property to a foreign partnership under section 721 and either:
○ Owned at least 10% (directly or constructively) immediately after the contribution, or
○ Contributed property exceeding $100,000 in value, including related-party contributions within the prior 12 months.
● Category 4: U.S. persons with reportable events under section 6046A, including acquisitions, dispositions, or changes in direct proportional interests of at least 10%.
A separate Form 8865 must be filed for each foreign partnership.
Year-Specific Filing Steps for 2021
1. Complete Partnership Identification Information (Parts G and H)
Enter the partnership’s name, address, country of organization, principal business activity code, functional currency, and exchange rate used. If the partnership’s tax year differs from the filer’s tax year, clearly disclose both year-end dates to prevent reconciliation issues on Schedule N and Schedule K-2.
2. Report Foreign Partnership Liabilities (Part C)
Itemize liabilities as:
● Nonrecourse liabilities
● Qualified nonrecourse financing
● Other liabilities
Accurate liability classification affects partner basis calculations and loss limitations under sections 465 and 752.
3. Address Section 267A Disallowed Interest or Royalty (Part H, Line 5)
Indicate whether the partnership paid or accrued interest or royalty payments during 2021 that were disallowed under section 267A due to hybrid mismatch or branch payment rules.
If “Yes,” enter the total disallowed amount and attach a detailed statement. This disclosure is mandatory under TCJA anti-avoidance provisions.
4. Complete Schedule B (Trade or Business Income and Expenses)
Report only ordinary trade or business income and expenses on lines 1a–22. Do not include capital gains, rental income, guaranteed payments, or portfolio items. Proper classification is critical, as misreporting affects Schedule N and Schedule K-2 international disclosures.
5. Complete Schedule K (Partners’ Distributive Share Items)
Populate all applicable Schedule K lines, including:
● Ordinary income or loss (Line 1)
● Guaranteed payments (Line 4c)
● Capital gains and losses (Lines 8–10)
● Self-employment earnings (Lines 14a–c)
● Credits (Line 15)
● AMT items (Line 17)
Line 16 includes an indicator that the partnership has items of international tax relevance and completed Schedules K-2 and K-3.
6. Prepare and Attach Schedule K-2 (Form 8865), if Required
Schedule K-2 reports items of international tax relevance, including:
● Foreign tax credits
● Transfer pricing items
● Subpart F income
● GILTI
● FDII
● Foreign currency gains and losses
Schedule K-2 follows the same line structure as Schedule K. For 2021, Notice 2021-39 provides penalty relief for good faith compliance efforts, even if reporting was incomplete or contained errors.
7. Complete Schedule O and Schedule P, if Applicable
● Schedule O: Required for Category 3 filers to report property contributions under section 721, including asset descriptions and fair market values.
● Schedule P: Required for Category 4 filers to report acquisitions, dispositions, or proportional ownership changes meeting reportable thresholds.
These schedules document cross-border property transfers and ownership changes.
8. Complete Schedule L and Schedule M-1 (and M-2, if Required)
Category 1 filers must complete:
● Schedule L (Balance Sheets)
● Schedule M-1 (Book-to-Tax Reconciliation)
● Schedule M-2 (Capital Accounts), if applicable
The small partnership exception applies only if both conditions are met:
● Total receipts under $250,000, and
● Total assets under $1,000,000 at year-end
If either threshold is exceeded, all schedules must be completed.
9. Complete Schedule N (Related-Party Transactions)
Report all transactions between the partnership and related parties, including:
● Sales and purchases
● Services
● Rents and royalties
● Borrowing and lending
For Schedule N, Lines 20–21 (loans), report the maximum outstanding balance during the tax year, not year-end or average balances. This reporting standard has been consistently required and is critical for transfer pricing and controlled partnership compliance.
10. Address Section 721(c) Partnership Status (Part H, Line 6)
Indicate whether the partnership qualifies as a section 721(c) partnership under Regulations §1.721(c)-1(b)(14). An affirmative answer may require additional reporting on Schedule K-2 and completion of Schedules G and H related to built-in gain tracking.
11. Disclose Dual Consolidated Loss (Part I, Lines 10a–10b)
Determine whether you hold a separate unit or a combined separate unit under Regulations §1.1503(d)-1. If a dual consolidated loss exists and an inconsistent treatment position is taken, attach Form 8833 to disclose the position.
12. Signature and Assembly Review
The general partner or authorized member must sign under penalties of perjury. If filing separately from the income tax return, ensure the appropriate box is checked and the signature section is completed. Paid preparers must include a valid PTIN.
2021 IRS Updates and Compliance Notes
● Schedule K-2 Introduction: First required for 2021, with transition penalty relief provided under Notice 2021-39.
● Section 250 FDII Reporting: Filers claiming FDII must separately report gross income from sales, licenses, and services involving the foreign partnership.
● Section 267A and 721(c): Continued heightened scrutiny under TCJA anti-hybrid and gain deferral rules.
● Parallel K-2/K-3 Rules: Similar international reporting applies to domestic passthrough entities (e.g., Form 1120-S), also subject to transition relief.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
