Form 8865 Checklist: 2023 Tax Year Return of U.S. Persons With Respect to Certain Foreign Partnerships
Purpose
Form 8865 reports U.S. persons' interests in certain foreign partnerships for the 2023 tax year. This form is required under three IRC Sections: Section 6038 (controlled foreign partnerships), Section 6038B (transfers to foreign partnerships), and Section 6046A (acquisitions, dispositions, and changes in foreign partnership interests).
The 2023 version continues the expanded international tax reporting through Schedule K-2 (Form 8865), which consolidates items previously reported on Schedule K, line 16 (Foreign transactions) and specific line 20 (Other information) items for tax years beginning after 2020. Taxpayers must report foreign income, foreign sources of income, and foreign currency transactions to ensure compliance with IRS tracking filing requirements.
Required Steps for 2023 Filing
1. Confirm Filer Category
Confirm the filer category (1, 2, 3, or 4) per the 2023 instructions and filing categories under Taxpayer Categories guidelines:
● Category 1: applies to U.S. persons who controlled the foreign partnership (i.e., held more than a 50% interest).
● Category 2: applies to U.S. persons who owned a 10% or greater interest while the partnership was controlled by United States persons (each owning at least 10%), but only if no Category 1 filer existed.
● Category 3: applies to U.S. persons who contributed property to a foreign partnership in exchange for at least a 10% interest or when contributions exceeded $100,000 within a 12-month period.
● Category 4: applies to U.S. persons who experienced reportable events: acquiring a direct interest that reaches or exceeds 10%, disposing of an interest that drops below 10%, or experiencing changes in proportional interest of at least 10% compared to the last reportable event.
2. Report Consolidated Group Parent Information (Item D)
Report the filer's consolidated group parent information if applicable. If the filer is a member of a consolidated group but not the parent corporation, list the name, address, and EIN of the common parent. This requirement has existed in prior years and is not unique to 2023.
3. Complete Item E—Form 8938 Coordination
Complete Item E by checking the box if any excepted specified foreign financial assets are reported on this form. Check this box only if the filer also files Form 8938, Statement of Specified Foreign Financial Assets, and includes this Form 8865 in the total number of forms reported on Form 8938, Part IV, line 19. This item coordinates reporting between Form 8865 and Form 8938 to avoid duplicative disclosure.
4. Section 267A: Disallowed Deductions (Question H5)
Identify any Section 267A disallowed interest or royalty deductions. If the foreign partnership paid or accrued interest or royalty for which a deduction is not allowed under Section 267A (which disallows deductions for certain payments in hybrid transactions or to hybrid entities), answer “Yes” and enter the total disallowed amount. Section 267A was enacted by the 2017 Tax Cuts and Jobs Act, and reporting on Form 8865 has been required since before 2023.
5. Section 721(c) Partnership Status (Question H6)
Answer Question H6 regarding Section 721(c) partnership status per Regulations section 1.721(c)-1(b)(14). A partnership qualifies as a section 721(c) partnership if:
● Section 721(c) property (appreciated contributed property with built-in gain) was contributed to the partnership
● A related foreign person with respect to the U.S. transferor is a direct or indirect partner
● The U.S. transferor and related persons own 80% or more of the interests in partnership capital, profits, deductions, or losses
If “Yes,” complete Schedule G and Schedule H (if applicable) relating to the gain deferral method.
6. Foreign Partnership Withholding Tax Obligations
Report any foreign partnership withholding tax obligations by checking applicable boxes on page 1, indicating whether the partnership must file Form 1042, Form 8804, or Form 1065. These forms capture withholding obligations on foreign income paid to partners or effectively connected income allocable to foreign partners.
7. Schedule K-2 (Form 8865) and Schedule K-3
Complete Schedule K-2 (Form 8865) if reporting international tax items and check the line 16 box on Schedule K. Any person required to file Form 8865, Schedule K, for a partnership that has items relevant to the determination of U.S. tax under international provisions must complete Schedule K-2.
Domestic partnerships may qualify for a filing exception if no partner requests Schedule K-3 within one month of the regular filing due date and certain other conditions are met. When required, Schedule K-2 provides standardized reporting for foreign tax credit limitation calculations, foreign-derived intangible income determinations, foreign sources of income classifications, and other international tax items. Partners receive corresponding Schedule K-3 information.
8. Small Partnership Exemption (Question H11)
Determine small partnership exemption. A partnership meets the exemption if both conditions are satisfied:
- The partnership's total receipts for the tax year were less than $250,000
- The value of the partnership's total assets at the end of the tax year was less than $1 million
If both conditions are met, answer “Yes” and omit Schedules L, M-1, and M-2. These thresholds have remained consistent across recent tax years.
9. Section 704(c) and Section 754 Adjustments
Complete Section 704(c) allocation and Section 754 basis adjustment schedules if applicable to 2023 transfers. Report these items when the partnership makes elections or has special allocation requirements under partnership tax rules. The instructions provide detailed guidance for reporting mandatory or voluntary basis adjustments related to contributed property with built-in gains or losses.
10. Section 864(c)(8) Transfers (Question 13)
Report Section 864(c)(8) transfers of partnership interests. Enter the number of foreign partners subject to Section 864(c)(8) as a result of transferring all or a portion of an interest in the partnership or receiving a distribution from the partnership. Section 864(c)(8) subjects foreign partners to U.S. tax on gain from the sale or exchange of partnership interests to the extent attributable to effectively connected income from United States sources.
11. Functional Currency and Exchange Rates (Item G8)
Report functional currency and exchange rates. Identify the foreign partnership's functional currency and the exchange rate used to translate foreign currency amounts to U.S. dollars. Consistent foreign currency translation is essential for accurate income statements and capital gains calculations.
12. Affiliation Schedule (Schedule A-3)
Complete the Affiliation Schedule listing all partnerships in which the foreign partnership holds a direct interest or a 10% or greater indirect interest. Include both foreign and domestic entities. Provide the name, address, EIN (if any), total ordinary income or loss, and check the box if the entity is a foreign partnership. This schedule assists the IR S tracking of filings for multi-tier partnership structures.
13. Schedule M-1 Reconciliation
Reconcile book income to return income using Schedule M-1, unless the small partnership exemption applies. Report income included on Schedule K but not recorded on books, guaranteed payments, expenses recorded on books but not included on Schedule K, and deductions included on Schedule K but not charged against book income. The 2023 format requires separate line entries for depreciation and travel/entertainment expenses as itemized deductions.
14. Schedule K-1 Preparation
Complete Schedule K-1 (Form 8865) for all direct partners who are U.S. persons with 10% or greater interests if you are a Category 1 or 2 filer. Schedule K-1 reports each partner's distributive share of income, deductions, credits, and other items. Partners use Schedule K-1 information to prepare their individual or corporate tax returns.
15. Signature Requirements
Sign and date page 1 only if filing Form 8865 separately because you are not required to file a U.S. income tax return. When Form 8865 is attached to your income tax return, your signature on that return covers all attachments; no additional signature is required on Form 8865 itself.
2023 Year-Specific Context
For tax years beginning after 2020, most items of international tax relevance are reported on Schedules K-2 and K-3, replacing prior reporting on Form 8865 Schedules K and K-1, line 16 (Foreign transactions) and specific line 20 (Other information) reporting. This consolidation provides partners with greater clarity for computing U.S. income tax liability regarding international items, including foreign tax credits and deductions.
Schedule N (Form 8865) remains required for Category 1 and 2 filers to report transactions between controlled foreign partnerships and their partners or other related entities. The 2023 column structure requires detailed reporting of sales, compensation, commissions, rents, royalties, distributions, interest, and maximum loan balances outstanding during the tax year.
Schedule A (Constructive Ownership of Partnership Interest) must be completed to show direct and constructive ownership. Check boxes (a) for direct interest and (b) for constructive interest under Section 267(c). If constructive ownership applies, provide identifying information for the attributed owners.
Schedule G (Form 8865) is required when applying the gain deferral method under Section 721(c). This schedule reports information about contributed property, the section 721(c) partnership, and compliance with gain deferral requirements.
Foreign taxes paid or accrued must be reported on Schedules K-2 and K-3 to provide information necessary for eligible partners to claim foreign tax credits. Schedule K, line 21, retains total foreign taxes paid or accrued for basis adjustments and income reconciliation purposes. The separation of international tax items onto dedicated schedules enhances accuracy in foreign tax credit calculations and reduces errors in capital gains reporting for cross-border partnership transactions involving foreign sources of income and foreign currency conversions.
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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.
