Part XIII. Use this information as follows.

• If you’re a nonresident alien individual, foreign trust, or foreign estate, complete Schedule P (Form 1040-NR), Foreign Partner’s Interests in Certain Partnerships Transferred During Tax Year.

• If you’re a foreign corporation, complete Schedule P (Form 1120-F), List of Foreign Partner’s Interests in Partnerships, Parts IV and V.

• If you’re a foreign partnership, complete Form 4797, Sales of Business Property; and Form 8949, Sales and Other Dispositions of Capital Assets, as needed.

• If this is an installment sale, see Form 6252, Installment Sale Income.

Item E—Part applicability. The partnership answered “Yes” to indicate the applicable parts of Schedule K-3. The partnership answered “No” to indicate the inapplicable parts of Schedule K-3.

Schedule K-3, Parts II and III, report information you use to figure the foreign tax credit. In general, a U.S. individual, U.S. citizen or U.S. resident individual beneficiary of certain domestic estates

and trusts, or domestic corporation may claim a credit for taxes paid or accrued, and in some cases deemed paid, to foreign countries or U.S. territories. In general, foreign corporations and nonresident alien individuals may claim a credit for taxes paid or accrued to foreign countries or U.S. territories with respect to ECI. The amount of foreign tax credit in a tax year is generally limited to the lesser of the foreign income taxes paid or accrued or the U.S. tax on foreign source income. The limitation is figured by separate categories of foreign source income, including foreign branch category, passive category, and general category. See the instructions for Forms 1116 and 1118, as well as Pub. 514, Foreign Tax Credit for Individuals, for a summary of the rules for determining the sources and separate categories of income.

Note: If you’re a partnership that is a partner in a partnership, the information that you receive on your Schedule K-3, Parts II and III, will need to be included on the Schedules K-3, Parts II and III, that you provide to your partners.

Partnership with U.S. partners and limited or no foreign ac- tivity. In many instances, a partnership with no foreign partners, no foreign source income, no assets generating foreign source income, and no foreign income taxes paid or accrued may have reported information on Schedule K-3. For example, if you claim the foreign tax credit, you generally need certain information from the partnership in Schedule K-3, Parts II and III, to complete Form 1116 or 1118. This information should have been reported in prior years, including before the Tax Cuts and Jobs Act of 2017, with the Schedules K and K-1, and is information you need to compute the foreign tax credit limitation, which determines the amount of foreign tax credit available to you.

Exceptions. You may not have received Schedule K-3 if the partnership was eligible for an exception. See Domestic Filing Exception in the Partnership Instructions for Schedules K-2 and K-3 (Form 1065). Also, if you (or, if you’re a pass-through entity, your direct or indirect partner) are eligible to claim a foreign tax credit, you aren’t required to receive Schedule K-3, Parts II and III, if you or your partners aren’t required to complete Form 1116. This could be the case, for example, because you (or, if you’re a pass-through entity, your direct or indirect partners) qualify for an exception to filing Form 1116. See section 904(j) and Form 1116 exemption exception in the Partnership Instructions for Schedules K-2 and K-3 (Form 1065). However, see reasons below for requesting the Schedule K-3 when you’re required to file Form 1116.

Example 2—domestic filing exception met; issuance of Schedule K-3 not required. A married couple, U.S. citizens, each own a 50% interest in USP, a domestic partnership. USP invests in a RIC. USP receives a Form 1099 from the RIC reporting $100 of creditable foreign taxes paid or accrued on passive category foreign source income. USP doesn’t have any foreign activity aside from that of the RIC. USP notifies the couple on an attachment to the Schedule K-1 that they won’t receive Schedule K-3 unless they request it. The married couple don’t request Schedule K-3 from USP for tax year 2025. Because USP qualified for the domestic filing exception, USP didn’t complete Schedule K-3 for the couple.

Reasons to request Schedule K-3 from domestic partner- ships with limited or no foreign activity. Section 904 generally limits the foreign tax credit to the lesser of the foreign taxes paid or accrued or the portion of U.S. tax liability attributable to foreign source taxable income. Foreign source taxable income is foreign source gross income less allocable expenses. In general, the partnership completed Schedule K-3, Parts II and III, because the partnership’s gross income, gross receipts, expenses, assets, and foreign income taxes paid or accrued may affect the foreign tax credit available to the partner. The source of certain gross income is determined by the partner.

4 Partner's Instructions for Schedule K-3 (Form 1065) (2025)

In addition, some expenses of the partnership are allocated and apportioned by the partner. Because the income source and expense allocation are determined by the partner in certain cases, it’s not possible for the partner to assume that all income of the partnership is U.S. source and all expenses of the partnership reduce U.S. source income. Also, the allocation and apportionment of certain partner expenses take into account distributive shares of assets and income of the partnership that aren’t otherwise reported on Schedule K-1. For example, under section 865(i)(5), for sourcing purposes, personal property sold by the partnership is treated as sold by the partners. Generally, income from the sale of certain nondepreciable personal property (excluding inventory and certain other property) is sourced according to the residence of the seller. In cases in which the partner is a pass-through entity, the partnership might not know the ultimate residence of the first non-pass-through partner. The distributive share of the partnership’s gain on the sale of personal property isn’t separately stated on Schedule K-1, but is reported in Schedule K-3, Part II.

As another example, the partner’s R&E expenses (which include the distributive share of the partnership’s R&E expenses) are allocated and apportioned by the partner; see Regulations section 1.861-17(f). R&E expenses are allocated and apportioned based on the gross receipts by Standard Industrial Classification (SIC) code. The distributive share of the R&E expenses by SIC code isn’t separately stated on Schedule K-1, but is reported in Schedule K-3, Part II. The partner needs Schedule K-3, Part III, Section 1, for the partner’s share of the partnership’s gross receipts by SIC code for purposes of allocating and apportioning R&E expenses.

In some cases, the partner will be able to use the information reported in Parts II and III to increase the foreign tax credit limitation, and the amount of available foreign tax credit to the partner. For example, Schedule K-3, Part III, Section 2, provides the partner with the tax book value of the assets of the partnership. In general, a partner apportions interest expense to reduce U.S. source gross income or foreign source gross income based on the tax book value of its assets, including its distributive share of the partnership’s interest expense and assets; see section 864(e)(2) and Regulations section 1.861-9(e). Taking into account the assets of a domestic partnership generating solely U.S. source income would result in more expense allocated to U.S. source gross income and less expense allocated to reduce foreign source gross income. Additional foreign source income increases the partner’s foreign tax credit limitation, and the ability of the partner to claim foreign tax credits. The regulations provide exceptions to asset method apportionment for certain less-than-10% limited partners, and these instructions take this into account such that the partnership isn’t required to provide these partners with certain portions of Schedule K-3. Schedule K-1 doesn’t separately state the distributive share of the partnership’s total interest expense, or the tax book value of the assets, whereas the Schedule K-3 contains this information. See Regulations section 1.861-9(e). See Lines 39 and 40 and Lines 41 through 43 under Part II ; and Section 2 under Part III, later, for further guidance.

Example 3—Parts II and III required for partnership with no foreign activity. U.S. citizens Kirby and Darby own equal interests in USP, a domestic partnership. USP has no foreign activity. In Year 1, Kirby pays $2,000 of foreign income taxes on passive category income other than capital gains. Such taxes are reported to Kirby on a payee statement. Kirby has interest expense of $5,000, and USP doesn’t have interest expense. None of Kirby’s interest expense is directly allocable to Kirby’s gross income. Kirby doesn’t have an overall domestic loss in tax year 2025.

Because Kirby must complete Form 1116 to claim a foreign tax credit, Kirby requests a Schedule K-3 by the 1-month date

and, therefore, the domestic filing exception doesn’t apply to USP with respect to Kirby. USP provides Parts II and III of Schedule K-3 to Kirby. Kirby’s share of the tax book value of USP’s assets is $50,000, which is reported in column (a) of Schedule K-3, Part III, Section 2. Not including its distributive share of the assets of USP, the tax book value of Kirby’s assets is $50,000. Of Kirby’s assets, $10,000 generates passive category foreign source income and $40,000 generates U.S. source income. Kirby has passive category foreign source taxable income before interest expense of $8,000 and Kirby’s U.S. tax rate is 25%. Kirby’s interest expense and USP’s assets are characterized in the same category under sections 163 and 469 for purposes of Temporary Regulations section 1.861-9T(d). Kirby uses the tax book value (as opposed to the alternative tax book value) to allocate and apportion interest expense.

Kirby’s interest expense is apportioned between U.S. source and foreign source income ratably based on the tax book value of Kirby’s U.S. source and foreign source assets. Without taking into account the distributive share of USP’s assets, the amount of Kirby’s interest expense that would reduce foreign source gross income is $1,000 ($5,000 x $10,000/$50,000). Therefore, Kirby’s foreign source taxable income would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, Kirby may only use $1,750 (25% (0.25) x $7,000) of the $2,000 of foreign income taxes. See section 904.

Taking into account the distributive share of USP’s assets, the amount of Kirby’s interest expense that reduces passive category foreign source gross income is $500 ($5,000 x $10,000/$100,000). Therefore, Kirby’s passive category foreign source taxable income would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, Kirby may use $1,875 (25% (0.25) x $7,500) of the $2,000 of foreign income taxes—an additional foreign tax credit amount of $125 after taking into account Kirby’s share of the tax book value of the partnership assets.

Darby doesn’t request a Schedule K-3 from USP for tax year 2025. Under the domestic filing exception, USP didn’t complete Schedule K-3 for Darby.

Example 4—Part II, not Part III, required for partnership with no foreign activity. The facts are the same as in Example 3, except that Kirby has $5,000 of expenses described in Regulations section 1.861-8(e)(9), and Kirby and USP have no other expenses. Further, Kirby’s share of USP’s gross income is $50,000. Not including its distributive share of the income of USP, Kirby’s gross income is $50,000. Of Kirby’s gross income, $5,000 is foreign source gross income and $45,000 is U.S. source gross income. USP doesn’t have any gross income the source of which is determined by the partner.

Kirby’s expenses must be ratably apportioned based on Kirby’s gross income (including its distributive share of the income of USP); see Regulations section 1.861-8(c)(3). Therefore, USP provided Schedule K-3, Part II, to Kirby. Before taking into account the distributive share of USP’s gross income, the amount of Kirby’s expenses described in Regulations section 1.861-8(e)(9) that reduce foreign source gross income is $500 ($5,000 x $5,000/$50,000). Therefore, Kirby’s foreign source taxable income would be $4,500 ($5,000 − $500). At a 25% U.S. tax rate, Kirby may only use $1,125 (25% (0.25) x $4,500) of the $2,000 of foreign income taxes. See section 904.

Taking into account the distributive share of USP’s gross income, the amount of Kirby’s expenses described in Regulations section 1.861-8(e)(9) that reduce foreign source gross income is $250 ($5,000 x $5,000/$100,000). Therefore, Kirby’s foreign source taxable income would be $4,750 ($5,000 − $250). At a 25% U.S. tax rate, Kirby may use $1,187.50 (25% (0.25) x $4,750) of the $2,000 of foreign income taxes—an additional foreign tax credit amount of $62.50 after taking into account Kirby’s distributive share of the gross income of USP.

Partner's Instructions for Schedule K-3 (Form 1065) (2025) 5

Because Kirby and USP don’t have R&E expenses or interest expense, and because USP didn’t pay or accrue any foreign income taxes, USP didn’t provide Schedule K-3, Part III, to Kirby.

Note: A partner may need the distributive share of the partnership’s gross income for purposes of allocating and apportioning expenses other than those described in Regulations section 1.861-8(e)(9) and should request this information from the partnership if it’s needed and if it hasn’t been provided.