What California Form 565 Is For
California Form 565 is the state information return used by partnerships that conducted business in California or earned California-source income during 2011. Similar to federal Form 1065, it reports the partnership’s income, deductions, and allocations rather than collecting an income tax at the entity level. Each partner receives a Schedule K-1 (565) and reports their share of income or loss on their own California return.
Entities that file Form 565 include general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and certain Real Estate Mortgage Investment Conduits (REMICs). Most LLCs classified as partnerships for federal purposes file Form 568 instead, although limited exceptions exist for foreign LLCs with only California-source income. Form 565 also supports state tracking of partnership allocations and enforces withholding rules for nonresident partners.
When You’d Use California Form 565 (2011)
Calendar-year partnerships had to file Form 565 by April 16, 2012 (April 15 fell on a Sunday). Fiscal-year filers use the 15th day of the 4th month after year-end. California automatically grants partnerships a five-month extension to file, moving the due date to September 15 for calendar-year filers, but the extension applies only to filing—not to paying the $800 annual tax for LPs, LLPs, and REMICs.
If you owed the $800 annual tax and needed extra time to file, you were required to pay by April 16 using Form FTB 3538, unless paying electronically. If you missed the deadline, you could still file late, though penalties begin to accrue. Amended returns are required if you discover an error or the IRS later adjusts your federal Form 1065. California requires amended filings within six months of the final federal determination.
Key Rules or Details for the 2011 Tax Year
Doing-Business Thresholds (New for 2011)
For years beginning on or after January 1, 2011, California adopted bright-line economic thresholds to determine whether an entity is “doing business” in the state. A partnership is considered to be doing business if it meets any of the following for 2011:
- Sales in California exceed $500,000 or 25% of total sales
- Property in California exceeds $50,000 or 25% of total property
- Payroll in California exceeds $50,000 or 25% of total payroll
Partnerships organized or commercially domiciled in California also qualify. Meeting any threshold triggers filing obligations regardless of how small the activity may seem.
$800 Annual Tax
LPs, LLPs, and REMICs must pay a nonrefundable $800 annual tax if they are doing business in California, organized here, or registered with the Secretary of State. The tax is not tied to income and applies even if the partnership is inactive. General partnerships are not subject to the $800 tax. LPs that only report California-source income but are not doing business or registered in California are exempt from the annual tax.
Pass-Through Taxation
Partnerships themselves do not pay California income tax (aside from the $800 tax for certain entities). Income, losses, deductions, and credits pass through to partners via Schedule K-1 (565). Residents report all partnership activity; nonresidents report only their California-source share.
Nonresident Withholding
Partnerships must withhold California tax on a nonresident partner’s share of California-source income unless the partner signs a waiver or qualifies for exemption. Partnerships file Form 592 for annual withholding and provide each affected partner a Form 592-B statement.
California Conformity (IRC as of January 1, 2009)
For 2011, California conformed to federal law through January 1, 2009. Notable departures included:
- No bonus depreciation
- No domestic production deduction (Section 199)
- No qualified small business stock exclusion or deferral
- No energy-efficient commercial building deductions
These differences require adjustments on Form 565 and partner K-1s.
K-1 Requirements
Every partner must receive a Schedule K-1 (565), even if their share of income is zero. Ownership percentages must be shown in decimals, and California-specific amounts must reflect any conformity differences.
Step-by-Step (High Level)
Step 1: Gather Records
Collect financial statements, bank records, depreciation schedules, and partner information, including residency status and ownership percentages.
Step 2: Prepare Federal Form 1065
California begins with federal figures, so complete Form 1065 first. Reviewing federal data highlights where California adjustments will be needed.
Step 3: Make California Adjustments
Apply adjustments for depreciation, Section 199, and other differences. These adjustments affect both partnership income and partner allocations.
Step 4: Complete Form 565 – Side 1
Enter partnership identification details, check the appropriate boxes for initial, amended, or final returns, and report income and deductions. Use California-adjusted amounts when calculating ordinary business income or loss.
Step 5: Complete Form 565 – Side 2 and Required Schedules
- Answer yes/no questions about distributions, ownership changes, and activities
- Complete Schedule A (cost of goods sold), if applicable
- Prepare Schedule K summarizing all allocable items
- Complete Schedule L (balance sheet)
- Complete Schedules M-1 and M-2 to reconcile book to tax and track capital account changes
Step 6: Prepare Schedule K-1 (565) for Each Partner
Report each partner’s distributive share, ownership percentage in decimal form, and any California adjustments. Provide all partners their K-1s by the filing deadline.
Step 7: Pay the $800 Annual Tax (if required)
LPs, LLPs, and REMICs pay the tax by the original due date. If an extension is needed, submit payment via FTB 3538 or electronically.
Step 8: Sign and File
A general partner must sign the return. File electronically when possible, or mail to the appropriate FTB address depending on payment status.
Step 9: Submit Withholding Forms
File Forms 592 and 592-B for nonresident withholding, and Form 592-F if there are foreign partners.
Step 10: Maintain Records
Keep all forms, schedules, and supporting documents for at least four years; retain basis records indefinitely.
Common Mistakes and How to Avoid Them
- Using Form 565 instead of Form 568 — LLCs generally file Form 568, not Form 565.
- Missing or late $800 tax — The extension to file does not extend time to pay.
- Incomplete or missing K-1s — Every partner must receive a fully completed Schedule K-1 (565).
- Failing to apply California adjustments — Federal figures often require modification for state purposes.
- Unsigned returns — Returns without a general partner’s signature are invalid.
- Ignoring IRS changes — Amend within six months of a federal adjustment.
- Overlooking withholding for nonresident partners — Required unless the partner provides an exemption or waiver.
- Using incorrect ownership percentages — Must be entered in decimal form and total 100%.
What Happens After You File
The FTB processes Form 565 and applies any annual tax payments. It does not typically send acknowledgments unless issues arise. Each partner uses their K-1 to prepare their own California return. The FTB may review or audit returns with unusual losses, missing schedules, or discrepancies with federal filings. The statute of limitations is generally four years from the due date or filing date, extended during federal examinations.
If additional tax, penalties, or interest are owed, the FTB issues a Notice of Proposed Assessment. Penalties for late filing include $18 per partner per month (up to 12 months). Refunds are issued if the partnership overpaid the $800 tax; processing typically takes several weeks.
FAQs
Does a general partnership owe the $800 annual tax?
No. Only LPs, LLPs, and REMICs owe the $800 tax. General partnerships still must file Form 565 if they do business or have California-source income.
How is Form 565 different from Form 568?
Form 565 is for partnerships and REMICs; Form 568 is for LLCs classified as partnerships. LLCs also may owe an income-based LLC fee that does not apply to partnerships filing Form 565.
Does an LP owe the $800 tax in its first year?
Yes. For 2011, newly formed LPs were required to pay the annual tax; the first-year exemption that applies to corporations did not apply to LPs or LLPs.
Must nonresident partners file California returns?
Yes. Nonresident partners with California-source income must file Form 540NR or the correct entity return. The partnership must also comply with withholding rules.
What if the partnership has only small California-source income?
You still must file if you have any California-source income. LPs not doing business and not registered or organized in California may be exempt from the $800 tax but must still file the return.
For official forms and instructions, visit the California Franchise Tax Board: https://www.ftb.ca.gov.
