What California Form 565 (2016) Is For
California Form 565 (2016), Partnership Return of Income, is an information return used by partnerships doing business in California or earning California-source income. It reports the partnership’s income, deductions, gains, losses, and other items to the Franchise Tax Board (FTB), but usually does not calculate a separate entity-level income tax liability.
Instead, Form 565 is a pass-through return. The partnership’s profits and losses flow to the partners, who report their distributive shares on their own California individual income tax return or business return. The form also produces California Schedule K-1 (565) for each partner, which shows the amounts those partners must include when they file a tax return.
When You’d Use California Form 565 (2016)
You use California Form 565 (2016) if you operate a partnership that is doing business in California, has California-source income, or is registered with the California Secretary of State. This includes general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and certain REMICs treated as partnerships for tax purposes.
For 2016, the filing deadline changed. Partnerships had to file by the 15th day of the third month after the close of their taxable year, rather than the fourth month used in prior years. For a calendar-year partnership, that due date was March 15, 2017. California grants an automatic six-month extension to file, but not to pay the $800 annual tax owed by LPs, LLPs, and REMICs.
You’d also file or refile California Form 565 (2016) if you need to correct errors after the original filing. Amended returns are filed on the same form by checking the “Amended return” box and attaching an explanation plus corrected Schedules K-1. Short-period returns are required when a partnership is formed or terminated mid-year; “Short Period” should be written at the top of the form.
Key Rules or Details for 2016
California treats non-LLC partnerships under Form 565 and LLCs under Form 568, so choosing the correct form is a key part of the filing requirements. LPs, LLPs, and REMICs generally must pay an $800 annual tax, even if the business has little or no income tax liability for the year. This amount is not deductible and does not reduce any partner’s distributive share.
A partnership must file Form 565 (2016) if it:
- Conducts a trade or business in California
- Has California-source income, even if formed elsewhere
- Is an LP or LLP registered with the Secretary of State, whether or not it is actively operating
California’s conforming date to the Internal Revenue Code for 2016 is January 1, 2015. That means California follows most federal partnership rules under Subchapter K but does not conform to a number of federal provisions, such as bonus depreciation, the domestic production activities deduction, or certain qualified small-business stock rules. Partnerships may need separate California adjustments to arrive at state income for tax liability and Schedule K-1 reporting.
The FTB can assess a late-filing penalty of $18 per partner, per month (or part of a month), up to 12 months, if the return is filed late or is incomplete. LPs, LLPs, and REMICs that pay the $800 annual tax late may also owe a penalty of 5% of the unpaid amount plus 0.5% per month, up to 25%, plus interest. These rules apply even if partners ultimately pay the income tax on their own returns.
Step-by-Step (High Level)
Step 1: Gather Federal and Partnership Information
Start with the partnership’s federal Form 1065, financial statements, prior California returns, and detailed records of California-source income and deductions. Confirm your entity type (general partnership, LP, LLP, or REMIC), Federal Employer Identification Number (FEIN), and California Secretary of State file number.
Step 2: Complete the Heading and Questions
On Side 1 of California Form 565 (2016), enter the partnership’s name, address, FEIN, accounting period, and Secretary of State file number. Check the boxes that apply, such as partnership type, short period, or amended return. Answer the questions on Side 2, including whether the partnership is registered or doing business in California, to establish your filing requirements.
Step 3: Report Income and Deductions
Fill out the income section with gross receipts, cost of goods sold, and other trade or business income—not investment income reported separately on Schedule K. Then list ordinary deductions such as salaries, rent, interest, taxes, and depreciation. Adjust any items where California law differs from federal law so the reported income aligns with California rules.
Step 4: Complete Schedule K and Related Schedules
Schedule K summarizes all items that pass through to partners: ordinary business income, separately stated gains and losses, credits, and other items that affect each partner’s tax liability. If the partnership has capital gains or losses, complete Schedule D (565). If owners include other pass-through entities, complete Schedule EO (565) so the FTB can track entity-level ownership layers.
Step 5: Prepare and Distribute Schedules K-1 (565)
Prepare a Schedule K-1 (565) for each partner, reporting their share of every item on Schedule K. Ownership percentages should be shown in decimal form to four decimal places (for example, 33.3333), and the totals of all K-1s must match the amounts on Schedule K. Provide each partner with their K-1 so they can file a tax return and report their share of income tax items correctly.
Step 6: Pay the $800 Annual Tax and File
If the partnership is an LP, LLP, or REMIC, ensure the $800 annual tax is paid by the original due date using Form FTB 3538 if needed. A general partner (or authorized fiduciary) must sign California Form 565 (2016). Assemble the return, attach any required schedules, and mail it to the appropriate FTB address, or file electronically if available.
Common Mistakes and How to Avoid Them
Many partnerships file the wrong form—LLCs classified as partnerships for federal purposes often mistakenly submit California Form 565 (2016) instead of Form 568. Always confirm your entity type before you file a tax return. Another frequent error is mismatching the number of Schedules K-1 with the partner count shown in Question L; every partner must have a K-1, even if their share is small.
Partnerships also mis-format ownership percentages, using fractions, percentages, or “Various” instead of precise decimal percentages. This can cause processing delays and notices. Another trap is misunderstanding the extension rules and assuming the six-month extension covers payment of the $800 annual tax; it does not. That tax must be paid by the original due date to avoid penalties on a past due return.
Using federal Schedules K-1 instead of California Schedule K-1 (565) is another common error. California wants its own forms and may treat a return as incomplete if federal forms are attached. Finally, some partnerships fail to amend their California return when the IRS changes the federal Form 1065. If federal tax liability or partnership income items are adjusted, you must file an amended California Form 565 within six months of the final federal determination.
What Happens After You File
After you file, the FTB processes the California Form 565 (2016) and records all income and allocation data. The agency uses Schedule K-1 information to match what partners report on their individual income tax return or other business returns. If a partner underreports their share of pass-through income, that mismatch can trigger notices or audits.
The FTB generally has four years from the later of the original due date or the filing date to assess additional income tax at the partner level or challenge partnership reporting. That period can be extended if the partnership or its partners are under IRS examination. During an audit, the FTB may request financial statements, partnership agreements, workpapers, and support for allocations.
If the partnership overpays the $800 annual tax or other fees, it may be entitled to a refund, which is processed after the return is reviewed. If the FTB later determines more tax is due—for example, because the annual tax was paid late—it will issue a notice that includes additional tax, penalties, and interest. Keeping complete records for at least four years, and longer for basis and property records, makes responding to any FTB inquiries much easier.
FAQs
Who is required to file California Form 565 (2016)?
Any partnership—general partnership, LP, LLP, or REMIC treated as a partnership—that is doing business in California, has California-source income, or is registered with the California Secretary of State generally must file California Form 565 (2016). LLCs classified as partnerships usually file Form 568 instead unless they meet a narrow exception.
Does California extend the due date for filing and payment?
Yes and no. California grants an automatic six-month extension to file California Form 565 (2016), so a calendar-year partnership could file as late as September 15, 2017, without a separate request. However, the extension does not extend time to pay the $800 annual tax due from LPs, LLPs, and REMICs; that must be paid by the original March deadline to avoid penalties and interest.
What penalties apply for late or incomplete returns?
If a partnership files late or submits an incomplete Form 565, the FTB can assess a penalty of $18 per partner for each month or part of a month the failure continues, up to 12 months. On top of that, LPs, LLPs, and REMICs that pay the $800 annual tax late may owe a penalty of 5% of the unpaid amount plus 0.5% per month, up to 25%, plus interest on both tax and penalties.
Can we file California Schedules K-1 electronically?
Yes. Partnerships may submit Schedules K-1 (565) electronically using CD or USB media under FTB Publication 1062. If you choose the paperless option, all K-1s for that year must be electronic; you cannot mix paper and electronic K-1s. A transmittal form is required with the electronic media, and you should not attach paper K-1s to California Form 565 (2016) in that case.
What should we do if we discover an error after filing?
If you find an error after you file a tax return, file an amended California Form 565 (2016). Check the “Amended return” box, attach a statement describing each change, and issue amended Schedules K-1 (565) to affected partners. If the error comes from an IRS audit or amended federal return, you must file the California amendment within six months of the final federal adjustment so that state income tax and tax liability match the updated numbers.
How long should we keep partnership records?
You should keep partnership tax returns, Schedules K-1, and supporting documents for at least four years from the later of the due date or the filing date. Records that support partner basis or property basis, such as capital contribution details and depreciation schedules, should be kept for the life of the partnership and several years afterward, in case partners amend a past due return or the FTB opens a later examination.
