What California Form 565 Is For
California Form 565 (2017) is the partnership information return used to report income, deductions, gains, losses, and other activity to the Franchise Tax Board (FTB). It is similar to federal Form 1065 but applies only to California tax rules and California-source income.
The form itself does not compute a partnership-level income tax. Instead, it reports items that flow through to the partners on California Schedule K-1 (565). Partners then use those K-1s to report their shares of income and deductions on their own California returns, whether they are individuals, corporations, trusts, or other entities.
Any partnership engaged in a trade or business in California, or earning California-source income, generally must file Form 565. This includes general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and certain REMICs treated as partnerships. LLCs classified as partnerships usually file Form 568 instead, unless they fall into specific exceptions.
When You’d Use California Form 565
You use California Form 565 (2017) for calendar-year partnerships with a year ending December 31, 2017, or for fiscal years beginning in 2017. The regular due date for calendar-year filers was March 15, 2018, or the 15th day of the 3rd month after the close of a fiscal year.
California gives partnerships an automatic seven-month extension of time to file; no separate extension form is required for the return itself. However, the extension does not extend the time to pay the $800 annual tax when it applies. LPs, LLPs, and REMICs subject to that tax must pay by the original due date, typically using Form FTB 3538.
You file an amended Form 565 if you discover errors or if the IRS later adjusts your federal Form 1065. Check the “Amended return” box, issue amended Schedules K-1 to affected partners, and attach a statement explaining which lines changed and why. If the IRS makes final federal changes, you must file an amended California return within six months of that federal determination.
Key Rules or Details for 2017
$800 Annual Tax
Limited partnerships, limited liability partnerships, and REMICs that are doing business in California, organized here, or registered with the Secretary of State owe an $800 annual tax.
- The tax is not deductible by the partnership
- It cannot be passed through as a deduction to the partners
- It applies for the full year, not prorated, if the entity exists or does business at any time during the year
An LP that only files to report California-source income, but is not doing business, registered, or organized in California, is generally not subject to the $800 tax.
“Doing Business” in California
A partnership is considered to be doing business in California if it:
- Actively engages in transactions for profit in the state, or
- Exceeds certain thresholds for California property, payroll, or sales (for 2017, roughly $56,195 for property/payroll or $561,951 for sales, or 25% of corresponding totals everywhere)
General partners of an LP doing business in California are also treated as doing business in California for their own filing purposes.
Schedule K and Schedule K-1
Form 565 includes Schedule K for the partnership totals and Schedule K-1 (565) for each partner’s share. Key points:
- Every partner must receive a California Schedule K-1 (565)
- The total of all K-1s must reconcile exactly to the amounts on Schedule K
- Ownership percentages must be shown in decimal format to four decimal places (for example, 0.3333), not as fractions or percentages
Signature and E-File
A general partner must sign Form 565 for it to be valid. If the partnership is in receivership or bankruptcy, the receiver or trustee signs. For years beginning on or after January 1, 2014, partnerships that use tax software must e-file their California returns unless they qualify for a specific exception.
California–Federal Differences
California generally follows federal partnership rules under Subchapter K as of January 1, 2015, but does not conform to several federal provisions. For 2017, differences include items like bonus depreciation, qualified small business stock exclusions, and the domestic production activities deduction. You may need California adjustments so partner-level income tax is computed correctly on their returns.
Step-by-Step (High Level)
Step 1: Gather Books, Records, and Federal Return
Compile your partnership books for 2017, including income, expenses, balance sheet detail, and partner capital accounts. Complete the federal Form 1065 first, because many California amounts start from federal numbers and then adjust for state rules.
Step 2: Complete Entity Information on Form 565
Enter the partnership name, address, FEIN, California Secretary of State file number, principal business activity, and accounting method. Answer the questions on entity type, ownership changes, real property transactions, and whether you are subject to the $800 annual tax.
Step 3: Report Income and Deductions
On Side 1, report gross receipts, cost of goods sold, and ordinary income or loss. Then list deductions such as salaries, guaranteed payments to partners, rent, interest, depreciation, and other expenses. The difference between total income and total deductions becomes your ordinary business income or loss.
Step 4: Complete Schedule K and Allocate to Partners
Use Schedule K to show the partnership’s totals for rental activities, interest, dividends, capital gains, charitable contributions, and credits. Then prepare a separate Schedule K-1 (565) for each partner, reporting their share of each item along with their identifying information and ownership percentages. Make sure all K-1 totals match the Schedule K lines.
Step 5: Compute Annual Tax, Payments, and Balance
If you are an LP, LLP, or REMIC subject to the $800 annual tax, report it on the appropriate line. Include any withholding, estimated payments, and extension payments such as FTB 3538. Determine whether you owe additional amount with the return or are due a refund.
Step 6: Sign, File, and Provide K-1s
Have a general partner sign and date the return. E-file if the return was prepared with software, or mail an allowed paper return to the correct FTB address based on whether you are sending a payment. Deliver Schedules K-1 to all partners so they can file their own California returns.
Common Mistakes and How to Avoid Them
- Missing or incomplete Schedules K-1
- Failing to attach a California K-1 for every partner
- Omitting names, addresses, or tax ID numbers
- Totals that don’t reconcile
- Schedule K amounts and the sum of all K-1s must match exactly
- Improper ownership percentages
- Use four-decimal-place decimals (0.2500), never “Various,” fractions, or percentage signs
- Missing signatures
- Ensure a general partner (or authorized fiduciary) signs before filing
- Ignoring the federal adjustment rule
- If the IRS changes your Form 1065, calendar six months to file an amended California Form 565
- E-file noncompliance
- If you used software, make sure you also filed electronically unless an exemption clearly applies
What Happens After You File
After Form 565 is filed, the FTB processes the return and may issue notices if something doesn’t match their records or is missing. They may request copies of federal returns, schedules, or supporting documentation, especially if your partnership is also under IRS examination.
Partners use their Schedules K-1 (565) to report California-source income on their own returns, even if they live outside California. The FTB generally has four years from the later of the original due date or the filing date to assess additional tax, and this period can be extended while federal audits are open. Penalties and interest can apply for late filing, late payment of the $800 annual tax, or failure to file when required.
FAQs
Does an LLC taxed as a partnership file Form 565 or Form 568?
Most LLCs classified as partnerships for tax purposes file Form 568, not Form 565. Form 565 is generally for traditional partnerships, LPs, LLPs, and certain REMICs. An LLC would use Form 565 only in limited situations, such as a foreign LLC not registered or doing business in California but having California-source income.
Can the $800 annual tax be deducted on the partnership return?
No. The $800 annual tax paid by LPs, LLPs, and REMICs is not deductible as a partnership expense and cannot be passed through as a deduction to partners. It is treated as a non-deductible entity-level payment.
We are not doing business in California, but one partner lives there. Do we still file Form 565?
Not necessarily. If the partnership itself is not doing business in California, is not registered here, and has no California-source income, it generally does not need to file Form 565. However, the California-resident partner may still need to report their share of partnership income on their own California individual return.
What should we do if we discover an error after filing?
File an amended Form 565 as soon as you spot the issue. Check the amended box, prepare corrected Schedules K-1 for affected partners, and attach a statement explaining each change. If the error stems from an IRS adjustment, you usually have six months from the final federal change to amend in California.
Is the $800 annual tax prorated if the partnership only exists for part of the year?
No. The $800 annual tax is not prorated. If your LP, LLP, or REMIC is organized, registered, or doing business in California at any time during the year, the full $800 applies, unless you fall into the narrow exception for LPs that are only reporting California-source income and are not otherwise considered to be doing business or registered in the state.
