What California Form 565 (2020) Is For
California Form 565 (2020) is the state partnership income tax return used to report a partnership’s income, deductions, gains, losses, and other items to the Franchise Tax Board (FTB). It’s similar to an individual income tax return, but the partnership usually does not pay the income tax itself. Instead, income and deductions flow through to partners, who report their shares on their own returns.
You must attach a separate Schedule K-1 (565) for each partner. Those K-1s tell partners what to include on their personal or business returns and help them calculate their California tax liability accurately.
When You’d Use California Form 565 (2020)
You file California Form 565 (2020) if your partnership:
- Is organized in California
- Is registered with the California Secretary of State
- Engages in a trade or business in California
- Has California-source income
This applies to general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and certain REMICs classified as partnerships. Most LLCs taxed as partnerships file Form 568 instead, unless they fall into specific exceptions in the instructions.
For calendar-year partnerships, the 2020 Form 565 was due March 15, 2021. California automatically gives a 7-month extension to file (to October 15, 2021 for calendar-year filers), but that does not extend time to pay the $800 annual tax or any other amount due. Late filing triggers a penalty of $18 per partner per month (or part month), for up to 12 months.
If you find an error, or the IRS changes your federal Form 1065, you file an amended Form 565 and issue amended paper Schedules K-1 (565). Generally, you must notify California within six months if the change increases your California income tax, or within two years if it leads to a refund.
Key Rules or Details for 2020
$800 Annual Tax
For 2020, LPs, LLPs, and REMICs that are doing business in California, registered here, or organized here owe an $800 annual tax, even if:
- The partnership had no income
- The partnership was inactive
This annual tax is not deductible as a business expense at either the entity or partner level. A later law exempts some newly organized entities from this tax for their first year starting in 2021–2023, but that relief does not change the 2020 requirement.
Federal–California Differences
California conforms to the Internal Revenue Code only as of January 1, 2015. Many Tax Cuts and Jobs Act (TCJA) changes do not apply for California income tax, including:
- The federal Qualified Business Income (QBI) deduction under Section 199A
- Expanded Section 179 expensing and bonus depreciation rules
- Federal opportunity zone gain deferral and exclusion
So you cannot simply copy your federal numbers. You must adjust for these differences on Form 565, especially on Schedule K, to get correct California income and filing requirements.
COVID-19 Relief Items for 2020
For 2020, several COVID-19 relief programs received special treatment for California income tax:
- Certain California small business COVID-19 grants are excluded from gross income
- Paycheck Protection Program (PPP) loan forgiveness is generally excluded from California income, but “ineligible entities” may be treated differently
- Related deductions may be limited or allowed depending on the program and entity type
You must review the 2020 instructions carefully to determine how to report relief payments and related expenses on your partnership return.
Audit Regime Changes
Starting with tax year 2020, California follows the federal Bipartisan Budget Act (BBA) partnership audit rules. Under these rules, tax can be assessed at the partnership level instead of only at the partner level. That makes accurate reporting on Form 565 even more important, because adjustments can affect the partnership itself, not just individual partners.
Step-by-Step (High Level)
Step 1: Confirm You Must File
Review your partnership’s activity, registration, and income to see if you must file a California partnership return and whether Form 565 or Form 568 is correct. If you have California-source income or are registered or organized in California, you almost certainly need to file a tax return.
Step 2: Gather Federal and State Records
Collect your completed federal Form 1065, federal Schedules K-1, financial statements, California-source income detail, and any COVID-19 relief documents. You’ll need these to reconcile federal and California amounts and to allocate items to partners on Schedule K-1 (565).
Step 3: Complete Entity and Income Sections
Fill in the partnership’s name, address, FEIN, California Secretary of State file number, accounting method, and business start date in California. Then report income and deductions, starting with federal amounts and layering on California adjustments (for Section 179, depreciation, opportunity zones, and COVID-19 items as needed).
Step 4: Prepare Schedule K and Schedules K-1 (565)
On Schedule K, show each category of income, deduction, credit, and other items for the partnership as a whole. Then prepare one Schedule K-1 (565) per partner, using accurate ownership percentages and filling out every required field. Partners use these K-1s to file a tax return and report their share of income tax items.
Step 5: Calculate the $800 Annual Tax and Other Payments
Determine whether your entity type is subject to the $800 annual tax for 2020 and ensure it is paid by the original due date. Report any extension payments, prior overpayments applied, and withholding (for example, nonresident partner withholding) to arrive at the balance due or overpayment.
Step 6: Complete Balance Sheet and Reconciliation Schedules
Fill out Schedules L, M-1, and M-2, reconciling book income to tax return income and tracking partners’ capital accounts. These schedules help the FTB understand your books and verify that loss and distribution items match partner capital.
Step 7: Sign and Submit
Have a general partner sign the return under penalty of perjury. If you use a paid preparer, they must sign and include their PTIN. E-file through approved software if possible, or mail the paper return to the FTB address for your payment situation. Then distribute K-1s to all partners.
Common Mistakes and How to Avoid Them
- Missing Schedules K-1
- Always attach a Schedule K-1 (565) for every partner on the return and provide a copy to each partner.
- No signature from a general partner
- An unsigned return is invalid. Make sure a general partner—not just a preparer—signs the form.
- Assuming the $800 tax doesn’t apply
- LPs, LLPs, and qualifying REMICs usually owe the annual tax even with no income. Don’t skip it just because the year was slow.
- Copying federal numbers without California adjustments
- California does not allow the federal QBI deduction, expanded Section 179, or many TCJA items. Adjust Schedule K to reflect California law.
- Using Form 565 when Form 568 is required
- Most LLCs classified as partnerships should file Form 568. Confirm your entity type before you file a tax return.
- Mishandling PPP and COVID-19 grants
- Check whether your partnership is an “eligible” or “ineligible” entity for excluding these amounts from California income and whether related expenses are deductible.
What Happens After You File
The FTB processes your Form 565 and checks for math accuracy, missing Schedules K-1, missing signatures, and obvious reconciliation issues. Electronic returns generally move faster than paper filings. If you overpaid, the FTB issues a refund or applies it as requested; if you owe, they may send a bill with penalties and interest.
California normally has four years from the due date or filing date (whichever is later) to audit a partnership return. That period can extend if the IRS examines your federal partnership return or if you fail to report federal adjustments. If the IRS changes your 2020 Form 1065, you must file an amended California Form 565 when those changes affect California income tax.
FAQs
Do partnerships ever pay California income tax directly?
Most income tax is paid by partners on their individual income tax return or corporate return. However, partnerships may owe the $800 annual tax and can be assessed additional income tax at the partnership level under the 2020 BBA audit rules if adjustments are made.
Do I still file Form 565 if the partnership had no income in 2020?
Usually yes, if you are an LP, LLP, or REMIC that is registered, organized, or doing business in California. You still file Form 565 and generally still owe the $800 annual tax, even for a “zero-income” year.
What if my partnership operates in several states?
You still file California Form 565 (2020) if you have California-source income or are registered or organized here. The partnership reports total items, then uses allocation and apportionment rules to identify what’s taxable to California so partners can calculate the right income tax liability.
Can I avoid quarterly estimated payments by increasing withholding?
Partnerships themselves don’t file an individual income tax return, but partners may need to make estimated tax payments. They can sometimes increase wage withholding or adjust their own estimated payments based on the income reported on Schedule K-1 (565) to avoid a past due return penalty on their personal accounts.
Where can I find the official 2020 Form 565 and instructions?
You can download the form and full instructions from the California FTB forms page: California Form 565 – Franchise Tax Board.
