What California Form 565 Is For
California Form 565 is the partnership information return used by general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and certain REMICs that do business in California or earn California-source income. The form does not compute a tax owed by the partnership itself. Instead, it reports the entity’s income, deductions, gains, and losses so each partner can report their share on an individual, corporate, or fiduciary return.
Form 565 works together with Schedule K-1 (565), which lists each partner’s distributive share. California generally follows federal partnership rules under Subchapter K but conforms to the Internal Revenue Code only through January 1, 2015. As a result, many newer federal provisions—such as the TCJA’s bonus depreciation rules and the qualified business income deduction—do not apply on the California return.
When You’d Use California Form 565
Partnerships using a calendar year must file Form 565 by March 15, 2022 for the 2021 tax year. Fiscal-year filers use the 15th day of the third month following year-end. California automatically grants a seven-month extension to file, but the extension does not delay payment of the $800 annual tax for LPs, LLPs, and REMICs.
If you file late or submit an incomplete return—such as missing Schedules K-1—the Franchise Tax Board (FTB) may assess penalties. Partnerships file an amended Form 565 when correcting errors or when a federal change affects state reporting. California requires amendments within six months of a final IRS determination and expects amended Schedules K-1 for all affected partners.
Key Rules or Details for Tax Year 2021
Filing Requirements
You must file Form 565 if the partnership:
- Conducted business in California
- Had California-source income
- Was organized or registered with the California Secretary of State
LPs and LLPs must file even if inactive. Most LLCs classified as partnerships file Form 568 instead, except for limited cases involving nonregistered foreign LLCs with only California-source income.
$800 Annual Tax
LPs, LLPs, and REMICs owe an $800 annual tax if they are doing business, organized, or registered in California. For tax years beginning 2021–2023, newly formed entities receive a first-year exemption from the annual tax.
California–Federal Differences
Because California conforms to the IRC as of January 1, 2015, partnerships must adjust items that differ from federal rules. Key differences include:
- No deduction for the federal qualified business income (QBI) deduction
- No federal bonus depreciation
- Different business interest limitation rules
- Federal like-kind exchange changes do not apply to non-real property
These adjustments may affect both the partnership’s income and each partner’s K-1.
Schedule K-1 Requirements
A complete Schedule K-1 (565) must be prepared for each partner and attached to the Form 565 filed with the FTB. Ownership percentages must be presented in decimal format. The number of attached K-1s must match the partner count reported on the return.
Pass-Through Entity Elective Tax
Beginning in 2021, eligible partnerships may elect to pay a 9.3% elective tax on qualified net income. Partners then claim a corresponding credit on their personal returns. The election must be made on a timely filed original return and is irrevocable for that year.
Step-by-Step (High Level)
Step 1: Confirm Filing Need
Verify that your partnership meets California’s “doing business” or income requirements, or is registered with the state. If so, Form 565 is required.
Step 2: Gather Federal and State Records
Compile the partnership agreement, current-year financials, federal Form 1065, depreciation schedules, and ownership information. California preparation generally starts with federal amounts before state adjustments.
Step 3: Complete Form 565
Report gross receipts, cost of goods sold, ordinary income or loss, and other income or deductions. Use the same accounting method used on the federal return, adjusted for California differences.
Step 4: Prepare Schedule K (565)
Summarize each distributive category—ordinary income, credits, investment income items, and other passthrough items. Ensure totals reflect any California-specific adjustments.
Step 5: Prepare Partner Schedules K-1
Complete a K-1 for each partner, including:
- Name, address, and tax ID
- Entity type
- Ownership percentage (four-decimal precision)
- Share of each item reported on Schedule K
Step 6: Reconcile Amounts
Verify that all K-1 totals match Schedule K. Confirm the number of K-1s equals the partner count reported on the main form.
Step 7: Pay the $800 Annual Tax (if applicable)
Submit payment by the original due date. Payments may be made electronically or by including a voucher with the return.
Step 8: File the Return
Partnerships must e-file when using tax software. Attach all K-1s and provide copies to partners by the filing deadline.
Common Mistakes and How to Avoid Them
- Missing or incomplete K-1s: Ensure every partner receives a properly completed Schedule K-1 and that all identifying information is included.
- Incorrect ownership percentages: Use decimal form rather than percentages, fractions, or formulas.
- Totals not reconciling: K-1 totals must match Schedule K. Discrepancies delay processing.
- Forgot to check “Amended”: When filing a corrected return, mark the amended box on both the Form 565 and revised K-1s.
- Late $800 tax payment: Extensions apply only to filing, not payment. Pay the annual tax by the original due date.
- Not adjusting for California rules: Items like bonus depreciation or QBI deductions must be corrected for California conformity.
- Late federal-change reporting: File an amended return within six months of an IRS adjustment to avoid penalties.
What Happens After You File
The FTB processes the return, validates the K-1 count, and checks for required schedules. If items are missing or incorrect, the FTB may issue a notice requesting clarification or adjustment. Partners must use their K-1s to prepare their personal California returns, including Form 540 for residents or Form 540NR for nonresidents.
Statute of Limitations
California generally has four years from the filing or due date—whichever is later—to assess additional tax. The statute extends while an IRS partnership audit is pending.
Audits and Examinations
The FTB can request documents supporting income, deductions, or partner allocations. Under California’s centralized partnership audit rules, adjustments may be assessed at the partnership level unless an election is made to push changes out to partners.
Recordkeeping
Maintain partnership books, tax returns, and partner basis records for at least four years. Partners should keep basis records for as long as they hold their interest.
FAQs
Does an LLC file Form 565 or Form 568?
Most LLCs taxed as partnerships file Form 568, not Form 565. Only certain nonregistered foreign LLCs with California-source income may use Form 565.
Do we file Form 565 if we are registered in California but had no income?
LPs and LLPs registered with the Secretary of State must file Form 565 and pay the $800 annual tax even if they have no income or activity.
Can Form 565 be e-filed?
Yes. California requires e-filing for partnership returns prepared with tax software.
What penalties apply for missing or late documents?
The FTB may assess $18 per partner per month, up to 12 months, for late or incomplete filings. Late annual tax payments may incur additional penalties and interest.
How are COVID-19 relief grants reported?
Many state and federal COVID-19 relief programs are excludable from income for California purposes. Some require filing Form FTB 4197. Review the instructions to determine whether an exclusion or reporting requirement applies.
What should we do if the IRS audits our partnership?
Report any federal adjustments by filing an amended Form 565 within six months and attach the IRS report. Partners may also need to amend their own returns.
For official forms and instructions, visit the California Franchise Tax Board at ftb.ca.gov.
