What California Form 565 (2023) Is For
California Form 565 (2023), Partnership Return of Income, is an information return used by partnerships to report income, deductions, gains, losses, and other tax items to the Franchise Tax Board (FTB). The partnership itself usually does not pay California income tax on this income tax return. Instead, the income or loss flows through to the partners, who report their shares on their own individual income tax return or business return.
You file California Form 565 (2023) if you are a partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), or a Real Estate Mortgage Investment Conduit (REMIC) classified as a partnership that is doing business in California or earning California-source income. The return also generates Schedule K-1 (565) for each partner so the FTB can match amounts to each partner’s California tax liability.
When You’d Use California Form 565 (2023)
You use California Form 565 (2023) when your entity is a partnership (not an LLC) with California filing requirements. That includes general partnerships, LPs, LLPs, and qualifying REMICs that conduct a trade or business in California, have California-source income, or are registered with the California Secretary of State. LLCs classified as partnerships generally file Form 568 instead, unless they fit a narrow exception as nonregistered foreign entities filing only to report California-source income.
For calendar-year filers, the 2023 Form 565 is due March 15, 2024—the 15th day of the third month after year-end. California grants an automatic seven-month extension to file, pushing the extended deadline to October 15, 2024. The extension applies only to filing, not to paying the $800 annual tax or any other balance due.
Partnerships also use California Form 565 (2023) for amended or short-period returns. You file an amended return if you find an error or if the IRS changes your federal partnership return. You file a short-period return if the partnership begins or ends during 2023 and has a tax year shorter than 12 months.
Key Rules or Details for 2023
Entity Classification and Form Choice
The first rule is choosing the correct form. Most LLCs classified as partnerships for federal purposes must file Form 568, not Form 565. Form 565 is generally for traditional partnerships, LPs, LLPs, and certain nonregistered foreign entities. A key exception: some nonregistered foreign LLCs and LPs that are not “doing business” in California but have California-source income may be required to use Form 565 to file a tax return.
Doing Business and Filing Requirements
A partnership is considered to be “doing business” in California if it actively engages in transactions for financial gain in the state or meets specific numeric thresholds. These thresholds relate to California sales, property, or payroll compared with total activity and are indexed annually. If you meet these filing requirements or have California-source income, you generally must file California Form 565 (2023).
$800 Annual Tax and First-Year Relief
LPs, LLPs, REMICs, and LLCs that are organized in California, registered with the Secretary of State, or doing business in the state must pay an $800 annual tax. This amount is not deductible and does not reduce any partner’s distributive share or tax liability. For taxable years beginning on or after January 1, 2021 and before January 1, 2024, new LPs, LLPs, and LLCs are exempt from the $800 tax in their first taxable year, which gives start-up entities limited relief.
Federal Conformity and Nonconformity
California Form 565 (2023) is based on federal partnership income, but California’s conformity date is January 1, 2015. California does not conform to many later federal changes, including the Section 199A qualified business income deduction, federal opportunity zone rules, and many Tax Cuts and Jobs Act provisions. Partnerships must adjust for these differences so partners see the correct amounts on their California Schedule K-1.
Federal Audit Changes and State Amendments
For years beginning on or after January 1, 2018, California follows a modified version of the federal centralized partnership audit regime. Partnerships must report each IRS change to the reviewed year within six months of the final federal determination and file an amended California Form 565 (2023) if necessary. Partners may also need to amend their own California income tax returns to reflect those changes.
Step-by-Step (High Level)
Step 1: Confirm You Should File California Form 565 (2023)
Verify whether you are a partnership, LP, LLP, or REMIC that should file Form 565 rather than Form 568. Confirm that you meet California filing requirements by checking whether you are doing business in the state or have California-source income.
Step 2: Complete the Identification Section
On Side 1, enter the partnership name, address, FEIN, California Secretary of State file number, and tax year. Check boxes for partnership type, amended return, short period, or final return as applicable. Answer all questions on Side 2, including whether the partnership is registered in California or acquired control of another entity.
Step 3: Report Income and Deductions
On Page 1, report gross receipts or sales, returns and allowances, and cost of goods sold. Then enter other income items and ordinary deductions such as salaries, guaranteed payments, rent, taxes and licenses, interest, depreciation, and other expenses. Start with federal Form 1065 figures, then adjust for California-specific rules where federal and state law differ.
Step 4: Complete Schedule K and Other Schedules
Schedule K summarizes all distributive share items for partners combined—ordinary income, rental income, interest, dividends, capital gains, charitable contributions, credits, and other items. If you had capital transactions, complete Schedule D (565). If partners include other pass-through entities, complete Schedule EO (565) so the FTB can track layered ownership.
Step 5: Prepare Each Schedule K-1 (565)
Prepare a California Schedule K-1 (565) for every partner. Include the partner’s identifying information, resident or nonresident status, beginning and ending capital accounts, and their share of all Schedule K items. Express profit, loss, and capital percentages as decimals to four places, and ensure all K-1 amounts reconcile to Schedule K totals.
Step 6: Pay the $800 Annual Tax and File
If you are an LP, LLP, or REMIC subject to the $800 annual tax, pay it by the original due date—usually March 15, 2024 for calendar-year filers. Use Form FTB 3538 if paying with an extension. A general partner must sign Form 565. Assemble the return, attach Schedules K-1 and any required forms, and mail or e-file to the FTB by the deadline or extended due date.
Step 7: Distribute K-1s to Partners
Provide each partner with their Schedule K-1 (565) by the partnership filing deadline (including extensions). Partners need this information to file a tax return and accurately report their California income tax liability.
Common Mistakes and How to Avoid Them
- Filing Form 565 for an LLC when Form 568 is required
- Assuming the seven-month extension covers the $800 annual tax payment
- Forgetting to prepare and attach California Schedules K-1 (565) for every partner
- Using fractions or “Various” instead of four-place decimal percentages on K-1s
- Ignoring federal audit changes and failing to file an amended Form 565 within six months
- Leaving out California adjustments for items like Section 199A or opportunity zone income
What Happens After You File
After you file California Form 565 (2023), the FTB posts the return and any payments to the partnership’s account. The agency uses Schedule K-1 (565) data to match each partner’s distributive share to the amounts reported on their own California individual income tax return or business return. Mismatches in income, credits, or withholding can trigger notices or examinations.
If the partnership paid more than required, the FTB issues a refund or credits the overpayment forward, depending on what you requested. If the FTB finds additional tax due—perhaps because the $800 annual tax was underpaid or a past due return was filed late—it will send a notice with penalties and interest. The general statute of limitations is four years from the original due date or filing date, but it can be extended when there is a federal audit or other special circumstances, so record retention is important.
FAQs
Who must file California Form 565 (2023)?
Any partnership, LP, LLP, or REMIC classified as a partnership that is doing business in California or earning California-source income generally must file California Form 565 (2023). LLCs classified as partnerships usually file Form 568 instead, unless they meet narrow exceptions as nonregistered foreign entities with California-source income.
Does the automatic extension postpone the $800 annual tax?
No. The automatic seven-month extension only extends the time to file a tax return, not to pay. LPs, LLPs, REMICs, and LLCs subject to the $800 annual tax must pay it by the original due date to avoid penalties and interest, even if the return itself is filed under extension.
How does California Form 565 (2023) affect individual partners?
Form 565 is a pass-through return. It determines each partner’s share of income, deductions, and credits, which are reported on Schedule K-1 (565). Partners then use their K-1 to file a tax return and compute their own California income tax liability on Form 540 or Form 540NR.
When do we have to amend California Form 565 (2023) for federal changes?
If the IRS audits your federal partnership return or you file an amended federal Form 1065 that changes income, deductions, or credits, you generally must file an amended California Form 565 within six months of the final federal determination. You also need to provide amended Schedules K-1 to partners so they can amend their own California returns if needed.
Is the $800 annual tax deductible?
No. The $800 annual tax is a nondeductible charge. It cannot be deducted on California Form 565 (2023), and partners may not claim it as a deduction on their own returns when they file a tax return reporting their share of partnership income.
