What California Schedule K-1 (565) Is For
California Schedule K-1 (565) gives each partner their share of a partnership’s income, deductions, credits, and other tax items for the tax year. While the partnership files Form 565 as an information return, the Schedule K-1 shows what portion of those items you must report on your own California income tax return. Partnerships don’t pay income tax directly, so everything “passes through” to the partners.
The 2020 schedule includes several columns showing federal amounts, California adjustments, and California-source income. This year also reflects California’s nonconformity with certain federal rules, including the qualified business income deduction under IRC section 199A.
When You’d Use California Schedule K-1 (565)
You’ll use Schedule K-1 (565) when preparing your California individual income tax return. Calendar-year partnerships must give partners their K-1 by March 15 unless an extension was filed. Although the partnership submits the form to the Franchise Tax Board (FTB), you keep your copy for your records and use the details to complete Form 540 or 540NR.
If you receive the K-1 late, you can request an extension for your personal return or estimate figures and amend later. When the partnership issues an amended Schedule K-1, you typically must amend your own return as well. Amended schedules are marked clearly in Box H(2) and usually come with an explanation of the changes.
Key Rules or Details for 2020
Taxability of Partnership Income
California taxes your full distributive share of income in the year it’s earned, whether or not cash was distributed. Losses may be deductible, but only if you meet basis, at-risk, and passive activity rules.
Loss Limitation Requirements
Three separate limitations apply in this order:
- Basis limitation – you can’t deduct losses beyond your adjusted basis.
- At-risk limitation – losses are limited to what you’re actually at risk of losing.
- Passive activity limitation – passive losses generally can’t offset nonpassive income.
Residency Matters
California residents use column (d) (California-law amounts). Nonresidents use column (e) for California-source income, plus certain items from Tables 1 and 2. Part-year residents use a mix depending on their residency period.
Federal vs. California Differences
For 2020, California doesn’t conform to several federal provisions. Column (c) shows adjustments for items such as charitable contribution limits, opportunity zone rules, and the federal QBI deduction. Review adjustments carefully when completing your return.
Step-by-Step (High Level)
Step 1: Verify Your Partner Information
Check that your name, address, and taxpayer identification number are correct. Review Items A–E for your partner status, profit/loss percentages, and liability shares. These details affect basis calculations and future deductions.
Step 2: Review the Columns
Column (b) reflects federal Schedule K-1 amounts. Column (c) provides California adjustments, and column (d) shows your total California amounts. Column (e) provides California-source amounts for nonresidents. Use the appropriate column based on your residency status.
Step 3: Apply Basis and At-Risk Rules
Calculate your adjusted basis by accounting for contributions, income, losses, distributions, and liability changes. Determine your at-risk amount using your investment and qualifying liabilities. These steps limit how much loss you can deduct.
Step 4: Evaluate Passive vs. Nonpassive Items
Determine which partnership activities are passive or nonpassive for you personally. Use California Form FTB 3801 or FTB 3802 to apply passive activity rules when required.
Step 5: Enter Items on Your Tax Return
Transfer each line item from the K-1 to the correct section of your return. Ordinary business income generally flows to Schedule CA (540 or 540NR). Capital gains, rental income, credits, and guaranteed payments each have their own reporting paths. Follow the instructions closely.
Step 6: Review Tables and Attachments
Tables 1–3 provide sourcing rules, apportionment data, and expense information. Some credits and special allocations appear only in supplemental statements, so read everything included with your K-1.
Common Mistakes and How to Avoid Them
- Skipping loss limitations
Always apply basis, at-risk, and passive activity rules before claiming losses. - Using the wrong column
Residents should use column (d); nonresidents must use both (d) and (e). - Attaching the K-1 to your return
Keep it for your records—don’t send it to the FTB. - Ignoring California-specific adjustments
Review column (c) to ensure you’re not using federal amounts by mistake. - Misclassifying passive activities
Confirm your participation level; limited partners are usually passive. - Not tracking basis over time
Maintain year-to-year worksheets to support future deductions and gain calculations.
What Happens After You File
Once you file your individual return, the FTB matches it with the partnership’s Form 565 and Schedule K-1. If items don’t align, you may receive a notice requesting clarification or documentation. Keep your K-1 and all worksheets for future audits.
If losses or credits were limited, they carry forward until you have enough basis, become more at-risk, or generate passive income. Suspended passive losses may also become deductible when you fully dispose of your partnership interest.
If the partnership is later audited under centralized audit rules, you may receive an amended K-1 showing adjustments. In that case, you’ll need to file an amended California return. Keep records for several years, especially if you expect to sell your partnership interest. Partnership income may also affect next year’s estimated tax requirements, so review whether additional payments are needed.
FAQs
Do I attach Schedule K-1 (565) to my California tax return?
No. The partnership has already filed it with the FTB. Keep it with your records and transfer the amounts to the correct lines on your return.
What’s the difference between columns (d) and (e)?
Column (d) shows your full share of items using California law. Column (e) shows only California-source amounts for nonresidents and part-year residents.
Why can’t I deduct the entire loss shown on my K-1?
Losses are limited by basis, at-risk, and passive activity rules. You must apply all three before deducting any partnership loss.
If I didn’t receive cash, why do I still owe tax?
Partnerships are pass-through entities. You owe tax on your share of income when it’s earned, not when it’s distributed.
How do I know if an activity is passive?
Rental activities are generally passive. For business activities, limited partners are usually passive, while general partners must meet material participation tests to treat income as nonpassive.
What should I do if I get an amended K-1 after filing?
Use the amended amounts to file an amended California return. Follow the instructions in Box H(2) and include an explanation with your amendment.
For more information, visit the Franchise Tax Board’s Schedule K-1 (565) page at https://www.ftb.ca.gov/
