What California Form 565 Is For
California Form 565 (2018) is the partnership return of income for entities doing business in California or earning California-source income. It is primarily an information return: it reports the partnership’s income, deductions, gains, and losses, and allocates those items to the partners.
Most tax liability is paid at the partner level. The partnership files Form 565 and issues a California Schedule K-1 (565) to each partner, and the partners use those K-1s to file their own income tax returns. One major exception is that certain partnerships, such as limited partnerships (LPs) and limited liability partnerships (LLPs), owe California’s $800 annual tax.
When You’d Use California Form 565
You use California Form 565 (2018) if your entity is treated as a partnership for tax purposes and:
- Is doing business in California
- Is organized or registered in California
- Has income from California sources
This generally covers general partnerships, LPs, LLPs, and some Real Estate Mortgage Investment Conduits (REMICs) treated as partnerships. Most LLCs classified as partnerships file Form 568 instead, unless they fall into limited exceptions (for example, some foreign entities with California-source income but not “doing business” in the state).
For calendar-year partnerships, the 2018 return was due March 15, 2019 (15th day of the 3rd month after year-end). California provides an automatic seven-month extension to file, typically to mid-October, but that does not extend time to pay any required $800 annual tax. Extension payments are made with Form FTB 3538.
If you discover an error after filing, or the IRS changes the partnership’s federal return, you file an amended Form 565. Check the “Amended return” box, file corrected Schedules K-1 marked “Amended,” and attach an explanation. If the IRS issues a final adjustment to your federal Form 1065, you generally must amend California within six months.
Key Rules or Details for 2018
California generally follows federal partnership rules, but for 2018 it conforms to the Internal Revenue Code only through January 1, 2015. That means it does not follow many newer federal provisions, including:
- The federal qualified business income deduction (IRC §199A)
- New limits on like-kind exchanges of personal property
- Federal opportunity zone gain deferrals and exclusions
- Certain TCJA partnership audit and termination rules
- Treatment of some foreign income under IRC §965
When federal and California rules differ, you make adjustments on Form 565, typically on Schedule K where you show federal amounts, California adjustments, and California totals.
Key 2018 partnership filing requirements include:
- $800 annual tax – LPs and LLPs that are doing business in California, registered with the Secretary of State, or organized in California generally owe a non-deductible $800 tax.
- Schedule K-1 (565) – You must prepare a California K-1 for each partner; federal K-1 (1065) is not a substitute. Totals from all K-1s must match Schedule K on Form 565.
- Nonresident withholding – Partnerships with nonresident or foreign partners may have withholding obligations and related filing requirements (Forms 592 series).
- Mandatory e-file – Entities that use tax software are generally required to e-file both original and amended returns.
- Record retention – Keep partnership returns and workpapers at least four years; partners should keep basis and ownership records much longer, since basis affects future tax liability.
Step-by-Step (High Level)
Step 1: Gather Federal and California Information
Start with your completed federal Form 1065 and all schedules. Collect the partnership’s FEIN, California Secretary of State number (if any), financial statements, partner lists and percentages, and any California-specific forms for depreciation, NOLs, or credits.
Step 2: Complete Form 565 Income and Deductions
On Form 565, report gross receipts, cost of goods sold, other income (interest, dividends, rents, capital gains), and deductions such as salaries, guaranteed payments, rent, and depreciation. The result is the partnership’s ordinary business income or loss, which will feed into Schedule K.
Step 3: Make California Adjustments on Schedule K
On Schedule K, show:
- Federal amounts
- California adjustments (for nonconformity to post-2015 federal changes and other state differences)
- California totals
Adjust for items like Section 199A, opportunity zone transactions, different depreciation rules, and any other nonconforming income tax items.
Step 4: Prepare Each Partner’s Schedule K-1 (565)
For every partner, prepare a Schedule K-1 (565) with their distributive share of income, deductions, credits, and other items. Use decimal ownership percentages to four places and ensure partner information is complete. When you add all K-1 line items, they must reconcile to Schedule K.
Step 5: Answer Questions and Complete Supporting Schedules
On Sides 2 and 3 of Form 565, answer all yes/no questions about activities, ownership changes, real property transfers, and foreign partners. Attach schedules such as Schedule D (capital gains and losses), Schedule L (balance sheet), Schedule M-1 and M-2 (book-tax reconciliations and capital accounts), and any California forms for withholding or credits.
Step 6: Pay Required Tax, Sign, and File
If you owe the $800 annual tax, ensure it is paid by the original due date, even if you file under extension. A general partner (or authorized fiduciary) must sign the return; if you use a preparer, they must sign and include their PTIN. File electronically when required and provide each partner with their K-1 so they can file their own return and calculate their individual income tax liability.
Common Mistakes and How to Avoid Them
- Missing or unsigned return
- An unsigned Form 565 is treated as not filed. Make sure a general partner signs before submission.
- Wrong form (565 vs. 568)
- Most LLCs classified as partnerships file Form 568, not 565. Confirm your entity type and California filing requirements.
- K-1 errors or missing K-1s
- Every partner listed on the return must receive a Schedule K-1 (565), and totals must match Schedule K. Avoid using federal K-1 forms.
- Ignoring the $800 annual tax
- LPs and LLPs often assume pass-through entities owe no entity-level tax. For 2018, the $800 tax still applies and is due by the original due date.
- Poor documentation for amended returns
- When amending, clearly identify each line changed, the new amount, and the reason. Attach copies of any IRS adjustments that prompted the amendment.
- Not handling nonresident partner withholding
- If you have nonresident or foreign partners, review withholding rules; failure to withhold can make the partnership liable for the tax instead of the partner.
What Happens After You File
The Franchise Tax Board reviews your Form 565 to verify math, completeness, and consistency between Form 565, Schedule K, and the partner K-1s. E-filed returns are usually processed faster than paper filings. If your payments exceed the $800 tax and any other amounts due, the FTB issues a refund or applies it to future years based on your election.
If additional tax is owed, the FTB will send a notice showing the balance due with interest and any penalties. Underpayment, late filing, or late payment can trigger penalties, including per-partner penalties for late returns.
The return may be selected for examination, especially where there are large losses, unusual adjustments, or differences from federal filings. The normal statute of limitations is four years from the due date or filing date, but IRS audits can extend California’s period. Partners then use their K-1 information to file their own income tax or corporate tax returns, and their tax liability may be adjusted if the partnership return changes later.
FAQs
Do all partnerships have to pay the $800 annual tax?
No. The $800 tax generally applies to LPs and LLPs that are doing business in California, registered in the state, or organized in California. Many general partnerships that only receive California-source income, but are not doing business in the state, may not owe this tax, though they still may need to file a tax return.
What is the difference between California Form 565 and Form 568?
Form 565 is the partnership return for traditional partnerships and some REMICs. Form 568 is the LLC return for entities treated as partnerships or disregarded entities. Most LLCs that do business in California or are registered there file Form 568, not Form 565.
Can I file Form 565 late without penalties?
California gives an automatic seven-month extension to file, but not to pay. If you file by the extended due date and paid any required $800 tax by the original due date, you usually avoid late-filing penalties. Filing after the extension or failing to pay on time can trigger per-partner penalties and interest.
Do I need to send the federal Form 1065 with my California Form 565?
Generally, no. You don’t attach the federal return unless the FTB specifically requests it. However, you must use federal amounts as the starting point on Form 565 and keep the federal partnership return in your records in case the FTB asks for it later.
What happens if the IRS changes our federal partnership return?
If the IRS audits your 2018 federal Form 1065 and makes changes, you must file an amended California Form 565 within six months if the change affects California tax. Include a corrected Schedule K, amended Schedules K-1 (565), and a copy of the federal adjustment notice.
How do foreign or nonresident partners affect the return?
Income allocated to nonresident or foreign partners may require California withholding and additional forms. The partnership may have to remit tax on behalf of those partners and report the withholding on the partners’ K-1s so they can claim credit when they file a tax return with California.
