What California Schedule K-1 (565) Is For
California Schedule K-1 (565) reports each partner’s share of a partnership’s income, deductions, credits, and other tax items for the 2017 tax year. Although the partnership files Form 565, the tax liability passes through to individual partners. This means you must report your share of income on your California tax return, even if you did not receive a cash distribution.
The partnership prepares a Schedule K-1 for every partner and sends a copy to both the partner and the Franchise Tax Board (FTB). You use it to complete your Form 540, Form 100, or other applicable state return. California requires adjustments because state and federal tax rules differ, so the K-1 includes columns for federal amounts, California adjustments, and California-source income for nonresidents.
When You’d Use California Schedule K-1 (565)
You use a 2017 Schedule K-1 (565) when you were a partner in a business that filed Form 565 for that year. Partnerships generally issue K-1s after filing their return, which—if operating on a calendar year—was due March 15, 2018. You then use the information to file your own 2017 individual income tax return.
If the partnership later discovers errors, it may issue an amended K-1 marked “Amended.” Partners who already filed their return may need to file an amended California return to correct their tax liability. Amended K-1s can result from partnership-level corrections, new information received, or federal audit changes.
Key Rules or Details for 2017
California and Federal Differences
California’s tax rules do not fully conform to the Internal Revenue Code for 2017. The state did not adopt major federal changes from the Tax Cuts and Jobs Act, including the qualified business income deduction and revised like-kind exchange rules. These differences appear in column (c) of the K-1.
Taxation of Distributive Share
Partners must report their full distributive share of partnership income, even if the partnership made no distributions. This “pass-through” structure can create tax liability without a matching cash payment.
Residency Rules
Residents report all income from the partnership, using column (d). Nonresidents use column (e), which lists only California-source income. Part-year residents prorate income based on the period of residency.
Loss-Limitation Requirements
Partners must apply three limitation layers before deducting losses:
- Basis limitation
- At-risk limitation
- Passive activity limitation
If losses exceed any of these thresholds, they are suspended and carried forward.
Step-by-Step (High Level)
Step 1: Review Your K-1
Confirm your identifying details, profit-sharing percentages, and partner classification. Review each income, deduction, and credit category so you understand what will flow into your tax return.
Step 2: Determine Your Residency Status
Use column (d) if you were a California resident for all of 2017. If you were a nonresident or part-year resident, use column (e) to determine your California-source income.
Step 3: Apply Loss-Limitation Rules
If the K-1 shows losses, calculate basis, at-risk amounts, and passive activity limits. Only after completing all three tests can you determine the deductible amount. Suspended losses must be tracked for future years.
Step 4: Transfer K-1 Items to Your Return
Use the K-1 instructions to place income and deductions on the correct lines of your California return. This may include Schedule CA, Schedule D, Schedule D-1, or other forms depending on the type of income.
Step 5: Report Credits
Lines 15a through 15f show possible credits. Withholding credits require attaching Form 592-B. Other credits may require separate forms, such as those for rental real estate or low-income housing.
Step 6: Complete Additional Tables (If Needed)
Tables 1–3 apply if you are a nonresident in an apportioning partnership or have a unitary relationship with the business. These tables help compute California-source income and apportionment factors.
Step 7: Keep Records
Maintain documentation for basis, at-risk calculations, passive loss limits, and carryforwards. These records will be important in future years and if the FTB reviews your return.
Common Mistakes and How to Avoid Them
- Using the capital account as tax basis
Keep your own basis schedule; Item J does not reflect tax basis - Ignoring loss-limitation rules
Apply basis, at-risk, and passive limits in order - Mixing current and prior-year suspended losses
Track each year's losses separately - Using the wrong income column
Residents use column (d); nonresidents use column (e) - Failing to attach Form 592-B
You cannot claim withholding credits without it - Misclassifying passive activity
Determine participation level accurately and use Form FTB 3801 - Skipping California adjustments
Use column (d) totals, not federal amounts
What Happens After You File
The FTB cross-checks your return against the partnership’s K-1 filings. If the numbers do not match, the agency may send a notice requesting clarification or may adjust your return. Partners must keep basis and loss-carryforward records because California does not track these figures for you.
If the IRS audits the partnership and adjustments are made, the partnership must notify California and issue amended K-1s when necessary. Depending on the changes, you may need to amend your own return. If you received withholding shown on Form 592-B, it will be applied to your tax liability; excess withholding may generate a refund.
When you dispose of your partnership interest, your adjusted basis determines your gain or loss. Keeping comprehensive records throughout your ownership period is essential because basis and suspended losses directly affect the final tax result.
FAQs
What’s the difference between my capital account and tax basis?
Your capital account is the partnership’s book record of your share of equity. Tax basis is your personal calculation used to determine deductible losses and gain or loss on sale. Basis reflects contributions, income, losses, and distributions and often differs from the capital account.
Do I owe tax on income even if the partnership didn’t distribute cash?
Yes. Partners report their share of partnership income for the year it is earned, not when it is distributed. Many partnerships make “tax distributions,” but they are not required to do so.
How do I know whether I can deduct losses on my K-1?
You must have sufficient basis, be at risk for the amounts, and meet passive-activity requirements. Losses disallowed under any test are suspended and may be deductible in a future year.
I’m not a California resident. Do I need to file a return if I received a K-1?
If your K-1 lists California-source income in column (e), you generally must file Form 540NR. Some exceptions apply for investment partnerships or small amounts of income below filing thresholds.
What do I do with Form 592-B?
Attach Form 592-B to your California return to claim withholding credits. Use the amount on Form 592-B even if it differs from the K-1 due to timing differences.
Can I amend my return if I receive an amended K-1?
Yes. Use the corrected information to file an amended return. If changes increase your tax liability, file promptly to reduce interest. If they reduce it, you may be entitled to a refund.
For official forms and instructions, visit the IRS Schedule K-1 information page: https://www.irs.gov/forms-pubs/search?q=Schedule+K-1
