What California Schedule K-1 (565) Is For
California Schedule K-1 (565) (2021) reports a partner’s share of a partnership’s income, deductions, credits, and other tax items. Partnerships do not pay income tax at the entity level; instead, items pass through to each partner, who reports them on their own individual income tax return.
The form serves as a bridge between the partnership’s Form 565 and the partner’s Form 540, 540NR, 100, 100S, or another applicable return. For 2021, partnerships must also report each partner’s capital account using the tax-basis method, giving the Franchise Tax Board (FTB) a clearer picture of partner activity during the year.
When You’d Use California Schedule K-1 (565)
Partners use Schedule K-1 (565) when a partnership has filed Form 565 for the 2021 tax year and you were a partner at any point during that year. The partnership must issue a K-1 for each partner by the original or extended due date, typically March 15, 2022 (or September 15 with extension).
You rely on the K-1 to complete your 2021 California return, but you generally do not attach it because the partnership already sends a copy to the FTB. If you do not receive your K-1 by the April 18, 2022 filing deadline, you may request an extension or file based on a reasonable estimate and amend when the actual K-1 arrives. A final K-1 indicates you exited the partnership; an amended K-1 usually requires you to amend your return.
Key Rules or Details for 2021
Deadlines and Filing Requirements
Most partnerships had a March 15, 2022 filing deadline. Partners needed to file or extend their California return by April 18, 2022 and pay estimated tax by that date. Nonresident partners may need to file a California return if they have California-source income, even if they live elsewhere.
Capital Accounts vs. Basis
Item L on the 2021 Schedule K-1 reports your capital account using the tax-basis method. Although this provides useful information, it is not the same as your tax basis in the partnership interest. Tax basis determines how much loss you may deduct and how to calculate gain or loss on sale. You must track basis separately, adjusting it each year for contributions, income, losses, distributions, and changes in partnership liabilities.
Understanding the Columns
The form shows federal amounts, California adjustments, and total California amounts. A separate column displays the California-source portion. California residents typically use the total California column; nonresidents and part-year residents use the California-source column only.
Loss Limitation Rules
Losses are not automatically deductible. You must apply three layers of limits:
- Basis limitation – You may deduct losses only up to your tax basis.
- At-risk rules – You may deduct only amounts you are economically at risk for.
- Passive activity rules – Losses from passive activities generally offset only passive income.
Suspended losses carry forward until you have basis, at-risk amounts, or passive income to use them.
Step-by-Step (High Level)
Step 1: Review Your K-1
Check your name, address, ID number, and percentages of profit, loss, and capital. Confirm whether the K-1 is original, amended, or final. Report discrepancies to the partnership quickly.
Step 2: Determine Residency and Column Use
Residents usually rely on total California figures. Nonresidents and part-year residents use only the California-source amounts. This determines how much partnership income appears on your individual income tax return.
Step 3: Transfer Items to Your Return
Map each line of the K-1 to the correct place:
- Ordinary business income → Schedule CA
- Rental income → Schedule CA (subject to passive loss rules)
- Interest, dividends, royalties → Schedule CA
- Capital gains → Schedule D
- Guaranteed payments → Schedule CA and federal Schedule SE (if applicable)
- Charitable contributions and other deductions → Schedule CA or itemized deductions
Step 4: Apply Loss Limitations
Update your basis calculation. Then apply the at-risk rules and passive activity rules. Any disallowed losses should be tracked and carried forward.
Step 5: Claim Withholding and Credits
If the partnership withheld California tax, claim it as a payment on your return. Report any credits listed on your K-1, attaching the appropriate forms when required.
Step 6: Keep Records and File
Retain your K-1, worksheets, and supporting documentation for future years. File electronically or by mail using your K-1 figures to complete your return accurately.
Common Mistakes and How to Avoid Them
- Using Item L as tax basis — track basis separately
- Ignoring basis, at-risk, and passive limits — apply them before deducting losses
- Attaching the K-1 to your return — it’s for your records only
- Combining suspended losses — track each year separately
- Using the wrong column for residency — residents use total California; nonresidents use California-source
- Forgetting guaranteed payments — report them as ordinary income and include for self-employment tax federally
What Happens After You File
The FTB matches your reported items with the partnership’s filing. If numbers differ, you may receive a notice seeking clarification or proposing changes. Partnership-level audits may result in amended K-1s, requiring you to amend your California return.
Suspended losses carry forward indefinitely until you meet requirements to use them. If you later find an error in how you reported K-1 items, file an amended California return and update carryforward schedules. Keep copies of basis worksheets, partnership agreements, and participation logs in case the FTB requests documentation.
FAQs
Do I attach Schedule K-1 (565) to my California return?
No. Keep it for your records. The partnership already submits a copy to the FTB.
What if I receive my K-1 after April 18, 2022?
You can file an extension and pay your estimated tax. When the K-1 arrives, file your original return or amend a previously filed return so it matches the K-1.
How is my capital account different from my tax basis?
The capital account reflects your equity for tax-basis accounting but does not include all adjustments used in basis calculations. Basis also includes your share of certain liabilities and determines how much loss you may deduct.
Which column should nonresidents use?
Nonresidents generally use the California-source column, which reflects only the portion of partnership income taxable by California.
How are guaranteed payments taxed?
Guaranteed payments are treated as ordinary income. Individual partners must also include them when calculating federal self-employment tax.
What if the partnership issues an amended K-1?
You should amend your California return to reflect corrected income, deductions, or credits. This keeps your return consistent with the partnership’s filing.
