Schedule K-1 (565) (2022): Partner’s Share of Income

What Schedule K-1 (565) (2022) Is For

Schedule K-1 (565) (2022) is used to report each partner’s share of income, deductions, credits, and other items from a partnership filing Form 565 under California law. The form supports proper tax return reporting by showing both federal law amounts and California-specific adjustments required by the California Franchise Tax Board. Although it references federal documents such as Form 1065, it is the partner’s responsibility to incorporate these items correctly when calculating income taxes owed to California.

When You’d Use Schedule K-1 (565) (2022)

You may need this form in several situations when partnership activity affects your tax filings.

1. Receiving partnership income: This applies when the partnership files Form 565 and provides each partner with a Schedule K-1, allowing the partner to include distributive items on the appropriate tax return.
   
   
2. Handling California-sourced income: This applies when income must be sourced under California law and reported on state filings such as Form 540NR according to guidance from the California FTB.
   
   
3. Correcting or amending partnership activity: This applies when the partnership needs to issue corrected documents due to changes under federal law or adjustments made by the California Franchise Tax Board.
   
   
4. Tracking partner-level limitations: This applies when the partner must compare federal reporting on Form 1040 with California requirements to arrive at accurate taxable income.
   
   
5. Reporting tax credits or withholding: This applies when the partner needs data from Schedule K-1 or forms such as Form 592-B to claim or reconcile amounts related to California withholding, tax credits, or estimated payments.

Key Rules or Details for 2022 Schedule K-1 (565)

Several key rules govern the reporting of items from Schedule K-1 (Form 565) (2022).

1. California and federal differences: This rule explains that items on Schedule K-1 (Form 565) (2022) may differ because California Revenue and Taxation Code provisions do not always align with federal income tax treatment.
   
   
2. Limits on deductions: This rule explains that California places limits on deductions, such as those under IRC Section 179, which require reconciliation with federal amounts through schedules like Schedule M-1 or the California Schedule S.
   
   
3. Reporting Business Property: This rule explains that dispositions of business property may involve federal Form 4797 and require adjustments that flow through California schedules to ensure the state return is completed accurately.
   
   
4. Schedule and form interaction: This rule explains that schedules such as Schedule M-2, Schedule M-1, Schedule B, and the California Schedule L are used to match federal reporting requirements with California law.
   
   
5. Special Reporting for Entity Types: This rule explains that limited liability companies, limited liability partnerships, foreign entities, S corporations, and C corporations must apply additional regulations under California law and state statute when filing related partnership forms.

Step-by-Step (High Level)

The filing process follows a sequence that ensures consistency between federal and California reporting.

1. Prepare federal documents first: This step explains that completing Form 1065 and the federal Schedule K-1 establishes the baseline amounts that will later be adjusted under California law.
   
   
2. Complete the California partnership return: This step explains that the partnership must prepare Form 565 and attach the required schedules, such as the California Schedule K and California Schedule M-1, as instructed by the California Franchise Tax Board.
   
   
3. Apply partner allocations: This step explains that the partnership must create a Schedule K-1 for each partner, reflecting the partner’s distributive share based on ownership percentages and the principal business activity.
   
   
4. Use supporting software and worksheets: This step explains that preparation may involve tools such as CCH ProSystem fx Tax, CCH Axcess Tax, Schedule L and M worksheets, and Schedule M-3 for entities that meet California filing thresholds.
   
   
5. Submit forms to the appropriate agencies: This step explains that filings must be sent to the California FTB and, when applicable, the California SOS or federal agencies, as additional forms such as Form 8832 may be required for classification elections.

Common Mistakes and How to Avoid Them

Several issues can be prevented by carefully reviewing California filing requirements and partner-level reporting rules.

• Missing supplemental schedules: Attach every required support schedule, such as Form FTB 4197 or Form FTB 3540, to avoid delays or notices from the California Franchise Tax Board.
  
  
• Incorrect apportionment amounts: Verify all California sourcing and allocation figures using California Department of Tax and Fee Administration rules and approved worksheets before submission.
  
  
• Failure to attach withholding forms: Include withholding documents such as Form 592 or Form 592-B to ensure partners receive proper credit for California withholding.
  
  
• Not filing required partner consents: Confirm that forms such as Form FTB 3832 or Form FTB 3834 are completed and included to maintain compliance with California filing expectations.
  
  
• Errors in depreciation reporting: Reconcile depreciation using forms such as Form FTB 3885L or Form FTB 3885P to match California requirements with federal depreciation schedules.

What Happens After You File

After you file, the California Franchise Tax Board processes the partnership’s Form 565 and reviews the attached Schedules K and K-1 to confirm that all items reconcile with California requirements. Partners then use their Schedule K-1 data to report income on their own state or federal returns, including any withholding or estimated payments recorded through forms such as Form 3536 or Form 3537. 

The partnership remains responsible for the annual tax and, if applicable, the California franchise tax. The California FTB may request clarification or supporting documents if inconsistencies or missing schedules are identified in the submission.

FAQs

How does Schedule K-1 (565) (2022) affect filings for a limited liability company?

A limited liability company uses Schedule K-1 to report partner allocations when filing Form 565 according to California Franchise Tax Board requirements.

Does an S corporation ever rely on information from Schedule K-1 (565)?

An S corporation may review partnership K-1 data if it has ownership interests in a partnership and must reconcile items on Form 1120S with California adjustments.

What if a partnership updates its structure using Form LLC-4/7 or Form LLC-3?

A partnership that files Form LLC-4/7 or Form LLC-3 must ensure its updated California SOS records match the information reported on Schedule K-1.

Can corporate software or a generative AI assistant be used to prepare Schedule K-1 (565)?

Corporate software or a generative AI assistant may support preparation tasks, as long as calculations adhere to California Revenue and Taxation Code rules and official California FTB instructions.

Do limited liability partnerships report items differently when completing Schedule K-1 (565)?

Limited liability partnerships report their distributive items using the same form but must follow additional California filing rules related to apportionment and entity classification.

‍