What Is a CA K-1 and How Does It Differ From the Federal Form?

Taxpayers who receive income from partnerships, S corporations, estates, or trusts may be familiar with Schedule K-1 at the federal level. However, California has its own version—CA K-1—which serves a similar purpose but includes state-specific adjustments that can affect tax liability.

Understanding how CA K-1 differs from the federal form is essential for accurate state tax filings. Key differences include California’s unique tax laws, income modifications, and additional reporting requirements.

Entities That Provide This Form

The CA K-1 is issued by pass-through entities, which allocate income, deductions, and credits to their owners or beneficiaries instead of paying tax at the entity level. These include partnerships, limited liability companies (LLCs) taxed as partnerships, S corporations, estates, and trusts.

Partnerships—whether general, limited, or limited liability—must provide a CA K-1 to each partner based on their share of income and expenses. LLCs classified as partnerships follow the same requirement.

S corporations issue CA K-1s to shareholders, reflecting their proportionate share of business income, losses, and deductions. Unlike C corporations, which pay corporate income tax directly, S corporations pass these amounts through to shareholders for personal tax reporting.

Estates and trusts distribute income to beneficiaries and must furnish a CA K-1 detailing the taxable portion of those distributions.

California imposes additional requirements on certain pass-through entities. LLCs doing business in the state must pay an $800 annual franchise tax and, if applicable, a gross receipts fee. Partnerships and S corporations may also be subject to California’s minimum tax and other state-specific levies, which impact reported amounts on the CA K-1.

Items It Reports

The CA K-1 details a taxpayer’s share of income, deductions, and credits from a pass-through entity. A key component is the allocation of ordinary business income or loss, reflecting the entity’s net earnings after expenses. Since California does not always conform to federal tax treatment, adjustments may be required.

Rental income is subject to California’s sourcing rules. If a partnership or S corporation owns rental property in multiple states, only the portion attributable to California is taxable.

Capital gains and losses are itemized separately, distinguishing between short-term and long-term transactions. California does not conform to federal tax treatment for certain gains, such as those from installment sales or like-kind exchanges, requiring taxpayers to recalculate taxable amounts.

Deductions and credits also appear on the CA K-1. Depreciation adjustments often differ from federal calculations due to California’s decoupling from bonus depreciation rules. The form also reports state-specific tax credits, such as the California Competes Tax Credit or Low-Income Housing Credit, which can reduce state tax liability.

Distinctions From the Federal Form

While both the federal and California Schedule K-1 allocate income, deductions, and credits, California applies its own tax treatment in several areas.

One major difference is how the state taxes nonresidents. The federal government taxes U.S. citizens and residents on worldwide income, but California taxes nonresidents only on income sourced within the state. A nonresident’s CA K-1 may reflect only a portion of their federal K-1 income, depending on the entity’s operations.

California also has different apportionment rules for multistate businesses. While federal tax law considers total income, California requires apportionment using a single-sales factor formula, which calculates taxable income based on the proportion of an entity’s total sales from California customers. A partnership generating revenue across multiple states might report lower taxable income on the CA K-1 than on the federal version due to the exclusion of out-of-state sales.

Tax basis calculations further differentiate the two forms. The IRS allows certain deductions, such as Section 179 expensing and bonus depreciation, but California imposes its own limitations and phase-out thresholds. This affects a taxpayer’s basis in an entity, impacting their ability to deduct losses or recognize gains upon selling their interest. A shareholder in an S corporation may have a lower California basis than their federal basis due to disallowed deductions, potentially leading to a higher taxable gain at the state level when selling shares.

Applying State-Only Adjustments

California’s tax code diverges from federal law in several ways, requiring adjustments on the CA K-1 to reconcile differences in income recognition, deductions, and credits.

One common adjustment involves tax-exempt interest. While municipal bond interest from California sources remains nontaxable at the state level, interest earned on out-of-state municipal bonds must be added back to taxable income. Federally, most municipal bond interest is exempt regardless of the issuing state.

Net operating losses (NOLs) also require adjustments. California imposes stricter limitations on NOL deductions than federal rules, particularly in years when budget constraints lead to temporary suspensions. For example, during the 2020 and 2021 tax years, California disallowed NOL deductions for businesses with more than $1 million in taxable income. Taxpayers relying on these deductions at the federal level may need to adjust their California taxable income.

Stock-based compensation creates another discrepancy. While both federal and state tax codes allow deductions for equity-based pay, California does not conform to the federal treatment of incentive stock options (ISOs). The state taxes the spread between the exercise price and fair market value at exercise, even though this amount is not considered taxable income federally. This can lead to unexpected tax liabilities for employees exercising ISOs in California.

Correcting Mistakes and Amendments

Errors on a CA K-1 can lead to misreported income, incorrect deductions, or missed tax credits, potentially resulting in penalties or an audit. If a pass-through entity identifies a mistake after issuing the form, it must prepare an amended CA K-1 and submit a revised version to both the recipient and the California Franchise Tax Board (FTB). The amended form should clearly indicate that it is a correction by checking the “Amended K-1” box and include only the changes while maintaining all other previously reported amounts.

Taxpayers who receive an amended CA K-1 may need to file an amended California tax return (Form 540X for individuals or the relevant business return). If the correction increases taxable income, additional tax and interest may be owed, while reductions in taxable income could result in a refund. California generally allows up to four years from the original filing deadline to amend a return, though this period may be extended if the federal return was also amended. If the amendment results from an IRS audit or federal adjustment, taxpayers must notify the FTB within six months.

Submission Guidelines

Pass-through entities must include all CA K-1s with their California tax return, typically Form 565 for partnerships, Form 568 for LLCs, and Form 100S for S corporations. These forms are due on the 15th day of the third month following the close of the entity’s tax year, meaning a calendar-year filer must submit by March 15. Late filings can result in penalties, including a per-partner or per-shareholder fine for each month the return is overdue.

Recipients of a CA K-1 must report the information on their personal or business state tax returns. If the entity operates in multiple states, taxpayers may need to allocate income using California’s apportionment rules. Electronic filing is encouraged, especially for entities with multiple partners or shareholders, as it reduces processing time and minimizes errors. The FTB requires certain entities to submit K-1 information electronically if they meet specific filing thresholds, ensuring streamlined data matching and compliance enforcement.