What Is CA Form 565 and Who Is Required to File It?

California Form 565, the Partnership Return of Income, is a state tax document used to report the financial activities of a partnership to the California Franchise Tax Board (FTB). Its role is to detail the income, deductions, gains, losses, and credits generated by the partnership’s operations. As an information return for a pass-through entity, the partnership itself does not pay state income tax on its profits. Instead, earnings and losses are “passed through” to the individual partners, who report this information on their personal California income tax returns.

Who is Required to File Form 565

A partnership must file Form 565 if it is actively “doing business” in California or if it receives income from California sources, regardless of its physical location. The Franchise Tax Board (FTB) defines “doing business” as engaging in any transaction for financial gain within California. A partnership is also considered to be doing business in the state if its California sales exceed $711,538, its real and tangible personal property exceeds $71,154, or the amount it pays in compensation exceeds $71,154.

This filing requirement applies to General Partnerships (GPs), Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs) that are organized or conduct business in California. Additionally, Limited Liability Companies (LLCs) that have elected to be treated as a partnership for federal tax purposes must file Form 565. The obligation to file exists even if the partnership incurred a net loss for the taxable year.

Information and Schedules Needed for Filing

Preparation for filing Form 565 begins with completing its federal counterpart, IRS Form 1065, U.S. Return of Partnership Income. The federal return serves as the foundation for the state filing, but preparers must account for differences between federal and California tax law. For example, depreciation rules for certain assets may require specific adjustments on the state return.

Accurate reporting requires detailed information for every partner, including their full name, current address, and taxpayer identification number. This can be a Social Security Number for an individual or an Employer Identification Number (EIN) for a business entity. The partnership must also report each partner’s specific percentage share of profit, loss, and capital.

Schedule K (565) acts as a summary, aggregating the total amounts of income, deductions, and credits that will be distributed among all partners. This schedule provides a high-level overview of the partnership’s pass-through items for the year.

From the summary on Schedule K, the information is broken down for each partner on a separate Schedule K-1 (565). Each partner receives a K-1 detailing their specific share of the partnership’s financial items. All partnerships must report partners’ capital accounts on Schedule K-1 using the tax basis method.

When a partnership engages in the sale or exchange of capital assets, the resulting gains or losses must be reported on Schedule D (565). This schedule is used to calculate the net capital gain or loss for the year, which is then passed through to the partners.

Calculating and Paying California Taxes and Fees

Although partnerships are pass-through entities for income tax, they are subject to certain state-levied taxes and fees. Most partnerships, LPs, LLPs, and LLCs taxed as a partnership must pay an $800 annual tax. This flat tax is due regardless of whether the entity generated income or a loss.

LLCs taxed as partnerships face an additional LLC fee, which is calculated based on the LLC’s total California-sourced income. This fee is tiered, meaning the amount owed increases as the LLC’s income crosses specific thresholds. The fee is $0 for LLCs with total California income under $250,000, but increases as follows:

• $900 for income between $250,000 and $499,999
• $2,500 for income between $500,000 and $999,999
• $6,000 for income between $1,000,000 and $4,999,999
• $11,790 for income of $5,000,000 or more

Partnerships with non-resident partners may have a withholding requirement. The partnership must withhold tax on behalf of its domestic non-resident partners based on their share of California-source income. The amount withheld is reported to the FTB and credited to the non-resident partner’s personal California tax liability.

The Filing and Submission Process

The deadline for filing Form 565 for calendar-year partnerships is March 15th. If a partnership operates on a fiscal year, the due date is the 15th day of the third month after the end of its fiscal year. Meeting this deadline is necessary to avoid potential penalties and interest.

If a partnership cannot file by the original due date, it can receive an automatic seven-month extension of time to file. An extension provides additional time to submit the return, but it does not extend the time to pay any owed taxes or fees. The $800 annual tax must be paid by the original due date to avoid penalties.

Partnerships have multiple options for submitting their completed Form 565. The FTB encourages electronic filing through approved tax software or the CalFile system. Alternatively, partnerships can mail a paper copy of the return to the address specified in the form instructions.

Payments for the annual tax and any applicable LLC fees can be made through the FTB’s Web Pay system or by credit card, though a service fee may apply. If mailing a payment, it should be sent with the appropriate payment voucher to ensure it is properly credited.