The State of California Franchise Tax Board (FTB) clarified the reporting requirements for partnerships and limited liability companies (LLCs), delaying California tax basis capital reporting on 2022 returns. In FTB Notice 2023-01, the FTB stated that is has “become aware that certain persons required to file Schedule K-1 (565) and Schedule K-1 (568) may be unable to timely comply with the requirement to report partner capital on the tax basis method as calculated under California law for 2022.”
Ultimately, the FTB will allow partnerships and LLCs to report their partners’ or members’ capital accounts on Schedule K-1 using the tax basis method as determined under federal law and reported on the federal Schedule K-1 (1065) or by using the tax basis method as determined under California law. Thus, the mandate to use tax basis capital reporting has been delayed until the 2023 taxable year.
For the 2023 taxable year, and subsequent taxable years, the FTB will require a taxpayer who files Form 565 or Form 568 to report its partners’ or members’ capital accounts on the Schedule K-1 (565) and the Schedule K-1 (568) using the tax basis method as determined under California law.
FTB’s 2022 Form 565 and 568 instructions contain methods to compute the beginning tax basis capital account analysis balance for those filing these forms who did not previously calculate their tax basis capital account on Schedule K-1 (565) and Schedule K-1 (568) under California law including methods similar to those the IRS permitted in its 2020 Form 1065 instructions.
The FTB had previously planned to implement these changes for taxable year 2022 under Notice 2022-01; yet chose to delay implementation after recognizing the difficulty this may present to some taxpayers. Notice 2022-01, issued in March of 2021, would have originally required for the taxable year 2021 that partnerships and LLCs be taxed as partnerships and to report their partners’ or members’ capital account information on Schedule K-1 (for Form 565 or Form 568) using the federal tax basis method as reported on Schedule K-1 (Form 1065), or by using the tax basis method as determined under California law.
Note: FTB Notice 2023-01 supersedes and replaces FTB Notice 2022-1.
Click the following link for more information on FTB Notice 2023-01, or email questions regarding the FTB Notice 2023-01 to FTBAdvocate@ftb.ca.gov. As always, individual taxpayers, corporations, partnerships, and limited liability companies should consult a tax advisor with questions on tax law.
Author, Jeff Spiegel
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.