California Franchise Tax Board Defers Capital Account Analysis Methodology (Again) for the 2022 Tax Year
On Monday, the California Franchise Tax Board (FTB) released Notice 2023-1, permitting taxpayers who file Form 565 or Form 568 to report its partners’ or members’ capital accounts on Schedule K-1 (565) or Schedule K-1 (568) using the tax basis method as determined under federal law, as reported on Schedule K-1 (Form 1065) or by using the tax basis method as determined under California law. This Notice is applicable for the 2021 and 2022 tax years and supersedes and replaces FTB Notice 2022-1. This Notice does not allow taxpayers to use their federal tax basis in lieu of their California tax basis for any other purpose, including reporting or determining their California tax liability.
Last year, the FTB followed the Internal Revenue Service’s lead, requiring an entity taxed as a partnership to report its partners’ or members’ capital accounts on the Schedule K-1 (565) and Schedule K-1 (568) using the same tax basis method as described in the 2021 Instructions for Form 1065, but calculated under California law. A couple months later, FTB Notice 2022-1 permitted taxpayers, for the 2021 tax year, who filed Form 565 or Form 568 to report its partners’ or members’ capital accounts on Schedule K-1 (565) or Schedule K-1 (568) to use the tax basis method as determined under federal law, as reported on Schedule K-1 (Form 1065), or to use the tax basis method as determined under California law. FTB Notice 2022-1 stated that beginning with the 2022 tax year and for every taxable year thereafter, 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.
My favorite quote from FTB Notice 2023-1, “The [FTB] 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.” I don’t know who these “certain persons” are, but consider them this practitioner’s new best friend!
Source: California Franchise Tax Board
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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