Tax Byte

The California Franchise Tax Board (FTB) announced yesterday that the controversial Forms 565 and 568 Schedule K-1 capital account reporting change is now delayed for one year.

Brief Background: Beginning for taxable year 2021, the FTB followed the changes made to the 2020 federal Schedule K-1 (Form 1065), and required 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.  Prior FTB Notice 2022-1 postponed the effective date of the change to 2022.

Current Calculation: FTB Notice 2023-1 released on January 30, 2023, postpones the effective date of the reporting change to 2023, and thus supersedes and replaces FTB Notice 2022-1. The FTB notes in its announcement yesterday that it has become aware that certain persons required to file Forms 565 and 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.

“While there were complaints (and sometimes cursing) by followers of #TaxTwitter discussing how impossibly hard it would be to make changes to the California Schedule K-1 capital accounts, it’s probably not those complaints that led to a delay,” Sharon Kreider, CPA, said. “More likely, the ‘big guys’ preparing hundreds or thousands of K-1s pushed a delay through the FTB with their political might.”