California grants one year reprieve on tax basis capital account reporting
On Mar. 8, 2022, the California Franchise Tax Board (FTB) issued FTB Notice 2022-01 giving taxpayers taxed as partnerships the option to continue to use federal capital account tax basis for the 2021 tax year instead of following the 2021 Form 565/568 instructions which state the capital account tax basis is required to use worldwide amounts determined under California law.
Taxpayers will only be allowed to use the federal tax basis for the capital account analysis for the 2021 tax year and are not allowed to use the federal tax basis for any other purposes, including reporting or determining their California tax liability.
For tax years 2022 and thereafter, the FTB will require taxpayers who file Form 565/568 to report their partners' or members' capital accounts on Schedule K-1 using the tax basis method as determined under California law.
This notice was released after the FTB indicated in the 2021 instructions to Form 565/568 Schedules K-1 and M-2 that a separate California tax basis is required rather than using the federal tax basis capital accounts and realized many taxpayers did not have enough time to comply with the new requirement. Therefore, the FTB issued Notice 2022-01 making the California tax basis capital account reporting optional for 2021.
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