Level 3

Question

Does a Partner of a CA-based partnership pay non-resident tax to CA?

Forum|Forum|1 year ago
March 27, 2025
2 replies
31 views

Hi Everyone,

I have been getting conflicting answers, so I thought I would pose the question to all of my colleagues here:

I have a client who is a non-resident partner in a CA-based partnership. The CA-based company does not have any customers within CA, so the partner's CA K-1 does not show any CA source income (and, my assumption is that the CA partnership has not paid CA tax for the income, since they do not have any CA-based customers). However, the K-1 income and distribution is coming to the non-resident partner from the CA-based company. Should the K-1 income to the non-resident partner from the CA-based company be considered CA-source income, creating the need to file a CA non-resident return, or does the CA company not having customers within CA eliminate the need for the non-resident partner to file a CA non-resident return?

Based upon the excerpt below from the CA FTB web site, receiving income from the partnership should require a return:

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As a nonresident, you pay tax on your taxable income from California sources.
Sourced income includes, but is not limited to:
1. Services performed in California
2. Rent from real property located in California
3. The sale or transfer of real California property
4. Income from a California business, trade or profession

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Thank you in advance.

Sincerely,
Kim Dole

This topic has been closed for replies.

Just-Lisa-Now-

Intuit Community Champion

Where is the partnership located? Why are they a CA [partnership if they're not doing business in CA?

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

K

KimDoleAuthor

Level 3

Hi Lisa,

The partnership is located in CA, but their customers are all outside of California.

BobKamman

Level 15

"The CA-based company does not have any customers within CA, so the partner's CA K-1 does not show any CA source income (and, my assumption is that the CA partnership has not paid CA tax for the income, since they do not have any CA-based customers)."

I would assume that they are filing a California partnership return, and not paying any tax because partnership income is taxed at the partner level, not the entity level, even in California. Client should ask the managing partner if a California return was filed, and if it included a California K-1 for him. He might already have it but didn't think you needed it.

K

KimDoleAuthor

Level 3

Hi Bob,

Yes, the partnership filed a CA return (I know that the income flows through to the partners federally, but it does not at the state level - I am not sure if the partnership has paid the CA excise tax because I only have access to the partners' K-1).

The non-resident partner received a K-1 from the partnership (but, with no CA-source income showing on the CA K-1).

The question is whether or not the non-resident partner needs to file a CA non-resident return, due to receiving a K-1 from a CA-based partnership (and the FTB site stating that "Income from a California business, trade, or profession" is taxable to a non-resident), if the CA K-1 from the partnership shows no CA-source income.

BobKamman

Level 15

All I know is what the Franchise Tax Board tells me.

"Some key features of a partnership are:

Partners decide the ownership structure and distribution of profit and losses
Partnerships file Partnership Return of Income (Form 565)
Each partners’ income is reported on their individual (Schedule K-1 Form 565)
Each partner is responsible for paying taxes on their respective tax return."

https://www.ftb.ca.gov/file/business/types/partnerships.html

It doesn't make any difference if the business has no customers in California. Where do they have offices, warehouses, factories, employees? And even if those are in China, if the business has chosen California as its residence, it has also chosen to pay California tax on its profits.

"We have no customers in California" sounds like someone's feeble excuse for not wanting to pay taxes there. It won't work.

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