2017 Instructions for Schedule K-1 (541) Beneficiary’s Share of Income, Deductions, Credits, etc.
References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2015, and to the California Revenue and Taxation Code (R&TC).
Schedule K-1 Federal/State Line References
The California Schedule K-1 (541), Beneficiary’s Share of Income, Deductions, Credits, etc., line items are formatted similar to the federal Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc. For more information, see the Schedule K-1 Federal/State Line References chart on page 35.
Round Cents to Dollars
Round cents to the nearest whole dollar. For example, round $50.50 up to $51 or round $25.49 down to $25.
The estate or trust uses Schedule K-1 (541) to report its beneficiary’s share of the income, deductions, credits, etc.
B. Who Must File
A fiduciary of the estate or trust (or one of the joint fiduciaries) must file a Schedule K-1 (541) for each beneficiary. A copy of each beneficiary’s Schedule K-1 (541) must be attached to the Form 541, California Fiduciary Income Tax Return, filed with the Franchise Tax Board (FTB). The fiduciary also must give each beneficiary a copy of his or her respective Schedule K-1 (541) and a copy of the Beneficiary’s Instructions for Schedule K-1 (541) or other prepared specific instructions. One copy of each Schedule K-1 (541) must be retained for the fiduciary’s records.
The estate or trust will be charged a $100 penalty for failure to provide a copy of each beneficiary’s Schedule K-1 (541), unless reasonable cause is established for not providing it (California Revenue and Taxation Code (R&TC) Section 19183).
D. Substitute Forms
If the estate or trust does not use an official FTB Schedule K-1 (541) or a software program with an FTB-approved Schedule K-1 (541), it must get approval from the FTB to use a substitute Schedule K-1 (541). Get FTB Pub. 1098, Annual Requirements and Specifications for the Development and Use of Substitute, Scannable, and Reproduced Tax Forms, for more information.
E. Taxable Year
Beneficiary’s taxable year. The beneficiary’s income from the estate or trust must be included in the beneficiary’s return for the taxable year in which the estate’s or trust’s taxable year ends.
Prior Year. Do not include in the beneficiary’s income any amounts deducted on Form 541 for an earlier year that were credited or required to be distributed in that earlier year.
F. Beneficiary’s Income
If no special computations are required, use the following instructions to compute the beneficiary’s income from the estate or trust.
California reporting requirements are the same as federal for:
- Character of income
- Allocation of deductions
- Allocation of credits
- Gifts and bequests
However, income of nonresidents from bank accounts, stocks, bonds, notes, and other intangible personal property is not income from sources in California unless one of the following applies 1) the property has acquired a business situs in California 2) orders with brokers have been placed so regularly as to constitute “doing business” (R&TC Section 17952).
Include on Schedule K-1 (541) column (e) only income from intangible property that is income from sources within California.
Attach a separate schedule to each beneficiary’s Schedule K-1 (541) showing intangible income, such as interest, dividends, capital gains from the sale of stocks, bonds, etc., whose source is dependent upon the residence or commercial domicile of the beneficiary.
For nonresidents, income from a trade or business conducted within and outside California is apportioned or allocated to California in accordance with Cal. Code Regs., tit. 18, section 17951-4(c).
G. Passive Activities
The limitations on passive activity losses and credits under Internal Revenue Code Section 469 apply to estates and trusts. Estates and trusts that distribute income to beneficiaries are allowed to allocate depreciation, depletion, and amortization deductions to beneficiaries. These deductions are called “directly allocable deductions.”
If items of income (loss), deduction, or credit from more than one activity are reported on Schedule K-1 (541), the fiduciary must attach a statement to Schedule K-1 (541) for each passive activity.
H. Nonresident Beneficiaries
If the beneficiary of an estate or trust was a nonresident of California for the estate’s or trust’s entire taxable year, California will only tax the beneficiary on income that is derived from California sources. If the beneficiary of an estate or trust is a resident of California for only part of the estate’s or trust’s taxable year, California will tax the beneficiary’s share of the estate’s or trust’s income or loss in accordance with FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency, and FTB Legal Ruling 2003-1. Where an estate or trust derives income from both within and outside California, it is necessary for the fiduciary to determine what portion of the beneficiary’s share of income of the estate or trust is from within and outside California. The amounts derived from or attributable to income from sources within and outside California are to be properly allocated and reported on the Schedule K-1 (541).
Payments to nonresidents having a business or taxable situs in California are subject to withholding of taxes. For more information, get the 2017 instructions for Form 592, Resident and Nonresident Withholding Statement; Form 592-B, Resident and Nonresident Withholding Tax Statement; and Form 592-V, Payment Voucher for Resident and Nonresidents Withholding.
General Summary of Treatment for Sourcing Specific Nonbusiness Income Items
For California tax purposes:
- Compensation for personal services has a source where the services are performed.
- Interest and dividends generally have a source at the taxpayer’s state of residence.
- Gains and losses from the sale or exchange of real and tangible personal property have a source where the property is located.
- Income from intangible personal property generally has a source at the taxpayer’s state of residence.
- Rents and royalties have a source where the property is located.
- Pensions have a source where the services were performed. However, California does not impose a tax on qualified retirement income or pensions received by nonresidents on or after January 1, 1996.
Generally, income from a business, trade, or profession is sourced as follows:
- If the operations are conducted wholly within California, the income has a California source.
- If the operations within California are so separate and distinct from the operations outside of California that taxable income can be separately accounted for, only the income from within California must be included in California source income.
- If the trade or business carried on within California is an integral part of a unitary business carried on outside of California, the entire net income must be reported and apportioned or allocated in accordance with the provisions of the Uniform Division of Income for Tax Purposes Act as contained in R&TC Sections 25120 through 25139.
S corporation, partnership, and limited liability company (LLC) income (loss), is apportioned or allocated in the same manner as any other business. If the estate or trust is a S corporation shareholder, partner, or member in a business entity, income sourced to California is generally included in column (e) of Schedules K-1 (100S, 565, or 568), Shareholder’s, Partner’s, or Member’s Share of Income, Deductions, Credits, etc. For more information, see Cal. Code Regs., tit. 18, section 17951-4 and related tax codes.
See Cal. Code Regs., tit. 18, sections 17951-1(c), 17951-2, and 17953 regarding taxability of distributions to nonresident beneficiaries.
For more information on California source income being distributed to a nonresident beneficiary, get Form 541 instructions, General Information R, Miscellaneous Items.
If the beneficiary of an estate or trust was a resident of California for the estate’s or trust’s entire taxable year, the beneficiary’s share of the estate’s or trust’s income or loss for the taxable year is taxable to California.
I. Internet Access
You can download, view, and print California tax forms and publications at ftb.ca.gov/forms.
Specific Line Instructions
When completing the California Schedule K-1 (541) refer to the Federal/State Line References chart on page 35 that shows the specific line instructions between the federal Schedule K-1 (Form 1041) and the California Schedule K-1 (541).
The estate or trust is required to request and provide a proper identification number for each beneficiary. Enter the beneficiary’s number on the respective Schedule K-1 (541) when the estate or trust files Form 541.
Individuals and business beneficiaries are responsible for giving the estate or trust their social security number or Individual Taxpayer Identification Number (ITIN), California corporation number, Secretary of State (SOS) file number, or federal employer identification number (FEIN) upon request.
The estate or trust may use federal Form W-9, Request for Taxpayer Identification Number and Certification, to request the beneficiary’s identifying number.
Fiduciary’s name, address
If there is more than one fiduciary or trustee, list all of the fiduciaries or trustees’ names, addresses, and indicate if the fiduciary is a nonresident. If more space is needed, add an attachment. Include the estate’s or trust’s FEIN at the top of each separate attachment.
Columns (b), (c), (d), and (e)
In column (b), enter the amounts from your federal Schedule K-1 (Form 1041).
In column (c), enter adjustments resulting from differences between California and federal law for each specific line item.
In column (d), enter the result of combining column (b) and column (c).
In column (e), enter California source income and credits.
Line 1 – Enter in column (b) the amount from federal Schedule K-1 (Form 1041), line 1.
Line 2 – Enter in column (b) the amount from federal Schedule K-1 (Form 1041), line 2a.
Line 3 –Enter the combined amount from federal Schedule K-1 (Form 1041), line 3 and line 4a on line 3, column (b). Attach a statement to Schedule K-1 (541) listing gains or losses from the complete or partial disposition of a rental real estate or trade or business activity that is a passive activity.
Line 5 – Enter on line 5 the beneficiary’s share of annuities, royalties, or any other income (before directly allocable deductions) that is not subject to any passive activity loss limitation rules at the beneficiary level. Use lines 6 through 8 to report income items subject to the passive activity rules at the beneficiary’s level.
Line 6 through Line 8 – Enter the beneficiary’s share of trade or business, rental real estate, and other rental income, minus allocable deductions (other than directly apportionable deductions). To assist the beneficiary in figuring any applicable passive activity loss limitations, also attach a separate schedule showing the beneficiary’s share of income derived from each trade or business, rental real estate, and other rental activity.
Line 9a through line 9c – Enter the beneficiary’s share of the depreciation and depletion deductions directly apportioned to each activity reported on line 5 through line 8. Itemize the beneficiary’s share of the amortization deductions directly apportioned to each activity on line 5 through line 8. For more information, get the instructions for federal Schedule K-1 (Form 1041).
Line 11a through Line 11d – If this is the final return, enter on line 11 the beneficiary’s share of any of the following:
- Excess deductions on termination (follow the instructions for federal Form 1041, U.S. Income Tax Return for Estates and Trusts)
- Capital loss carryover
- Unused net operating loss (NOL) carryover for both regular and alternative minimum tax, if the NOL carryover would be allowed to the estate or trust in a later year but for termination
Note:No deduction is allowed for estate taxes.
Net Operating Loss (NOL)
For more information, get form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Individuals, Estates, and Trusts.
Line 12a – Enter the beneficiary’s share of the adjustment for minimum tax purposes. To figure the adjustment, subtract the beneficiary’s share of the income distribution deduction figured on Form 541, Schedule B, line 15, from the beneficiary’s share of the income distribution deduction on an alternative minimum tax basis figured on Schedule P (541), Alternative Minimum Tax and Credit Limitations – Fiduciaries, Part II, line 15. The difference is the beneficiary’s share of the adjustment for minimum tax purposes.
An estate or trust cannot pass through the alternative minimum taxable income (AMTI) exclusion to the beneficiary. The fiduciary for the estate or trust must recalculate Schedule P (541), by leaving Part I, line 7b blank. This will eliminate the effect of the AMTI exclusion but allow other items of adjustment or tax preference to be passed through to the beneficiary. The recalculated amount on Schedule P (541), Part I, line 10, must be entered on Schedule K-1 (541), line 12a, column (d).
Line 12b through Line 12e – Enter the amounts from Schedule P (541), line 4. Get the instructions for federal Schedule K-1 (Form 1041) for more information.
Line 13 and Line 14 – Enter the beneficiary’s trust payments, withholding, taxes paid to other states, and/or other credits. Attach a separate sheet for each item reported on line 13a-d and line 14a showing the computation. Items that must be reported on these lines include the allocable share, if any, of items listed on line 13a through line 14a.
Line 13a – Enter the beneficiary’s share of estimated payment credited.
Form 541-T, California Allocation of Estimated Tax Payments to Beneficiaries, must be submitted in order for the beneficiary to receive credit for the payments.
Line 13b – If the fiduciary withheld taxes at source for a domestic or foreign nonresident beneficiary, if there is a withholding credit allocated to you from another entity, or backup withholding, the fiduciary must provide each affected beneficiary (including California residents), a completed Form 592-B. The fiduciary and beneficiaries must attach Form 592-B to the front of their California tax return to claim the withholding amounts. Schedule K-1 (541) may not be used to claim the withholding credit.
Line 13c – Enter taxes paid to other states reported on Schedule S, Other State Tax Credit.
Attach a copy of the return filed with the other state, evidence of payment, and a copy of Schedule S to verify the amount of tax paid.
Line 13d – Enter on an attached schedule each beneficiary’s allocable share of any credit or credit information that is related to a trade or business activity.
Line 14a – Enter tax-exempt interest received by the estate or trust. Include exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company.
Line 14d – Enter any other item that is not included. The estate or trust may need to report supplemental information that is not specifically requested on the Schedule K-1 (541) separately to each beneficiary.
If the estate or trust claims tax benefits from a former Enterprise Zone (EZ), Local Agency Military Base Recovery Area (LAMBRA), Manufacturing Enhancement Area (MEA), or Targeted Tax Area (TTA), it should give the beneficiaries their distributive share of the business income and business capital gain or loss apportioned to the EZ, LAMBRA, MEA, or TTA on this line.
SCHEDULE K-1 FEDERAL/STATE LINE REFERENCES
The following chart cross-references the line items on the federal Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc. to the appropriate line items on the California Schedule K-1 (541), Beneficiary’s Share of Income, Deductions, Credits, etc. For more information, see the Specific Line Instructions for Schedule K-1 (541) and the Beneficiary’s Instructions for Schedule K-1 (541).
|Federal Schedule K-1 (Form 1041)||CA Schedule K-1 (541)|
|2a||Ordinary dividends||2||Dividends (ordinary and qualified)|
|2b||Qualified dividends||Not applicable|
|3||Net short-term capital gain||3||Net capital gain or (loss)|
|4a||Net long-term capital gain||3||Net capital gain or (loss)|
|4b||28% rate gain||Not applicable|
|4c||Unrecaptured section 1250 gain||Not applicable|
|5||Other portfolio and nonbusiness income||5||Other portfolio and nonbusiness income|
|6||Ordinary business income||6||Ordinary business income|
|7||Net rental real estate income||7||Net rental real estate income|
|8||Other rental income||8||Other rental income|
|10||Estate tax deduction||10||Not applicable|
|11||A||Excess deductions||11a||Excess deduction on termination (Attach computation)|
|11||B||Short-term capital loss carryover||11b||Capital loss carryover|
|11||C||Long-term capital loss carryover||Not applicable|
|11||D||NOL carryover – regular tax||11c||NOL carryover for regular tax purposes|
|11||E||NOL carryover – minimum tax||11d||NOL carryover for alternative minimum tax purposes|
|12||A||Adjustment for minimum tax purposes||12a||Adjustment for alternative minimum tax purposes|
|12||B-F||AMT adjustments||Not applicable|
|12||G||Accelerated depreciation||12b||Accelerated depreciation|
|12||J||Exclusion items||12e||Exclusion items|
|13||A||Credit for estimated taxes||13a||Trust payments of estimated tax credited to beneficiary|
|13||B-R||Federal credits||Not applicable|
|Not applicable||13b||Total withholding (equals amount on Form 592-B, if calendar year)|
|Not applicable||13c||Taxes paid to other states. Attach Schedule S|
|Not applicable||13d||Other California credits. Attach schedule|
|14||A||Tax-exempt interest||14a||Tax-exempt interest|
|14||B||Foreign taxes||Not applicable|
|14||C||Qualified production activities income||Not applicable|
|14||D||Form W-2 wages||Not applicable|
|14||E||Net investment income||14b||Net investment income|
|14||F||Gross farm and fishing income||14c||Gross farm and fishing income|
|14||G||Foreign trading gross receipts (IRC 942(a))||Not applicable|
|14||H||Adjustment for section 1411 net investment income or deductions||Not applicable|
|14||I||Other information||14d||Other information|