Partnerships, S Corporations and Certain Trusts
Non-resident - Generally, California taxes taxpayers’ distributive share of partnership, S corporations and trust income derived from California sources if taxpayers are non-residents of California.
“ Example: The taxpayer is a non-resident of California and holds a partnership interest in a California partnership. He received a Schedule K-1 from the California partnership that included net income of $10,000 from California sources. Determination: His $10,000 distributive share of partnership net income has a source in California and is taxable by California. ”
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Part-Year Resident - If a taxpayer changes their residency during the year, California taxes distributive shares of partnership, S Corp and certain trust income based upon the period of California residency and the period of non residency during the partnership’s, S corps’ or simple trust’s (distributes income annually) taxable year.
Under Legal Ruling 2003-1, items of income and deductions are treated as though they were received ratably over the year and allocated according to the ratio of the amount of time the taxpayer was a resident and non-resident of California. Under this ruling, the allocation of income between the period of residency and non residency must be made in a manner that reflects the actual date of realization using a daily pro rata method unless the taxpayer has actual dates when income was realized by the entity.
“ Example – Allocating Partnership Income: Jim was a resident of Arizona until September 15 when he became a California resident. He has a 50% interest in the J&B Partnership that has a December 31 year-end. The partnership conducts business within and outside California. Jim’s Schedule K-1 (565) from the partnership shows that he has $10,000 of taxable income from all sources, $5,000 of which is sourced to CA.Jim was a California non-resident for 257 days of the partnership’s tax year and a resident for 108 days. He will include in California taxable income for the year, $6,480 of income from J&B, computed as follows: - Non-resident period: 257/365 X $ 5,000 = $3,521 - Resident period: 108/365 X $10,000 = $2,959 ”
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