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

Hi Lisa,

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

"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.  

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.

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.  

What numbers are shown in Column E, Side 2 of the California Schedule K-1?

Hi Bob,

Column E shows $0 across the board for CA-source amounts on the non-resident partner's CA K-1.  I agree that it sounds like an attempt to get out of paying CA taxes, which is why I questioned the CA K-1 in the first place.  Essentially, they are saying that neither the partnership nor the partner owe CA taxes.  My concern is solely for the non-resident partners.  They are adamant that they do not need to file a non-resident CA return for the K-1 income.  I just don't want them to get into hot water if the CA K-1 from the partnership is incorrect and should show the income to the partner as CA-source income.

Based on that K-1 there is no need for your client to file a CA nonresident return. If you did, it would show -0- CA source income and -0- tax.

Document your discussion with partnership accountant in the file and move on.

@BobKamman California uses revenue for apportionment; not 3 factors (except in limited circumstances). So if there is no CA source revenue but CA nexus, you'd wind up with CA K-1s with no CA source income.

So the K-1 could be correct. If the whole K-1 on its face (federal and all states) looks to be correct, I'm not about to question it. On the other hand, if it looks like a giant mess I would.

Thank you, sjrcpa.  That is where the problem lies.  I think the CA K-1 is incorrect.  I don't want the partner to get into trouble, if California questions it, but you are right - I have documented my concerns and will move on.