Deducting California franchise tax on federal Form 8825 instead of Form 1065 in Lacerte

The $800 California state franchise fee is normally shown on Form 1065, page 1. However, a partnership whose only business is rental real estate may prefer to show the fee as an expense on the real estate activity, Form 8825.  This can be accomplished with the following steps:

To remove the $800 fee from Form 1065 page 1:

1. Navigate to Screen 13, Deductions.
2. Remove the amount from Taxes / State tax (CA returns only ...
3. Navigate to Screen 37, Miscellanoues Information.
4. Select California from the left navigation panel.
5. Verify that Form 565/Form 568 $800 tax: 1 = option 1, 2 = option 2 (code 1) is either blank or contains a 2.

To include the tax as a deduction on Federal Form 8825 but not on California Form 8825:

1. Navigate to Screen 17, Rental Real Estate.
2. Scroll down to the Expenses section
3. Include the amount in Taxes.
4. In the section State Amounts if Different, enter -1 in Taxes.

Note:  This amount will be adjusted on the Form 565/568 page 3 Line 2. If the Screen 37 option is NOT set to "2," it must be manually adjusted on California Schedule M-1.

To manually reflect the tax as book-tax difference on California schedule M-1:

1. Navigate to Screen 27, Schedule M-1, M-3 (Book-Tax Adj.).
2. Select Schedule M-1 from the left navigation panel.
3. Locate the Expenses Recorded on Books not Included on Schedule K (+) section.
4. Enter $800 in State tax (auto if using opt. 1 or 2) (CA).