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Inconsistent treatment of items

include its distributive share of LLC items referred to above for any LLC

Generally, members must report tax items shown on their Schedule K-1s

taxable year ending within or with the member’s tax accounting period.

and any attached schedules, the same way the LLC treated the items on its

Distributive Items of Business Income

tax return. If the treatment on a member's original or amended tax return

Apportionment of Business Income – Unitary Business

is inconsistent with the LLC's treatment, or if the LLC has not filed a tax

If the LLC’s activities and the member’s activities constitute a unitary

return, the member must attach a statement with its original or amended

business under established standards (other than ownership require-

tax return to identify and explain any inconsistency or to note that a LLC

ments), the combined business income of this single trade or business

tax return has not been filed. If a member is required to attach this

apportioned to California is determined by combining the member’s

statement but fails to do so, the member may be subject to an accuracy

distributive share of the LLC’s apportionment factors with the factors of the

related penalty.

member for any LLC year ending within the member’s tax accounting

period. Combined business income is then apportioned by using a 3- or 4-

D Income Not from a Trade Or Business of the

factor formula consisting of the combined property, payroll, and a single or

LLC (Nonbusiness Income)

double-weighted sales factor. Use of a 3-factor formula depends upon

whether combined gross business receipts (member’s share of the LLC’s

If the LLC has income that is not from a trade or business (nonbusiness

gross business receipts plus the member’s own gross business receipts)

income), the source of that nonbusiness intangible income will be

are more than 50% from agricultural, extractive, savings and loans,

determined at the member level. However, nonbusiness income from real

banking, or financial business activities.

or tangible personal property located in California, such as rents, royalties,

gains, or losses is California source income (Cal. Code Regs., tit. 18

If you are a member that is unitary with the LLC, use Table 2 to compute

section 17951-3 and R&TC Sections 23040, 25124, and 25125). This

your factors, applying the rules shown below (see Cal. Code Regs., tit. 18

information should be included on the appropriate line of column (e), as

section 25137-1 for examples). Members that are unitary with the LLC

well as in Table 2, Part B, if the LLC believes it is unitary with the member

should perform the following steps:

or if the LLC is uncertain whether it is unitary with the member.

1. Combine your distributive share of the LLC’s business income with

Non-unitary members should ignore the information in Table 2 and use

your own business income to determine total business income.

column (e).

2. Compute property, payroll, and sales factors by combining your

The source of income from all nonbusiness intangibles will depend on

distributive share of the LLC’s factors from Table 2, Part C, with your

whether the member is required to apportion its income and whether the

own factors as explained below.

member is a corporation. In most cases, income from nonbusiness

3. Apply the apportionment factor determined in Step 2 to the total

intangible property is sourced at the residence or commercial domicile of

business income determined in Step 1 to arrive at business income

the member. If the member is a non-apportioning corporation the

apportioned to this state.

intangible income is from California sources unless it has acquired a

1. Unitary Member’s Computation of Property Factor

business situs outside of this State (R&TC Section 23040).

Use Schedule R to compute the numerator and the denominator of the

However, for individuals, estates, and trusts that are not required to

property factor. Adjust factors in accordance with Cal. Code Regs.,

apportion income, income from nonbusiness intangibles will have a

tit. 18 sections 25130 and 25131. Also apply the following special

California source if the intangible has acquired a California business situs.

rules:

For example, a nonresident pledges stocks, bonds, or other intangible

A. Include in the denominator of your property factor your distributive

personal property in California. This pledge is security for the payment of

share of the LLC’s beginning and ending balances of real and

debt, taxes, or other liabilities incurred for a business in this state. The

tangible personal property owned (if rented, multiply rent by 8) and

pledged property will acquire a business situs in California. Another

used during the tax accounting period in the regular course of

example is a nonresident who maintains an office and bank account in

business. See Table 2, Part C.

California for the business activities in this state. The bank account will

B. Include in the numerator of the member’s property factor the value

acquire a business situs in California. See Cal. Code Regs., tit. 18

of such property that is described in 1A (above) that is located in

section 17951-2 and R&TC Section 17952. If the intangible income is

California. See Table 2, Part C.

determined to have a business situs by the LLC, the intangible income will

C. See Cal. Code Regs., tit. 18 section 25137-1(f)(1)(B) for examples

be included in column (e).

of how to avoid duplication of the value of property that is rented by

If the member is an apportioning taxpayer or is a corporation, Cal. Code

the member to the LLC or vice versa.

Regs., tit. 18 sections 17951-4 and 25137-1 require that nonbusiness

2. Unitary Member’s Computation of Payroll Factor

income from intangibles be allocated in accordance with the rules of R&TC

Use Schedule R to compute the numerator and the denominator of the

Sections 25126 and 25127.

payroll factor in accordance with Cal. Code Regs., tit. 18 sec-

Because the source of intangible nonbusiness income is dependent upon

tions 25132 and 25133. Apply the following special rules:

the status of the individual member, that income is not included in

A. Include in the denominator of your payroll factor your distributive

column (e) and is entered only in Table 1. The member must determine the

share of the LLC’s payroll used to produce business income. See

source of such income by applying the rules described above.

Table 2, Part C; and

B. Include in the numerator any such payroll described in 2A that is

E Unitary Members

applicable to California. See Table 2, Part C.

Note: The following rules apply to corporations, individuals, and other

3. Unitary Member’s Computation of the Sales Factor

entities that conduct a trade or business that is unitary with the LLC’s trade

Compute the numerator and denominator of the sales factor in

or business (see Cal. Code Regs., tit. 18 section 17951, incorporating the

accordance with Cal. Code Regs., tit. 18 sections 25134 to 25136.

provisions of section 25137 and regulations thereunder).

Apply the following special rules:

Unitary members cannot use the California source information reflected in

A. Include in the denominator of the sales factor your distributive

column (e). Such members must use the information in Table 1 and

share of the LLC’s sales that give rise to business income. See

Table 2 as described below and in Specific Line Instructions G and H.

Table 2, Part C;

B. Include in the numerator of your sales factor the amount of such

The member’s distributive share of LLC items is determined by applying

sales described in 3A attributable to California; and

the LLC rules in R&TC Sections 17851 through 17858. The determination

C. Eliminate intercompany sales as follows:

of the portion of the distributive share of business and nonbusiness

income that has its source in California or that is includible in the

• Sales by the member to the LLC to the extent of the member’s

member’s business income subject to apportionment is made in accor-

interest in the LLC; or

dance with Cal. Code Regs., tit. 18 section 25137-1 if the member, or the

• Sales by the LLC to the member not to exceed the member’s

LLC or both, have income from sources within and outside this state. The

interest in all LLC sales. See Cal. Code Regs., tit. 18 sec-

member, in computing net income for its tax accounting period, must

tion 25137-1(f)(3).

Page 34 Schedule K-1 (568) Instructions 2005

Instructions For Form 568 - Limited Liability Company Return Of Income - State Of California Franchise Tax Board - 2005 Page 21

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