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Distributive Items of Nonbusiness Income for a Unitary Member

Schedule K-1 (568), Item I, that information is based on the LLC’s books

Income in Table 2, Part B, is from a California source under R&TC

and records and should not be used to compute your basis.

Sections 25124 and 25125. Schedule K-1 (568), column (e) data is not

You can compute the basis of your LLC interest by adding items that

used by a unitary member, unitary members must make certain to

increase your basis and then subtracting items that decrease your basis.

separately include such items as California source income.

Items that increase your basis may include:

• Money and the adjusted basis of property you contributed to the LLC;

Specific Instructions

• Your distributive share of the LLC’s income; and

A Questions and Items

• Your distributive share of the increase in the liabilities of the LLC (and/

or your individual liabilities caused by your assumption of LLC

The LLC completes the questions and items on each Schedule K-1 (568)

liabilities).

for all its members. For more information, see the instructions for federal

Schedule K-1 (1065).

Items that decrease your basis, but not below zero, may include:

• Money and the adjusted basis of property distributed to you;

B Schedule K-1 (568)

• Your share of the LLC’s losses; and

• Your share of the decrease in the liabilities of the LLC (and/or your

Important Note to Members: If your Schedule K-1 (568) reports losses

individual liabilities assumed by the LLC).

and/or deductions, you must first apply the basis, at-risk, and passive

activity limitations before such losses/deductions can be deducted on your

Note: This is not a complete list of items and factors that determine basis.

California return. See Specific Instructions C, Loss Limitations. Also, see

Get federal Publication 541 for a complete discussion of how to determine

IRC Section 705(a) for information on how to compute basis.

the basis of your LLC interest.

Note: If your return is ever examined, you may be required to provide your

At-Risk Rules

computations and the supporting documents for your membership

The at-risk rules limit the amount of loss (including loss on disposition of

interest.

assets) and other deductions (such as IRC Section 179, R&TC

Sections 17267.2, 17267.6, and 17268) that you can claim to the amount

If you are an individual member, the amounts in column (c), Adjustments,

you could actually lose in the activity.

and column (d), Total amounts using California law, that are from

nonpassive activities must be reported on the appropriate California form

If you have: (1) a loss or other deduction from an activity carried on as a

or schedule; such as, Schedule D, California Capital Gain or Loss

trade or business or for the production of income by the LLC; and

Adjustment, Schedule D-1, Sales of Business Property, Schedule CA (540),

(2) amounts in the activity for which you are not at-risk, you will have to

California Adjustments — Residents, or Schedule CA (540NR), California

complete federal Form 6198, At-Risk Limitations, to figure the allowable

Adjustments — Nonresidents or Part-Year Residents.

loss to report on your return. Complete federal Form 6198 using California

amounts.

Amounts in column (e), California source amounts and credits, that are

from passive activities must be reported on form FTB 3801, Passive

See the instructions for federal Schedule K-1 (1065), At-Risk Limitations,

Activity Loss Limitations, form FTB 3801-CR, Passive Activity Credit

and federal Publication 925, Passive Activity and At-Risk Rules, for more

Limitations, or form FTB 3802, Corporate Passive Activity Loss and Credit

information.

Limitations. Use the related worksheets to figure any passive loss

Passive Activity Loss and Credit Rules

limitations. If the LLC knows that you are a California resident, it may leave

IRC Section 469 limits the deduction of certain losses and credits.

column (e) blank. California residents are subject to tax on their entire

California law generally conforms to this federal provision. These rules

taxable income shown in column (d) (R&TC Section 17041).

apply to members who have a passive activity loss or credit for the taxable

If you are not an individual member, report the amounts as instructed on

year.

your California return.

For California purposes, passive loss limitations apply to individuals,

If you have losses, deductions, credits, etc., from a prior year that were not

estates, trusts (other than grantor trusts), closely held corporations, and

deductible or usable because of certain limitations they may be taken into

S corporations.

account in determining your net income, loss, etc., for this year. However,

Even though the passive loss rules do not apply to grantor trusts,

do not combine the prior-year amounts with any amounts shown on this

partnerships, and LLCs, they do apply to the owners of these entities.

Schedule K-1 (568) to get a net figure. Instead, report the amounts on an

attached schedule, statement, or form on a year-by-year basis. See the

A passive activity is generally a trade or business activity in which the

instructions for federal Schedule K-1 (1065) for more information.

member does not materially participate or a rental real estate activity in

which the member does not actively participate. An LLC may have more

C Loss Limitations

than one activity. Each member must apply the passive activity loss and

credit limitations on an activity-by-activity basis.

The amounts shown on line 1 through line 3 of your Schedule K-1 (568)

reflect your distributive share of income or loss from the LLC’s business or

Individuals, estates, trusts, and S corporations must complete form

rental operations. If you have losses from the LLC, there are three potential

FTB 3801 to calculate the allowable passive losses and form FTB 3801-CR

limitations imposed on losses before you may deduct them on your return.

to calculate the allowable passive credits. Corporations must complete

These limitations and the order in which they must be applied are:

form FTB 3802.

• Basis limitations (IRC Section 704);

The amounts reported on Schedule K-1 (568), line 1 and line 14, are

• At-risk limitations (IRC Section 465); and

normally passive activity income (loss) or credits from the trade or

• Passive activity loss and credit limitations (IRC Section 469).

business of the LLC if you are a member who did not materially participate

in the trade or business activities of the LLC. The amounts reported on

Each of these limitations is discussed separately below.

Schedule K-1 (568), line 2, line 3, and line 13b are from rental activities of

Note: Other limitations may apply to specific deductions such as the

the LLC and are passive activity income (loss) or credits to all members.

investment interest expense deduction. These limitations on specific

There is an exception to this rule for losses incurred by qualified investors

deductions generally apply before the basis, at-risk, and passive loss

in qualified low-income housing projects. The LLC will identify any of these

limitations.

qualified amounts on an attachment for line 2.

Basis Rules

The passive loss rules apply to the items attributable to each publicly

Generally, California tax law conforms to federal tax law concerning basis

traded partnership (PTP) that is not treated as a corporation under IRC

limitation. You may not claim your share of an LLC loss (including a capital

Section 7704. Thus, members who do not materially participate in the

loss) that is greater than the adjusted basis of your LLC interest at the end

operations of a PTP are allowed to deduct their share of the PTP’s losses

of the LLC’s taxable year.

only to the extent of passive income from the same PTP or when the entire

The LLC is not responsible for keeping the information needed to compute

interest is sold, IRC Section 469(k). See the instructions for form FTB 3801

the basis of your LLC interest. Although the LLC does provide you with an

and form FTB 3802 for rules to calculate and report income, gains, and

analysis of the changes to your capital account on your

Schedule K-1 (568) Instructions 2005

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Instructions For Form 568 - Limited Liability Company Return Of Income - State Of California Franchise Tax Board - 2005 Page 22

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