Instructions For Form 568 - Limited Liability Company Return Of Income

Form 568 Instructions

LLCs must report interest paid on municipal bonds that are

Q Investment Partnerships

issued by a state other than California, or a municipality other

Income of nonresident members, including banks or

than a California municipality and that are held by California

corporations, derived from ‘‘qualifying investment securities’’ of

taxpayers. Entities paying interest to California taxpayers on

an LLC that qualifies as an ‘‘investment partnership’’ is

these types of bonds are required to report interest payments

considered income from sources other than California, except

aggregating $10 or more paid after January 1, 1998. Information

as noted below. Therefore, nonresident members generally will

returns will be due June 1, 1999. Get form FTB 4800, Federal

not be taxed on this income. The LLC should inform its

Tax Exempt Non-California Bond Interest and Interest-Dividend

nonresident members if all or a portion of their distributive share

Payment, for more information.

of income is from ‘‘qualifying investment securities’’ of an

LLCs must use form FTB 3834, Interest Computation Under the

‘‘investment partnership’’ and whether it is sourced to California.

Look-Back Method for Completed Long-Term Contracts, to

Income from an LLC that is an investment partnership (LLC

report interest due or to be refunded under the look-back

investment partnership) is generally considered business income

method on long-term contracts.

(see Appeal of Estate of Marion Markus, Cal. St. Bd. of Equal.,

Any information returns required for federal purposes under IRC

May 6, 1986). LLC investment partnerships that are doing

Section 6038, Section 6038A and Section 6038B are also

business within and outside California should apportion

required for California purposes. Attach the information returns

California source income using Schedule R, Apportionment and

to the Form 568 when filed. If the information returns are not

Allocation of Income.

provided, penalties may be imposed under R&TC Section

LLC investment partnerships that are doing business solely

19141.2 and Section 19141.5

within California should treat all business income of the LLC

All information returns, unless otherwise noted, are mailed

investment partnership as California source income.

separately from the Form 568. Information returns should be

LLC investment partnerships that have California source income

sent to:

should show on Schedule K-1 (568), column (e) each member’s

FRANCHISE TAX BOARD

distributive share of California source income.

PO BOX 942857

Generally, members who are nonresident individuals would not

SACRAMENTO CA 94257-0500

record this income as California source income. However, there

N Special Items

are two exceptions to the general rule when a nonresident

individual may have California source income from a LLC

California LLC tax law generally follows federal partnership tax

investment partnership. Nonresident individual members will be

law in the areas of:

taxed on their distributive shares of income from the ‘‘LLC

•

IRC Section 702(a) items;

investment partnership’’ if the income from the qualifying

•

Elections;

investment securities is interrelated with:

•

Distributions of unrealized receivables and inventory;

Any other business activity of the nonresident partner; or

•

Members’ dealings with the LLC;

Any other entity in which the nonresident partner owns an

•

Contributions to the LLC;

interest that is separate and distinct from the investment

•

Income of foreign nonresident members subject to

activity of the partnership and that is conducted in California.

withholding-at-source, Forms 592, 592-A and 592-B;

•

Nonresident individuals will be taxed on their distributive share

Basis and at-risk rules;

•

of investment income from an LLC investment partnership if the

Passive activity limitations;

•

qualifying securities were purchased with working capital of a

Net operating loss deduction by a member of the LLC (An

trade or business that the nonresident owns an interest in and

LLC is not allowed the deduction for net operating losses for

that is conducted in California (R&TC Section 17955).

California or federal purposes);

•

Corporations that are members in an LLC investment

Publicly traded partnerships;

•

partnership are not generally taxed on their distributive share of

Long-term contracts;

•

LLC income, provided that the income from the LLC is the

Installment sales;

•

corporation’s only California source income. However, if the

Vacation pay;

•

corporation:

Amortization of past service costs;

•

Distributions of contributed property by an LLC; and

Participates in the management of the investment activities

•

Recognition of precontribution gain in certain LLC

of the LLC investment partnership; or

•

distributions to members.

Has income derived from or attributable to sources within

this state other than income from the LLC investment

See the instructions for federal Form 1065 for specific

partnership,

information about these areas.

then the corporation will be taxable on its distributive share of

O Signatures

California source income from the LLC.

Form 568 is not a valid return unless it is signed by an

See Question K instructions for definitions of ‘‘investment

authorized member or manager of the LLC. If a receiver, trustee

partnership’’ and ‘‘qualifying investment securities.’’

in bankruptcy or assignee controls the organization’s property or

R Nonresident Members

business, that person must sign the return.

An LLC is required to file form FTB 3832 with Form 568. Form

Paid Preparer’s Information

FTB 3832 is signed by the nonresident members to show their

Generally, anyone who is paid to prepare the LLC return must

consent to California’s jurisdiction to tax their pro rata share of

sign the return and complete the ‘‘Paid Preparer’s Use Only’’

income attributable to California sources.

area of the return.

Form FTB 3832 is required to be filed:

The paid preparer must:

•

For the first taxable period for which the LLC became

Complete the required preparer information;

•

subject to tax; or

•

For any taxable period in which the LLC had a nonresident

(signature stamps or labels are not acceptable); and

•

member not previously listed on form FTB 3832.

Give the LLC a copy of the return in addition to the copy to

be filed with the FTB.

Separate forms for an individual (or groups of individuals) are

permissible. The LLC must maintain and have available for

A person who prepares the return and does not charge the LLC

inspection a form FTB 3832 signed by each nonresident

should not sign the LLC return.

member.

P Group Returns

If the LLC fails to file form FTB 3832 on behalf of any

nonresident member on time, then the LLC is responsible for

Nonresident members of an LLC doing business or deriving

paying the tax on that nonresident member’s distributive share

income from sources in California may elect under R&TC

of income determined at the highest marginal rate. See General

Section 18535 to file a group nonresident return. Get FTB

Information H for more information.

Pub. 1067, Guidelines for Filing a Group Form 540NR, for more

information.

Page 6

Form 568 Booklet 1998

Instructions For Form 568 - Limited Liability Company Return Of Income - 1998 Page 5

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