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California Conforms to New Federal Partnership Audit Rules

This article is reproduced with permission from Spidell Publishing, Inc.

California has conformed to the federal centralized partnership audit regime (CPAR), allowing the California Franchise Tax Board (FTB) to conduct audits, make adjustments, and assess tax against the partnership rather than the partners. Like federal law, the new regime applies to returns filed for partnership taxable years beginning after 2017.

If partnership adjustments are made at the federal level, partnerships must report each partnership item change or correction to the FTB, even if there is no change in tax liability, within six months of the date of each final federal determination. This applies whether the partnership pays the tax or makes a push-out election to have the reviewed-year partners pay the tax.

While California generally conforms to the federal CPAR rules, below are some of the key modifications:

  • Federal elections (such as the opt-out for small partnerships, push-out election, etc.) are binding except:
  • Unitary apportioning partners must file an amended California return and separately report and pay tax related to their share of federal adjustments; and
  • Partnerships that can show that the FTB’s collection ability will not be impeded can apply to the FTB to make a separate California election;
  • Tiered and indirect partners must make all required reports and payments to the FTB 90 days after the due date for complying with the federal reporting and payment requirements (due for federal purposes 45 days and 60 days, respectively, from the federal partnership adjustment);
  • California apportionment and sourcing rules apply for purposes of determining the partners’ California tax liabilities;
  • Partnerships that make a push-out election must file a group nonresident return and pay tax on behalf of nonresident partners;
  • Partnership or tiered partners may request to enter into an alternative agreement with the FTB regarding reporting, payment, due dates or any other provision stemming from a federal adjustment;
  • Statute of limitation rules similar to the rules for reporting federal adjustment apply to partnership adjustments; and
  • Only partnerships may claim refunds related to payments paid by the partnership, but partners may be eligible to claim an Other State Tax Credit for the partnership payments.

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