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Tips for filing a nonresident group return (form 540NR)

A business entity, acting as the authorized agent, may choose to file a group nonresident return for certain nonresidents. To participate, nonresidents must receive distributive shares of income from business entities that derive income from California sources, or that are doing business in California. The business entity pays the tax on behalf of the nonresident individuals who elect to file a group return.

A group nonresident return is considered a group of individual returns that meets the California individual income tax return filing requirement. Thus, a qualified nonresident individual who elects to be included in the group nonresident return is not required to file a separate income tax return for the tax year.

If your clients filed as part of a group nonresident return, you may have observed that the complex rules and requirements often result in special handling. To expedite processing of nonresident group returns:

  1. Don’t include taxpayers whose California taxable income exceeds $1 million.
    For taxable years beginning on or after January 1, 2005, these cannot be included in the group nonresident return, as they are subject to the Mental Health Services Tax and must file separate from the group.

    A married couple should not be part of a group return if they filed a federal tax return, and either spouse has California income over the $1 million threshold. The couple is required to file a joint California nonresident return.


  2. Use the right form, for the right tax year.
    Do not use a 2004 form with the “04” crossed out and replaced with “05.” You can get current and prior year forms from our Website (www.ftb.ca.gov).


  3. Use a calendar year for the group nonresident return, even if the business has a fiscal year end.
    You should also make any estimated tax payments on a calendar year basis.


  4. Use Form 540-ES to make estimated tax payments for the group nonresident return.
    Estimate payments made for a nonresident group return must be made on FTB Form 540-ES. Estimated tax payments made on Form 100-ES, Corporation Estimated Tax, will not be properly credited to the group nonresident return, but will be credited to the corporate account. Please see the example in FTB Pub. 1067 for detailed instructions on how to complete the estimate voucher.


  5. Use long Form 540NR and attach the Schedule 1067A and a signed Form 3864 for the correct tax year.
    The California Nonresident or Part-Year Resident Income Tax Return (long Form 540NR) is required for filing a nonresident group return. The following forms must be attached to the return:
    • Schedule 1067A      Nonresident Group Return Schedule

    • Form 3864              Group Nonresident Return Election

    An authorized general partner, member-manager, corporate officer, or an attorney-in-fact must sign Form 3864. A new election form must be signed and attached each year to each group nonresident return filed.


  6. Include only individuals in the group nonresident return.
    Partnerships, LLCs, C corporations, S corporations, Estates, or Trusts cannot be included in the group nonresident return. The exception to this is grantor trusts, described under IRC Section 675-677, and not recognized as a separate taxable entity for income tax purposes.

    Example: The ABC partnership consists of a general partner and 20 limited partners. The general partner is a C corporation. The limited partners consist of 15 nonresident individuals, an S corporation, a nonresident estate, an LLC, an LLP, and a trust, which is not a grantor trust. One nonresident individual has California taxable income in excess of $1,000,000. The other 14 nonresident individuals have California taxable income of less than $1,000,000 each.

    Only the 14 nonresident individuals with California taxable income of less than $1 million can be included in the group return. None of the other partners can be included.

    In addition, the individuals must be full-year nonresidents of California, and the only California source income must be from the business entity. If, for example, a nonresident has California source income from a business entity, and from a separate California rental property, this person cannot elect to be included in the group nonresident return.

  7. Election to be included in the group nonresident return is irrevocable.
    Inform your clients that once a group return is filed, it cannot be amended to either include or exclude a nonresident individual.

  8. Income taxed at the highest marginal rate.
    The income reported on the group nonresident return is taxed at the highest marginal rate of 9.3 percent.

  9. Moving estimated payments.
    Use Schedule 1067B to authorize us to move estimated tax payments from either the group to the individual’s account, or the individual’s account to the group. It will take us six to eight weeks to move the estimated tax payments, and make them available to be claimed on the return.

    FTB Pub. 1067 contains information regarding the Group Nonresident Returns. You can get FTB Pub. 1067 along with other California tax forms and publications at www.ftb.ca.gov. You may also call (916) 845-3465 for more information.