Which Schedule K items does a partnership withhold on for a nonresident partner: only apportioned business income, or also guaranteed payments, gains, rents, interest, dividends and a lower tier's income?

What each state applies its rate to

Schedule K is the part of the federal partnership return that lists each item passed through to the partners. None of the eight states withholds on a Schedule K line as such. Each applies a rate to the part of the nonresident partner's share (in California, the payments) that the state treats as its own source income, meaning income the state may tax because of where the property or business is. That part is the base. Income is apportioned when a formula divides it among states and allocated when a rule assigns it wholly to one state.

The states differ in three ways. They differ on whether the base is the partner's share or the cash paid out. They differ on which Schedule K lines they treat as source income. And they differ on where they state the answer for each line: in a statute, a regulation, a form or a guide. Where this article refers to the Department in a state's section, it means that state's department of revenue (in New Jersey, the Division of Taxation).

Three states answer the line question on the face of their forms: Illinois on Schedule K-1-P, New Jersey on Form NJ-1065 and Schedule NJK-1, and Minnesota on Schedule KPI. California, New York and Pennsylvania answer it in sourcing rules and published guidance. Georgia and Oregon answer it in part.

In New York the duty is a payment of estimated tax made for the partner under Tax Law section 658(c)(4), not withholding as such. This article says "withhold" for all eight states where the difference does not matter and "pay estimated tax" where it does.

This article covers only the base. Withholding on foreign partners, exemption certificates, composite elections, refunds and the way a credit climbs the tiers are separate questions, noted in a sentence only where they touch the base.

Rate and base, state by state

• California. Seven percent of the gross payment or distribution amount of California source income paid to nonresident individuals and non-California business entities (Cal. Code Regs., tit. 18, section 18662-4(a)(1), (a)(3)). Withholding is optional on the first $1,500 of income paid to a payee for the calendar year ((a)(2)).
• New York. The partnership pays estimated tax for the partner. The amount starts with the partner's distributive share (the partner's portion of the entity's income) derived from New York sources, determined under Tax Law section 631 as for a nonresident individual. That share is multiplied by the highest section 601 rate for an individual partner (or the section 210 rate for a C corporation partner) and reduced by the partner's share of listed credits (section 658(c)(4)(A)). The 2025 and 2026 Form IT-2658-I worksheets multiply by 10.9 percent.
• New Jersey. The partner's share of the partnership's entire net income is multiplied by an allocation factor, and the rate is .0637 for nonresident noncorporate partners and .09 for nonresident corporate partners (N.J.S.A. 54:10A-15.11 a.(1)). The 2025 Form NJ-1065 instructions put each partner's share of New Jersey income in column H and the 6.37 percent and 9 percent multipliers in columns I and J.
• Illinois. The base is the nonresident owner's distributive share, "whether or not distributed," of two kinds of income: business income apportionable to Illinois, and nonbusiness income allocated to Illinois (other than income allocated to the taxpayer's commercial domicile, generally the place from which the business is managed). That base is multiplied by the owner's rate under section 201(a) through (d) of the Illinois Income Tax Act (86 Ill. Adm. Code 100.7035(a), which restates 35 ILCS 5/709.5(a)). Individual, estate and trust owners and corporate owners have different rates.
• Georgia. Four percent of the nonresident member's share of taxable income sourced to Georgia, "whether distributed or not" (O.C.G.A. section 48-7-129(a)(1), (a)(2)).
• Pennsylvania. The base is the income from Pennsylvania sources allocable to nonresident partners. It is multiplied by the rate in section 302(b), which the Department states as 3.07 percent (72 P.S. section 7324.1(a)). The statute reaches any nonresident partner (72 P.S. section 7324(a)). The Department's guide limits the partnership's duty to nonresident individual, estate and trust owners. The guide measures the duty on each owner's expected share of distributable Pennsylvania-source taxable income.
• Oregon. The base is the owner's share of the entity's distributive income from Oregon sources. The rate is the highest marginal rate under ORS 316.037 for an individual owner (ORS 314.781(2)). The 2025 Form OR-19 instructions state 9.9 percent for individual owners and, for corporate owners, 6.6 percent on the first $1 million and 7.6 percent above it.
• Minnesota. This applies to nonresident individual partners only. The partnership withholds on the distributive share allocable to Minnesota under section 290.17 that is "paid or credited during the taxable year," at the highest individual rate under section 290.06, subdivision 2c (Minn. Stat. section 290.92, subd. 4b(a), (b)). The 2025 Schedule KPI states 9.85 percent in its composite tax instruction.

Share-based and distribution-based bases

California measures the base on cash paid out. The other seven states measure it on the partner's share, with a Minnesota qualification noted below. California's regulation applies the 7 percent rate to "payments of California source income" and to "the gross payment or distribution amount" (Cal. Code Regs., tit. 18, section 18662-4(a)(1), (a)(3)). Franchise Tax Board (FTB) Publication 1017 (revised 02/2026) adds that "Distributions are deemed first from distributable income and second as return of capital." A partnership makes a good faith effort to estimate the year's California source income. Where the year's income is "impractical or impossible to estimate," the partnership uses the California source income recognized as of the date of the distribution (Question 104). A proposal to move California to a share-based model is reported in the live article on California withholding for domestic owners, which this article does not restate.

Six of the other seven states start from the partner's share, in the wording set out in the previous section. Illinois and Georgia say so in terms ("whether or not distributed" and "whether distributed or not"). Pennsylvania measures each owner's "expected share" of distributable Pennsylvania-source taxable income. Minnesota is less clear. The statute reaches the distributive share allocable to Minnesota "paid or credited during the taxable year" (Minn. Stat. section 290.92, subd. 4b(b)), while the 2025 Schedule KPI states the partner's Minnesota source distributive income on line 53 and the withholding on line 55. The statute's words and the form's structure point in different directions, and no source read chooses between them.

Operating business income

An apportioned share of operating business income is in the base in every state. In California it is the California-source portion of what is paid or distributed. The regulation apportions the partnership's business income at the partnership level under Revenue and Taxation Code sections 25120 to 25139. A unitary partner (one whose own business forms a single integrated business with the partnership's) is the exception and apportions at the partner level (Cal. Code Regs., tit. 18, section 17951-4(d)(1), (d)(2)). In New York it is the share derived from New York sources under Tax Law section 631. A business carried on partly within and partly without New York is apportioned and allocated under the Tax Commission's regulations (section 631(c)). In Georgia, "taxable income sourced to this state" means the entity's income allocated or apportioned to Georgia under Code Section 48-7-31 (O.C.G.A. section 48-7-129(a)(1)). In Minnesota, section 290.17 apportions all income of a trade or business except nonbusiness income (subd. 3). New Jersey applies an allocation factor. Illinois uses the business income apportionable to Illinois. Oregon uses the portion of modified distributive income derived from or connected with Oregon sources. Pennsylvania uses the owner's share of Pennsylvania-source income sorted into the personal income tax classes.

Guaranteed payments

A guaranteed payment is a fixed amount a partnership pays a partner for services or for the use of the partner's capital, without regard to the partnership's income. Seven states put guaranteed payments in the base, and Pennsylvania sorts them by purpose.

• California. A nonresident partner's guaranteed payments are sourced "as if the guaranteed payments were a distributive share of partnership business income" (Cal. Code Regs., tit. 18, section 17951-4(d)(3)). Publication 1017 (Question 105) answers: "If the guaranteed payments represent income from California sources and are not subject to wage withholding through EDD, the payments are subject to withholding." EDD is the Employment Development Department. The regulation draws no line between payments for services and payments for capital.
• New York. Section 632(b)(1) of the Tax Law gives no effect to a partnership agreement provision that "characterizes payments to the partner as being for services or for the use of capital." A label in the agreement therefore does not change where a guaranteed payment is sourced.
• New Jersey. Net guaranteed payments are in the base after the allocation factor. The Schedule NJK-1, Part II, line 2 instruction takes the partner's net guaranteed payments from line 23c, column A, of Form NJ-1065, and column B multiplies that amount by the allocation factor from line 19b.
• Illinois. Schedule K-1-P line 29, "Guaranteed payments to partner (federal Form 1065 only)," is a Step 4 business line. Schedule K-1-P(3) Line 7 takes Step 4, Column B, Lines 20 through 27 and 29 through 31. The line does not separate services from capital. Neither 86 Ill. Adm. Code 100.3010 nor section 1501(a)(1) of the Illinois Income Tax Act mentions guaranteed payments in the words read. No source read says how Illinois classifies a guaranteed payment as business or nonbusiness income other than by the line on which it is reported.
• Georgia. Rule 560-7-8-.34 as amended effective June 11, 2026, names guaranteed payments among the Georgia separately stated items in the nonresident member's share. The rule excludes payments made to a member "in a capacity other than as a member," such as salaries, rents and royalties.
• Oregon. The 2025 Form OR-19 instructions treat guaranteed payments as "a business income component of the PTE's distributive income" attributed directly to the owner who receives them.
• Minnesota. The statute does not mention guaranteed payments. Schedule KPI carries them on line 43. The Department's instructions treat them as part of the partner's distributive share, apportioned at the same percentage as the income.
• Pennsylvania. The Department's guide classifies a guaranteed payment by what it pays for. For a nonresident, the guide sets these rules. A payment for services rendered directly in producing income from a business, profession or farm is allocable or apportionable to Pennsylvania "to the same extent as the net profits". A payment for services in producing rental or royalty income follows that income. A payment for other services or for the use of capital is allocable to the state of residence. Finally, "Nonresidents are not taxed on a guaranteed payment for the use of capital for Pennsylvania personal income tax purposes."

Six states (California, Georgia, Illinois, New Jersey, Oregon and Minnesota) do not distinguish services from capital for withholding in the sources read. New York disregards the label. Pennsylvania alone treats a payment for the use of capital as outside the tax for a nonresident.

Separately stated gains and section 1231 gain

Section 1231 gain is the federal category for gain on the sale of property used in a trade or business. In most of these states the test is where the property is and whether the gain belongs to a business, not the federal character of the gain.

• New York. Tax Law section 631(b)(1) sources to New York the items attributable to ownership of an interest in real or tangible personal property in the state and to a business, trade, profession or occupation carried on in the state. The Form IT-204-I instructions for column C of Form IT-204-IP direct that items of real property are not allocated and that real property outside New York State is not allocable to New York.
• California. Publication 1017 (Question 73) says that rent and the gain on a sale of California real or tangible personal property are California source income: "This includes rents, lease payments, and the gain on the sale of such property." A gain on an intangible is California source only through a business situs (the property is employed as capital in California), and then "The entire income, including the gain from the sale of such an asset, is income from California sources" (Question 18). A gain that is business income is apportioned at the partnership level. A gain that is not business income is sourced under Revenue and Taxation Code sections 17951 through 17955 (Cal. Code Regs., tit. 18, section 17951-4(d)(1), (d)(4)).
• Illinois. Schedule K-1-P splits gains by line. Capital gain or loss from real property (line 16) and from tangible personal property (line 17) are Step 3 nonbusiness lines. They are in the base only when allocated to Illinois. Schedule K-1-P(3) Line 6 takes Step 3 lines 12 through 17 and 19, so gain from intangible personal property (line 18) falls outside Line 6. Net short-term and long-term capital gain (lines 26 and 27) and net section 1231 gain (line 30) are Step 4 business lines. They fall inside Line 7 and are apportioned.
• New Jersey, Georgia, Oregon and Pennsylvania. The sources read do not sort separately stated gains. New Jersey taxes the share of entire net income multiplied by an allocation factor, and the instructions total columns D and F into column H. Georgia's base is income allocated or apportioned to Georgia under Code Section 48-7-31, and Oregon's base is the Oregon-source portion of modified distributive income. The part of the Pennsylvania guide read does not address sales of partnership assets, and its class rules apply.
• Minnesota. Schedule KPI carries gains on lines 47 through 49, including Minnesota net section 1231 gain (loss) on line 49. The statute separately excuses withholding where the distributive shares are attributable to income recognized because of a sale, exchange or other disposition of real estate, depreciable property, or property described in Internal Revenue Code section 179 (subd. 4b(d)(4)(ii)). On the text as printed, that clause has no cash condition. The clause on property with a basis reduction does have a cash condition (clause (iii)). No source read says how clause (ii) fits with line 49, and this article does not treat either way of reading the two together as settled.

Whether an Illinois gain is business or nonbusiness income is a matter of classification, and the Department's rule turns on how the property was used. Under 86 Ill. Adm. Code 100.3010(c)(3), gain from the sale of real or tangible personal property "constitutes business income if the property, while owned by the person, was used in its trade or business," and it is nonbusiness income if the property was used to produce nonbusiness income or was removed from the property factor (the part of the apportionment formula that counts the business's property) before the sale. The 2025 IL-1065 instructions state that all income of a partnership is business income unless both parts of a two-part test are met. First, the income must be attributable to only one state. Second, it must be earned through activities totally unrelated to any business conducted in more than one state. The instructions also describe an irrevocable election to treat all income other than compensation as business income. On that reading, a gain on a building that a rental business owns and rents out is business income on line 30, apportioned. A nonbusiness line 16 gain needs facts showing that the building was a passive investment. The sources read do not say where a nonbusiness section 1231 gain on real property is reported; Schedule NB has a line captioned capital gain (loss) from real property and no section 1231 line.

Rents

Rent follows the location and the use of the property. California treats rent from California real or tangible personal property as California source income (Publication 1017, Question 73). New York sources income from ownership of real or tangible personal property in the state to New York (Tax Law section 631(b)(1)(A)). Illinois sorts rent by line. Rental income (line 12) is a Step 3 nonbusiness line, in the base only when allocated to Illinois. Net income from rental real estate and other rental activities (lines 21 and 22) is a Step 4 business line, apportioned. The Department's rule makes rental income from real and tangible property business income if the property "is used in the person's trade or business or is attendant to it," and its examples treat the leasing of two floors of a building bought for the business as business income and the leasing of a whole building bought as an investment as nonbusiness income (86 Ill. Adm. Code 100.3010(c)(2), Examples C and D). Minnesota carries rents on Schedule KPI lines 41 and 42. Georgia excludes rents paid to a member in a capacity other than as a member. The sources read do not address partnership rents separately for Georgia. Pennsylvania treats a guaranteed payment for services in producing rental or royalty income as following that income. The sources read for New Jersey, Oregon and Pennsylvania do not otherwise break rents out.

Interest and dividends

California and New York start from the same general rule for a nonresident's intangible income, meaning income from stocks, bonds, notes and similar property. They differ on the exception. Minnesota, Pennsylvania and Illinois work differently.

• California. Income of a nonresident from stocks, bonds, notes or other intangible personal property "is not income from sources within this state unless the property has acquired a business situs in this state" (Rev. and Tax. Code section 17952). A nonresident who buys or sells such property in California so regularly, systematically and continuously as to constitute doing business has California-source profit or gain whatever the situs of the property. Publication 1017 (Question 18): "California business situs is acquired when the property is employed as capital in California." A separate exclusion can remove qualified investment securities income of an investment partnership from the base (Question 103), which the live article on California investment partnerships covers.
• New York. Income from intangible personal property, "including annuities, dividends, interest," is New York source "only to the extent that such income is from property employed in a business, trade, profession, or occupation carried on in this state" (Tax Law section 631(b)(2)).
• Minnesota. Section 290.17 assigns income or gains from intangible personal property not employed in the recipient's business to Minnesota if the recipient is a Minnesota resident or a resident trust or estate (subd. 2(c)). The paragraph says nothing about a nonresident recipient. Section 290.17 also apportions all income of a trade or business except nonbusiness income (subd. 3). Schedule KPI carries interest on line 44 and dividends on line 45.
• Pennsylvania. The Department's guide says that an entity "should not withhold Pennsylvania personal income tax on income from intangibles such as interest, dividends, or sale of stock." That is the Department's instruction, stated in its guide.
• Illinois. Nonbusiness interest, dividends and intangible gain (Step 3 lines 10, 11 and 18) are outside Schedule K-1-P(3) Line 6. The Schedule K-1-P(1) instruction for those lines tells a partner that uses an Illinois address to enter its share of nonbusiness income from Column A, and tells any other partner to enter zero. Interest (line 23) and dividends (line 24) are Step 4 business lines inside Line 7. The same dollars are therefore in the Illinois base or out of it depending on whether the partnership reports them as business or nonbusiness income. That is a return-preparation decision governed by section 1501(a)(1) and 86 Ill. Adm. Code 100.3010.
• New Jersey, Georgia and Oregon. The sources read do not address interest and dividends. New Jersey's statute excludes a qualified investment partnership, an investment club and a partnership listed on a United States national stock exchange, and the Division's 2025 instructions add a hedge fund status condition.

The exception matters in practice. Interest or dividends that a partnership employs in its business can enter the base as business income in California, New York, Illinois and Minnesota, so a partnership whose working capital is employed in a New York or California business cannot treat all interest as outside the base.

A lower tier's income

When the nonresident partner is itself a partnership (an upper tier) that holds an interest in another partnership (a lower tier), two questions arise: whether the lower tier withholds on distributions to the upper tier, and whether the lower tier's share enters the upper tier's own base. How a credit climbs the tiers is the subject of a separate live article; this section covers the base question only.

• New York. Under 20 NYCRR 137.6, a nonresident partner's distributive share of each upper-tier partnership item attributable to the lower tier "retains the source and character determined at the level of the lower tier partnership," and the Form IT-204-I instructions say the same. The estimated payment duty does not reach partners that are partnerships: the Form IT-2658-I instructions say estimated payments "are not required for partners and shareholders who are resident individuals, partnerships, S corporations, estates, or trusts." The upper tier pays for its own nonresident individual and C corporation partners.
• Illinois. Schedule K-1-P(1) Step 4, Column B points a partner that received business income from any other partnership, S corporation or trust to the Schedule K-1-P or K-1-T from that entity. Schedule K-1-P(3) Line 7 draws on that column. Publication 129 (R-12/25) adds that a member that is a pass-through entity itself is required to report and pay pass-through withholding on behalf of its own nonresident members on the income passed through to them. The exception is a member that elects to pay the pass-through entity tax (an elective tax the entity pays in place of its owners) for all its members. Corporations, S corporations and partnerships count as nonresidents for pass-through entity income.
• Georgia. Under the amended rule, an upper-tier entity withholds only if it does business or owns property in Georgia on its own account. Credit moves up the tiers on Form G2-A with an allocation schedule. A member includes its share of the entity's income before the entity apportions and allocates it (paragraph (4)).
• Oregon. The 2025 Form OR-19 instructions state: "Withholding isn't required if the owner is another PTE, except for entities that are disregarded for tax purposes." Tax withheld by a lower tier on distributions to an upper tier is applied to the upper tier's withholding (ORS 314.781(6)).
• Minnesota. Subdivision 4b(a) requires withholding only for nonresident individual partners. The Schedule KPI line 39 instruction adds Minnesota source gross income from all partnerships, estates and trusts.
• Pennsylvania. The Department's guide says an entity may not withhold Pennsylvania personal income tax for another entity or a Pennsylvania resident individual.
• California. Publication 1017 (Question 108) requires a partnership to withhold on all California source income distributions to domestic nonresident partners that are partnerships, publicly traded partnerships or master limited partnerships, unless it receives a waiver on Form 588.

New York, Illinois, Georgia, Oregon and Minnesota answer the base question in the words above. California and Pennsylvania do not. California's Publication 1017 states the lower tier's duty and is silent on whether the upper tier's base includes the lower tier's share. Pennsylvania's guide limits an entity's withholding to nonresident individuals, estates and trusts and does not address the share either. No source read says whether a California upper tier withholds again on redistributed lower-tier California source income that was already withheld on.

Losses and netting

Net New Jersey losses produce no entry. The column H instruction says that if the result is a loss, no entry is made. Pennsylvania forbids offsetting income or gain in one class with a loss in another class. California does not let a partner's losses reduce the withholding base. Net operating loss carryovers are determined at the partner level, and withholding is required on current distributions of California source income (Publication 1017, Question 111). A partner cannot net losses from other California entities against income it receives from the partnership (Question 112). Georgia's amended rule does not allow a loss in one entity to offset income in another. Illinois lets Illinois-source losses offset Illinois-source income only in the investment partnership variation (86 Ill. Adm. Code 100.7034). Oregon's base is the net amount of "income, gain, deduction or loss" of the entity (ORS 314.775(1)), so a loss reduces it, though the Form OR-19 instructions do not say so in terms.

Thresholds and exceptions

• California. Withholding is optional on the first $1,500 paid to a payee in a calendar year and must begin once total payments of California source income for the year exceed that amount (Cal. Code Regs., tit. 18, section 18662-4(a)(2); 2025 Form 592-PTE instructions).
• New York. No estimated payment is due for a partner whose estimated New York tax for the year does not exceed $300 (Tax Law section 658(c)(4)(D)(i)); the Form IT-2658-I instructions say "$300 or less per tax type." Estimated payments are also not required for an owner included on a group return or for whom the commissioner has issued a waiver ((D)(ii)).
• Georgia. No withholding is due if the member's aggregate share of taxable income sourced to Georgia is less than $1,000 (O.C.G.A. section 48-7-129(e)(1)(B)).
• Oregon. No withholding is due if the owner's share of distributive income is less than $1,000 for the tax year (ORS 314.784(1)(a)); the 2025 Form OR-19 instructions measure the amount as Oregon-source distributive income.
• Minnesota. No withholding is due if the partner has Minnesota assignable federal adjusted gross income from the partnership of less than $1,000 (subd. 4b(d)(2)).
• New Jersey, Pennsylvania and Illinois. No dollar floor appears in the sources read.

An election to pay a pass-through entity tax can turn withholding off. Minnesota excuses withholding where "the partnership has elected to pay the pass-through entity tax under section 289A.08, subdivision 7a" (subd. 4b(d)(6)). The 2025 Form OR-19 instructions say that "A PTE that elects to pay the PTE elective tax will generally not be required to withhold for the owners". The Form IT-2658-I instructions say a New York partnership that elected the pass-through entity tax need not make personal income tax estimated payments for a nonresident individual partner. The live article on pass-through entity tax elections covers California, New York, New Jersey and Illinois.

What changed or may change

Georgia amended Rule 560-7-8-.34 (filed May 22, 2026, effective June 11, 2026), and paragraph (9) applies it to taxable years beginning on or after January 1, 2024. The base definition, the guaranteed payment words and the $1,000 floor are unchanged from the earlier copy. The statute, O.C.G.A. section 48-7-129, carries the same words basing the withholding on the member's share and not on distributions, and the same $1,000 floor. The Illinois investment partnership rule applies to years ending on or after December 31, 2023. California's rule remains the distribution-based regulation quoted above. This article states each state's rule only for the year of its source: Publication 1017 as revised 02/2026, the 2025 and 2026 Form IT-2658-I, the 2025 Form NJ-1065 and Illinois instructions, the 2025 Form OR-19 and Schedule KPI, and Georgia's rule as amended.

Worked example

All parties, facts and figures in this example are invented, and the year is 2025.

Setting. A partnership operates a regional equipment-rental business in California, New York and Illinois and owns one rental building in Illinois, which it rents out as part of the same rental business. Its commercial domicile is outside all three states. It has one nonresident individual partner, Partner A, with a 20 percent interest in every item except the guaranteed payments, which go to Partner A alone. Partner A lives outside California, New York and Illinois and has no other source income in those states. The partnership apportions its operating income 40 percent to California, 30 percent to New York, 20 percent to Illinois and 10 percent elsewhere.

Premises that carry the result.

1. Building gain. In the primary case, the building is used in or attendant to the rental business, so the gain on its sale is business income on the Department's reading (86 Ill. Adm. Code 100.3010(c)(3) and (c)(2)). In the alternative case, the building was held as a passive investment, leased to unrelated tenants, and never used in or attendant to the equipment business, with no election under section 1501(a)(1). The gain is then nonbusiness real property gain on line 16, allocated to Illinois. Both cases are computed. The alternative case needs facts showing that a building held by a rental business was a separate investment, and the classification is the swing item in the result.
2. The interest is on portfolio investments and is not employed in the business. If it were working capital employed in the New York business, New York would allocate Partner A's $8,000 share at the 30 percent business allocation percentage, $2,400, making the New York base $107,400 and the estimated tax $11,706.60. The example computes that alternative for New York only.
3. The lower tier operates only in Illinois and is not unitary with the partnership, and the example takes the lower tier's reported Illinois sourcing as given. If it were unitary, which the sources read for this article do not address, the lower tier's income could enter California's apportionment on combined factors; the example does not compute that alternative because the inputs are not given.
4. Partner A's guaranteed payments are not subject to wage withholding through the Employment Development Department, and payments to Partner A during the year (distributions and guaranteed payments) exceed the California-source income computed below.
5. New York treats the guaranteed payments as part of the distributive share and allocates them at the 30 percent business allocation percentage. That percentage is an assumption of the example: the sources read for this article state that a label in the partnership agreement is disregarded (Tax Law section 632(b)(1)) and do not state the allocation percentage for a guaranteed payment.
6. The Illinois computation has no additions or subtractions and no unrecaptured section 1250 gain (a federal category of gain on depreciated real property).

Schedule K items for the year.

• Ordinary business income from the partnership's own operations: $1,000,000; Partner A's amount is $200,000.
• Guaranteed payment for services: $100,000, all to Partner A.
• Guaranteed payment for capital: $50,000, all to Partner A.
• Section 1231 gain on the Illinois rental building: $300,000; Partner A's amount is $60,000.
• Portfolio interest: $40,000; Partner A's amount is $8,000.
• Distributive share from a lower tier that operates only in Illinois, reported to the partnership as Illinois-source: $200,000; Partner A's amount is $40,000.

California (the base is payments or distributions of California-source income):

• Ordinary income: $200,000 times 40 percent is $80,000.
• Guaranteed payments, services and capital, sourced as a distributive share of business income: $150,000 times 40 percent is $60,000.
• Building gain, primary case (business income apportioned at the partnership level): $60,000 times 40 percent is $24,000. Alternative case (nonbusiness real property outside California): $0.
• Portfolio interest: $0, because intangible income of a nonresident has no California business situs here.
• Lower-tier share: $0, because it is Illinois-source as reported and not unitary.
• California-source income: $164,000 in the primary case and $140,000 in the alternative.
• Withholding at 7 percent if the partnership also withholds on the first $1,500: $11,480 in the primary case and $9,800 in the alternative. If it uses the option not to withhold on the first $1,500, 7 percent of $162,500 is $11,375 and 7 percent of $138,500 is $9,695.

New York (the base is the share of New York source income):

• Ordinary income: $200,000 times 30 percent is $60,000.
• Guaranteed payments, label disregarded and allocated at the business allocation percentage: $150,000 times 30 percent is $45,000.
• Illinois building gain: $0 in either case. The column C instruction for Form IT-204-IP directs that items of real property are not allocated, and real property outside New York State is not allocable to New York. An apportioned reading under section 631(b)(1)(B) and (c) would add $18,000 and produce a base of $123,000 and an estimated tax of $13,407; the example follows the form's instruction.
• Portfolio interest: $0, because it is not employed in a New York business.
• Lower-tier share: $0, because the source and character fixed at the lower tier, which operates only in Illinois, carry through (20 NYCRR 137.6).
• New York source income: $105,000. Estimated tax: $105,000 times 10.9 percent is $11,445, above the $300 floor.

Illinois (the base is Schedule K-1-P(3) Lines 6 and 7):

• Business base: ordinary income of $200,000 times 20 percent is $40,000, and guaranteed payments (line 29) of $150,000 times 20 percent is $30,000, for a subtotal of $70,000.
• Building gain, primary case (business income on line 30, apportioned at 20 percent): $60,000 times 20 percent is $12,000. Alternative case (nonbusiness, line 16, allocated to Illinois in full): $60,000.
• Portfolio interest: $0, because it is nonbusiness and Partner A does not use an Illinois address.
• Lower-tier share, reported as Illinois-source business income in Column B of Schedule K-1-P(1), Step 4: $40,000.
• Base: $70,000 plus $12,000 plus $40,000 is $122,000 in the primary case; $70,000 plus $60,000 plus $40,000 is $170,000 in the alternative.
• Withholding at the individual rate of 4.95 percent (the Department's rate page lists 4.95 percent of net income for individuals effective July 1, 2017): $122,000 times 4.95 percent is $6,039 in the primary case, and $170,000 times 4.95 percent is $8,415 in the alternative. The Line 13 replacement tax instruction names partnership, S corporation, nonresident trust and corporation members and does not name an individual. These figures are the gross duty before any credit for tax the lower tier withheld.
• The lower tier's own withholding: the partnership is a nonresident member of the lower tier for this purpose (Publication 129). On the lower tier's 2025 Schedule K-1-P(3), the partnership therefore carries replacement tax of 1.5 percent on Line 13, which is $3,000 on its $200,000 share, and zero on Lines 16 through 18. The partnership may claim some or all of that amount as a credit against the amount it must withhold from its own owners (86 Ill. Adm. Code 100.7035(d)(1)). How that credit reaches the partnership's own return is the subject of a separate article.

What the example shows. The same Schedule K produces three bases in the primary case ($164,000, $105,000 and $122,000). California measures payments or distributions of California-source income and apportions the building gain as business income; New York disregards the guaranteed payment label and does not allocate out-of-state real property; and Illinois apportions the building gain at 20 percent, puts the lower tier's Illinois income in the base at full value and leaves the portfolio interest out. The classification of the building gain moves Illinois by $2,376 and California by $1,680 and does not change the New York result.

What it leaves out. Partner A's items from other states, credits, a pass-through entity tax election, the composite and exemption routes, a loss on any line, the timing of installments, the unitary alternative for the lower tier and the Illinois rules for investment partnerships.

Practice notes

Map every Schedule K line to the state's own form line before the first estimated payment: Illinois publishes the line ranges on Schedule K-1-P(3), Minnesota the lines of Schedule KPI, and New Jersey the column structure of Form NJ-1065, while California and Pennsylvania publish sourcing rules and no line map. Treat the business or nonbusiness classification of interest, dividends and real property gain as a withholding decision in Illinois. The same dollars are in the base on Schedule K-1-P line 23, 24 or 30, and out of it or allocated on line 10, 11 or 16. Record the facts that support the classification. Separate guaranteed payments for services from guaranteed payments for the use of capital in the working file. Pennsylvania treats the second as outside the tax for a nonresident, and the other states read do not distinguish them. Keep California's estimate of California-source income together with a log of payments and distributions. In California, the base is what is paid or distributed.

Keep a one-page state memo of the base wording, the rate, the threshold and the form line for each state, with the source and the date read, and note that Georgia's rule is read as amended effective June 11, 2026. Record, for each lower-tier distributive share, the lower tier's reported state sourcing and the statement that carries it. New York, Illinois, Georgia, Oregon and Minnesota each speak to whether that share is in the upper tier's base. Where the partnership elects a pass-through entity tax, check each state's own switch-off words, including Minnesota's subdivision 4b(d)(6) and the Oregon instruction for an elective tax. G&G State Tax Group advises partnerships and their partners on nonresident withholding and multistate procedure alongside its state and local tax practice.