What California Schedule EO (565) (2017) Is For
California Schedule EO (565), Pass-Through Entity Ownership, is an attachment to Form 565 used to disclose a partnership’s ownership in other pass-through entities. It shows when your partnership or LLC taxed as a partnership owns interests in other partnerships, LLCs taxed as partnerships, or disregarded entities such as single-member LLCs.
The schedule helps the Franchise Tax Board see how income and losses move through multiple tiers of entities before reaching the partners who ultimately file an individual income tax return. By mapping the ownership chain, the FTB can confirm that California-source income is being reported and taxed correctly at each level.
When You’d Use California Schedule EO (565) (2017)
You must file Schedule EO (565) for the 2017 tax year whenever your partnership files Form 565 and holds any ownership interest in other pass-through entities. That includes even small percentage interests and wholly owned disregarded entities, whether or not those entities are active or do business in California.
The schedule follows the same filing requirements and due dates as Form 565. For calendar-year 2017 partnerships, the original due date was March 15, 2018, with an automatic seven-month extension to October 15, 2018. If you file a past due return or an amended Form 565 and the ownership information changes or was incomplete, you also need to file an updated Schedule EO with the corrected details.
Key Rules or Details for 2017
Comprehensive Disclosure Requirement
The core rule is full disclosure of ownership in other pass-through entities. You must report all interests in:
- Partnerships
- LLCs taxed as partnerships
- Disregarded entities your partnership owns 100%
You report these interests even if the other entities are formed in another state, are not required to file a California return, or have no California business activity.
Part I vs. Part II
Part I is for partial ownership in other partnerships and LLCs taxed as partnerships, where your partnership owns less than 100%. You must list each entity’s legal name, California Secretary of State (SOS) file number if it has one, FEIN, whether it generated California-source income for you, and your profit and loss sharing percentages.
Part II is for complete ownership of disregarded entities, typically single-member LLCs your partnership owns 100%. You report the same identifying information and whether those disregarded entities had California-source income, but no percentages, since ownership is total.
California-Source Income and Conformity
The California-source income checkbox is critical in both parts. You must indicate whether the partially owned entity passed California-source income to your partnership or whether the disregarded entity itself earned California-source income. For 2017, California generally conformed to the Internal Revenue Code as of January 1, 2015, so use California’s classification and sourcing rules when deciding what to report as California-source income.
Step-by-Step (High Level)
Step 1: Identify All Relevant Entities
Review your records to identify every partnership, LLC taxed as a partnership, and disregarded entity your partnership owns. Include entities formed or registered in any state, and list those with both active operations and simple investment holdings.
Step 2: Gather Required Information
For each entity, collect the legal name, California SOS file number (if registered in California), FEIN, and 2017 Schedule K-1s you received. The profit and loss sharing percentages for Part I entities should match the percentages shown on those K-1s.
Step 3: Determine California-Source Income
Evaluate whether each entity had California-source income in 2017. Look at where business was conducted, where property is located, and whether the entity had California customers, employees, or real estate. For disregarded entities, use their books and records to decide if they earned California-source income.
Step 4: Complete Part I for Partial Ownership
List each partnership or LLC taxed as a partnership in which you own less than 100%. Enter identifying information, check the box if California-source income applies, and report the exact profit and loss percentages as shown on the K-1s, even if profits and losses are allocated differently.
Step 5: Complete Part II for Wholly Owned Disregarded Entities
List every single-member LLC or other disregarded entity that your partnership owns 100%. Provide identifying information and indicate whether each entity had California-source income. Leave ownership percentages off this part because they are implicitly 100%.
Step 6: Attach Schedule EO to Form 565 and File
After reviewing for accuracy and completeness, attach Schedule EO behind Form 565 with the rest of your schedules. File your full return package by the original or extended due date to avoid penalties and interest on your partnership’s income tax obligations.
Common Mistakes and How to Avoid Them
- Failing to include Schedule EO when any reportable ownership exists
- Listing entities in the wrong part (putting SMLLCs in Part I instead of Part II)
- Leaving FEINs or California SOS file numbers blank when they can be obtained
- Using estimated or rounded ownership percentages instead of the exact K-1 figures
- Not checking the California-source income box when there clearly is California activity
- Forgetting to attach an updated Schedule EO with an amended Form 565
What Happens After You File
Once your partnership files Form 565 with Schedule EO, the Franchise Tax Board uses the schedule as a roadmap to verify the broader ownership chain. It compares the entities listed on your schedule with their own filings and checks that income reported as California-source is actually being picked up by the correct entities and partners who file a tax return.
If Schedule EO is missing or incomplete, the FTB may treat your Form 565 as incomplete and assess penalties. For 2017, the penalty for an incomplete partnership return is $18 per partner per month (or part of a month), up to 12 months, which can quickly create a large liability. The FTB may also send notices if entity identifiers, ownership percentages, or California-source income markings do not match other information they have.
If you discover an error after filing—such as an omitted entity or incorrect ownership percentage—you should file an amended Form 565 with a corrected Schedule EO and an explanation. Keeping copies of filed schedules, K-1s, and your California-source determinations will help if the FTB later questions how your partnership reported its income tax and filing requirements.
FAQs
Do we have to report an out-of-state partnership with no California activity?
Yes. You must report all ownership interests in other partnerships and LLCs taxed as partnerships on Schedule EO, even if they operate only outside California and have no California-source income. You would leave the California-source income box unchecked and the California SOS file number blank if the entity is not registered in California.
How is Part I different from Part II on Schedule EO?
Part I is for partial ownership interests in entities taxed as partnerships where your partnership owns less than 100%. Part II is for disregarded entities your partnership owns 100%, such as single-member LLCs. Partial interests never go in Part II, and disregarded entities owned entirely by your partnership never go in Part I.
What if we can’t find an entity’s California SOS file number?
If an entity is not registered with the California Secretary of State, it will not have a California SOS file number, and you can leave that field blank. You still must provide the entity’s full legal name and FEIN so the FTB can identify it.
Do dormant or inactive entities still have to be listed?
Yes. Even if an entity had no activity in 2017, it must be listed on Schedule EO if your partnership held an ownership interest in it. The disclosure rule is based on ownership, not on whether the entity had current-year income.
What happens if we forgot to attach Schedule EO and already received a penalty notice?
You should file an amended Form 565 with a completed Schedule EO as soon as possible and include a statement explaining the omission. You can request penalty relief if you believe you had reasonable cause, but you still need to correct the return quickly to keep additional penalty months from accruing.
Why are ownership percentages so important on Schedule EO?
The profit and loss sharing percentages tie Schedule EO to the Schedule K-1 amounts that ultimately reach partners and affect their tax liability. Using exact percentages from the K-1 helps the FTB reconcile income flows through the entity chain and confirm that the correct amount of income tax is being reported at the partner level.
