What IRS Schedule EO (565) (2017) Is For
IRS Schedule EO (565) (2017) is a required attachment for partnerships and limited liability companies (LLCs) taxed as partnerships that have ownership in other pass-through entities. Its primary function is to disclose detailed ownership information to the California Franchise Tax Board, helping them track the flow of income and verify tax-relief/essential-guide-to-alaska-penalty-abatement-relief-options-explained">tax compliance across multiple entity layers.
When You’d Use IRS Schedule EO (565) (2017)
- Filing requirements involving pass-through entities: This applies when a partnership or California LLC taxed as a partnership holds ownership in another pass-through entity and is filing a tax return using Form 565.
- Changes in ownership during the year: This applies when a partnership acquires or disposes of ownership interests that affect the structure reported on the original or amended federal return.
- Amended federal return or amended California return: This applies when a change in federal income tax allocations under the Internal Revenue Code prompts the need to amend the California partnership return and attach a revised Schedule EO.
- Reporting disregarded entities: This applies when the partnership wholly owns a single-member LLC or another disregarded entity that must be disclosed under state reporting requirements.
- Foreign entities reporting: This applies when ownership interests include foreign entities or foreign corporations that may not file California returns but must still be disclosed on Schedule EO for proper compliance.
Key Rules or Details for 2017 IRS Schedule EO (565) (2017)
Several rules govern how taxpayers must complete IRS Schedule EO (Form 565) (2017) to comply with California Franchise Tax Board reporting requirements.
- Complete disclosure of pass-through entities: All ownership interests in partnerships, LLCs taxed as partnerships, and disregarded entities must be reported regardless of whether the entity operates in California or is registered with the Secretary of State.
- Accurate Schedule K-1 information: Taxpayers must report profit and loss percentages exactly as shown on the applicable Schedule K-1 or California Schedule K-1 received from the entity.
- Identification of California-source taxable income: Each entity listed must indicate whether it generated California-source income, such as business activity, real estate holdings, or sales involving California property.
- Proper classification under Internal Revenue Code: Entities must be categorized for federal tax purposes based on classification rules in effect as of January 1, 2015, under California law, which may differ from current Internal Revenue Service rules.
- Use of FTB forms when applicable: Supporting documents such as Form FTB 3804, Schedule IW, and Form FTB 3893 may be required depending on the ownership structure and pass-through income reported.
Step-by-Step (High Level)
- Gather entity information: The taxpayer must collect complete legal names, Federal Employer Identification Numbers (FEINs), and California Secretary of State file numbers for all relevant pass-through entities, disregarded entities, or foreign entities.
- Review Schedule K-1 documents: The taxpayer must confirm profit and loss sharing percentages directly from each Schedule K-1 or California Schedule K-1 to ensure consistency with reporting requirements.
- Determine California-source income: The taxpayer must evaluate whether any listed entity generated California-source income, such as business revenue, rental income, or capital gains from the disposition of business property.
- Complete Part I for partial ownership: The taxpayer must report all ownership interests of less than 100 percent, including those in S Corporations or partnerships classified as pass-through entities.
- Complete Part II for disregarded entities: The taxpayer must list all wholly owned disregarded entities, such as single-member LLCs, including their identifying numbers and whether they generated taxable income in California.
- Attach required tax forms and schedules: The taxpayer must ensure all applicable tax forms, such as Schedule IW, Schedule P, or Form FTB 3832, are completed and attached to the partnership return.
- Review for accuracy: The taxpayer must double-check that ownership percentages, classification details, and California-source income indicators are correct, especially when a claim for credit or Pass-Through Entity Tax is involved.
- File by deadline: The taxpayer must submit the full tax return, including Schedule EO, by the standard filing deadline or extended due date to avoid penalties, such as a late payment penalty or negligence penalty.
Common Mistakes and How to Avoid Them
Several recurring errors occur when taxpayers complete IRS Form 565 (Schedule EO) (2017).
- Omitting foreign entities: Taxpayers should ensure they include ownership in foreign entities and foreign corporations, even when those entities are not required to file California returns.
- Incorrect ownership percentages: Taxpayers should avoid rounding or estimating and instead report ownership percentages exactly as shown on each Schedule K-1 or California Schedule K-1.
- Leaving California-source income boxes blank: Taxpayers should assess whether income was derived from California sources, such as business activity, and mark the income box accordingly.
- Misclassifying disregarded entities: Taxpayers should only list 100 percent owned disregarded entities in Part II and should not include them in Part I, which is reserved for partial interests.
- Failing to attach required schedules: Taxpayers should ensure that all necessary forms, such as Form FTB 3804, Schedule M-3, or Form FTB 3537, are correctly submitted with the tax return.
- Incorrect use of federal income tax classifications: Taxpayers should follow the classification rules established under California law, which may differ from current Treasury Department or Internal Revenue Service guidelines.
- Missing amended return requirements: Taxpayers should file an amended return with a revised Schedule EO when there are updates to ownership, business activity, or federal adjustments that affect state reporting.
What Happens After You File
Once IRS Schedule EO (565) (2017) is filed with the partnership’s tax return, the California Franchise Tax Board reviews the ownership disclosures to ensure proper reporting of California-source income. The board may cross-reference the schedule with data from other entities to identify omissions or inconsistencies.
If the form is missing or contains errors, the Franchise Tax Board may issue a notice, impose penalties, or request clarification. Taxpayers should retain supporting documentation, including Schedule K-1, federal returns, and FEIN verification, in case of an audit or compliance inquiry.
FAQs
When is IRS Schedule EO (565) (2017) required for a California LLC or partnership?
It is required when a California LLC or partnership holds any ownership interest in pass-through entities, including disregarded entities or foreign corporations, for purposes of state and federal compliance.
Do disregarded entities always need to be reported on Part II of this schedule?
Yes, all 100 percent owned disregarded entities must be listed in Part II, even if they generate no qualified net income or federal income tax obligation.
Does an amended federal return require a revised Schedule EO filing?
Yes, if any ownership changes, income allocations, or federal short-term rate adjustments occur, a corrected Schedule EO must accompany the amended federal return.
What if the entity held is a C corporation or subject to Schedule EO (568)?
Only passthrough entities and disregarded entities are reported on Schedule EO (565); C corporations and entities reportable under Schedule EO (568) are not included.
How does the Franchise Tax Board use this form to enforce compliance requirements?
The California Franchise Tax Board uses the form to trace passthrough income across entity structures, identify reporting gaps, and verify that applicable taxpayers meet their filing requirements under the California Revenue and Taxation Code.
