If you earn rental income on a home or building you own, receive royalties or have income reported on a Schedule K-1 from a partnership or S corporation, then you must prepare a Schedule E with your tax return. You must report all income and losses from these activities on the Schedule E as well as your personal tax return.
- Reporting rental income on Schedule E
- Partners and shareholders of S corporations
- Limitation on Schedule E losses
Reporting rental income on Schedule E
One of the more common reasons you may find yourself filling out a Schedule E is if you own real estate that you rent out to tenants. This also includes the rental income you receive when renting out space in the same home you reside in. In most cases, the IRS doesn’t consider you self-employed, so you won’t have to prepare a Schedule C. However, if you provide a range of services to tenants or manage your rental properties as your main business activity, then your participation in the rental may rise to the level of self-employment and require you to file a Schedule C rather than Schedule E.
Partners and shareholders of S corporations
When you earn income as a partner or as a shareholder of an S corporation, you must report your share of the business income on the Schedule E. For purposes of the Schedule E, the actual business the partnership or S corporation engages in isn’t relevant to your obligation to prepare the schedule. Generally, you will receive a Schedule K-1 from the partnership or corporation that reports your share of income, losses and deductions. You must use the figures from the K-1 when preparing your Schedule E. These items will “flow-through” to your personal income tax return and are taxed with all other income you receive that you don’t report on Schedule E.
Limitation on Schedule E losses
A Schedule E does not only report income. You might use it to report a net loss from your particular business activity. Generally, when you engage in an activity for profit, the IRS limits your deductible loss to the amount you are “at-risk” for.
To illustrate, if you invest $50,000 in a partnership and at the end of the year your share of losses are $60,000; the IRS only allows you to deduct $50,000 since you are not responsible for reimbursing the partnership for the excess $10,000 in losses.
You must also consider the passive activity rule to determine if further limitations exist on the amount of losses you can deduct. Though the rules are fairly complex and include many exceptions, the IRS treats your business activity as passive if you don’t actively participate in it. In this case, you can only deduct passive losses to the extent of your passive income.
How to file your Schedule E
When filling out the Schedule E, you only need to fill out the relevant parts that relate to the type of income or loss you incur. For example, if you have partnership income, then only fill out the section that applies to partnerships. You must attach the schedule to your personal Form 1040 and submit it by the filing deadline.
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