Preparing IRS Form 1040 Schedule E
Schedule E for S-Corporation Shareholders
Certain business entities, including S-corporations, “pass through” their profits to the owners or shareholders of the business. These individuals must then report these profits on their own personal tax returns, on page 1 of IRS Form 1040, Schedule E.
The S-corp does not pay income tax of its own, although it is required to file a return—Form 1120S—if it has more than one owner or shareholder. This return reports the profits that pass to each individual shareholder.
An S-corp must issue a Schedule K-1 to each of its shareholders, reporting that individual's share of business income, losses, credits and deductions. Most tax software programs have a Schedule K-1 input screen where you can type in the information from the K-1 to a form that looks exactly like the K-1.
Generally speaking, ordinary net business income or loss is reported on Schedule E. Other sources of income are reported on their own schedules, then entered on the appropriate line of the 1040 tax return.
For example, interest and dividends passed through by an S-corporation to a shareholder are reported on Schedule B. Capital gains are reported on Schedule D. Your tax software program will take the information on the K-1 input screen and report the income and expense amounts in the right place on your Form 1040. If you're not using software, you might want to seek the guidance of a tax professional.
Request an Extension
The first thing any S-corporation shareholder should do is request an automatic extension of time to file his tax return. Why? The deadline for the corporation’s Form 1120S is March 15. Few S-corporations can actually meet this deadline and will take extensions of their own. S-corporations can file Form 7004 to request an automatic extension of six months until Sept.
S-corporations will not issue Schedule K-1s until Form 1120S is completed, so shareholders will have to wait to file their own returns until the corporate return is finished. Therefore, shareholders should request an automatic extension as well, making their personal tax returns due Oct. 15 rather than April 15.
A Note About Schedule K-1s
Not all Schedule K-1s are the same. They don’t all reflect only S-corporation tax information. You might also receive a Schedule K-1 if you’re a partner in a business or the beneficiary of an estate or trust that has passed tax liability for its earnings on to you.
All these Schedule K-1s report similar information, but they’re slightly different. If you receive multiple Schedule K-1s or expect to, you might do best to seek the assistance of a tax professional to make sure all information in reported correctly on your Form 1040.
NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.