Schedule E for Supplemental Income and Loss Explained

For Partnerships, S Corporation Shareholders - Schedule K-1 Income/Loss

Completing Schedule E
Completing Schedule E. Bojan Kontrec/Getty Images

What is Schedule E for a Partnership or S Corporation? 

IRS Schedule E - Supplemental Income and Loss (PDF) is a form that reports on supplemental income from different types of business owners and business activity. The form is filed by the business owner on his or her personal tax return on Form 1040.

Types of Business Ownership Reported on Schedule C

Schedule E includes income or losses for individuals from:

  • Partnerships
  • S corporations
  • Rental real estate
  • Estates and trusts
  • And other similar entities.

How Schedule E works with Schedule K-1

To understand Schedule E you must first understand Schedule K-1, so let's back up a little to look at the process.Note that Schedule E works the same way for an S corporation owner.

Let's take a partnership that is filing its federal income tax return.

First, the partnership as a whole files a tax return on Form 1065, showing total income, expenses, and net income (profit).

From the Form 1065, the partnership net income is divided between the partners according to the requirements set out in the partnership agreement as to the amount of distributive shares (ownership shares) held by each partner. If there are two partners, for example, each might have 50% ownership. 

From this information, a Schedule K-1 is prepared for each partner. The Schedule K-1 shows the individual partner's share of  ordinary income, rental/real estate,interest, dividends, royalties, short-term and long-term capital gains, other income/loss, section 179 deductions, other deductions, and self-employment earnings/loss.

 

Then, Schedule K-1 information for each partner is entered in Part II of Schedule E for that partner's personal tax return.

Schedule E Income on Form 1040

Schedule E - Supplemental income, is a complicated form that includes income from several different sources. The part of Schedule E that's relevant to a partnership isPart II Income or Loss From Partnerships and S Corporations.

In this section, the partner lists income sources. 

Note that you must differentiate passive income (activity) vs. non-passive income (non-passive activity) on Schedule E.  Passive income is for investors who do not participate in running the company. Non-passive income is derived from active participation in the activities involved in running the partnership. 

Finally, all sources of Schedule E income, including income from a partnership or S corporation, is totaled on Line 41 of Schedule E. The total income/loss from all sources, totaled on Line 41 of Schedule E, is entered on Line 17 of Form 1040, and Schedule E is attached.

Do I Need a Tax Preparer to Complete Schedule E? 

If you have a simple partnership with only one source of income, and you are sure that income is active rather than passive, you may not need a tax preparer. It's always wise to have a CPA or Enrolled Agent working on a complicated tax return from a partnership, LLC,  S corporation, or corporation. 

Disclaimer: This article is intended to be a general overview of this subject, not tax or legal advice. Before you take any action or file this form, consult your tax professional.