Schedule E is a tax form filed by individual business owners as part of their personal tax return preparation. It’s used to report income from rental property, partnerships, S corporations, and other types of supplemental income.
This article discusses Schedule E, what types of income it reports, and how to complete and file this form.
- Schedule E is a supplemental income schedule that reports income from some miscellaneous types of businesses, estates, trusts, and royalties.
- Schedule E filers may have losses as either active business owners or passive investors, but their passive losses are limited to the amount of their income.
- The form totals each type of supplemental income and loss, calculates loss limits, and shows a summary of net income, which is to be included on the individual’s Form 1040.
Schedule E Explained
Schedule E is a tax schedule that must be completed for several miscellaneous types of income called supplemental income. A business doesn’t file Schedule E; the owner files this schedule as part of their personal tax return. Owners of specific types of small businesses use Schedule E, including owners of rental property, partners in partnerships, and S corporation owners.
Passive Income and Losses
Some business owners don’t take an active part in running their businesses; they are merely passive investors. For example, a limited partnership business has both general partners who participate in managing the business and limited partners who invest money but who don’t have management responsibilities. Each partner uses Schedule E to report their share of the partnership’s income and losses.
Business owners who are passive investors like in the example above can only deduct their share of business losses up to the amount of their income from these activities.
The owner of a business that rents real estate is considered to have passive income or losses, even if they participated in the business activities. Real estate professionals are the exception.
Schedule E vs. Schedule C
Schedule E and Schedule C are both filed as part of the owner’s personal tax return. Whether a business owner uses Schedule E or Schedule C depends on the type of business.
Schedule E is used to report business income for:
- Partners in partnerships
- S corporations shareholders
- Limited liability company (LLC) owners filing as partners
These business owners may be active in the business or have passive activities that limit their losses.
Schedule C is used by self-employed individuals reporting business income as a:
- Sole proprietorship (single-owner business)
- Independent contractor
- Single-owner limited liability company (LLC)
In a Schedule C business, the owner has the intent to make a profit and is continuously and regularly involved in the activities of the business, so these owners don’t have passive income.
If you are renting your property as an Airbnb host or as a vacation-type rental, you must use Schedule C to report your business income if you provide substantial services for the convenience of renters, like regular cleaning or daily breakfast.
What Is Supplemental Income?
Supplemental income as defined by the IRS is income from several different types of activities, including:
- Renting real estate (except for real estate agent businesses)
- Royalties from intellectual property and other types of property
- Income or loss from a partnership or S corporation
- Income or loss from an estate or trust
- Income or loss from Real Estate Mortgage Investment Conduits (REMICs) as residual owners
- Farming and fishing income
Supplemental income is different from supplemental wages, which are paid to employees in addition to their regular hourly pay or salary.
The IRS separates rental income into several different types. The most common are:
- Rental-for-profit activity with no personal use of the property
- Rental income and expenses with personal use of the property, such as Airbnb-type rentals or vacation rentals
You’ll need to itemize all your expenses for each property you own. If you sometimes use your property for personal purposes, you must divide some expenses for the property on Schedule E to get a percentage on business versus personal use.
Partners and S Corporation Owners
Partners in partnerships and S corporation owners receive a Schedule K-1 each year showing their share of the business income for the year. The information on this schedule is used to complete the owner’s Schedule E.
The business owner must separate passive from nonpassive income and loss to determine if any of their losses are subject to passive loss limits (described above).
Other Passive Income
Royalties are payments for the use of property, typically intellectual property, such as the use of a trademark or patent. Because there is no loss in receiving these payments, they are considered passive income and any losses may be limited.
A beneficiary of an estate or trust receives a Schedule K-1 form and must report that information on Part III of Schedule E. Passive and nonpassive income and losses must be separated. Additional tax forms may be required for calculating passive income.
Using Schedule E to Report Supplemental Income and Loss
Schedule E contains several sections for reporting different types of supplemental income.
- Part I: This part is for income/loss from rental real estate and for royalties. You must describe the property, including its address, the number of days the property was used for personal purposes, and details on rental or royalty income and all expenses.
- Part II: This is for income/loss from partnerships and S corporations. You must separate passive income and loss from nonpassive income and loss for each income source.
- Part III: This is for income from estates and trust, with similar details required for passive and nonpassive income or loss.
- Part IV: This is for individuals who have a residual interest in a Real Estate Mortgage Investment Conduit (REMIC).
Go through each section that applies to your business situation and total the passive and nonpassive income and loss. Then add up the totals from each section to get a total income or loss amount on line 41 of Schedule E.
This process is complicated, so it can be beneficial to get help from a licensed tax preparer to make sure the form is completed correctly.
How To File Schedule E
File Schedule E along with other schedules on your tax return. Include the net income total from line 41 of Schedule E on Schedule 1 (Additional Income and Adjustments) of Form 1040. The total from Schedule 1 is then added to Form 1040.
The best way to file your tax return and pay your taxes is electronically, either through tax software or an authorized tax preparer. If you want to make a tax payment separately, you can use one of the IRS’s electronic payment options.
You can also file a paper copy of your tax return with the IRS. The address depends on which state you file from and whether you are also making a payment.
Frequently Asked Questions (FAQs)
How do you calculate depreciation on Schedule E?
To calculate depreciation, use IRS Form 4562 Depreciation and Amortization. You must complete this form and attach it to your tax return if you are claiming:
- Depreciation on business property first placed in service during the tax year
- Depreciation on listed property (property for both business and personal use), including vehicles
- Section 179 expense deductions or amortization
If your rental business has depreciation expenses for the year, including depreciation on a business vehicle, these are entered on line 18 of Schedule E. Attach Form 4562 to your tax return along with Schedule E.
How do you amend Schedule E?
If you need to make changes to Schedule E after you file your tax return, you must file an amended tax return using Form 1040-X. Include a revised copy of Schedule E and any other forms or schedules with changes.
How you make the change on your tax return depends on what has changed. For example, if the change to Schedule E changed your adjusted gross income, show the change on Line 1 of Form 1040-X. Use Part III of this form to explain the reason for the change.