Schedule E for Supplemental Income and Loss Explained
IRS Schedule E - Supplemental Income and Loss is a form that reports on income or loss from several different types of business and real estate activity. The form is filed by the business owner as part of their personal tax return on Form 1040/1040-S.
What Is Supplemental Income?
Schedule E lists specific types of income considered as supplemental, including income from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).
This article focuses on Schedule E to report income or loss from partnerships, S corporations, and rental real estate businesses, including home-sharing and AirBnB-type activities. This discussion doesn't include real estate professionals, but it does include properties owned by an individual, partnership, or corporation and from which an owner receives income and have expenses.
For estates and trusts, you can find information from the IRS about Form 1041, the income tax return for estates and trusts.
Schedule E and Passive Income and Loss
You will see a lot about "passive activities" in Schedule E, but what are they? Most types of business owners actively participate in their businesses. But some types of business activities are considered to be passive, in which the owner doesn't participate in the operation of the activity on a regular, continuous, and substantial basis.
Passive activities are taxed differently from active participation, and this difference comes into play in Schedule E for both real estate activities and activities of partners and S corp owners.
The IRS considers rental real estate activities as passive, even if the person materially participates in the operation of the business.
Some partners and S corporation owners have limited roles in their business and their losses are limited. For example, limited partners are essentially passive investors who pay a general partner to operate the business.
The difference between passive activities and material participation is most important when it comes to losses, because losses from passive activities may be limited to the amount of the gain, while losses for individuals who materially participate in their businesses are not limited.
Schedule E for Rental Real Estate
Schedule E records income and expenses from real estate activities, which are usually considered as passive activities. You receive income from rental activities mainly for the use of a tangible property (a rental property, for example), rather than for services.
The designation of rental income as passive has several implications for business owners: :
- Deductions or losses from passive activities are limited, as mentioned above.
- Because rental income is passive rather than active, the person isn't considered self-employed, and you don't have to pay self-employment tax (Social Security/Medicare tax) on this income.
See IRS Publication 925 - Passive Activity and At-risk Rules for more details on passive activity and business losses. See IRS Instructions for Form 8582 for passive losses in real estate.
Schedule E for Partnerships and S Corporations
Schedule E is used to report income for individual partners in a partnership and for owners of S corporations. The income of the business for the year is calculated and the profits or losses are distributed to the owners in the form of a Schedule K-1. This information on the individual owner's income or loss is included in Part II of Schedule E.
However, Schedule E is not used to report rental real estate activities for partnerships and S corporations. Instead, these two groups use IRS Form 8825 to report rental real estate income and expenses.
Schedule E vs. Schedule C = Substantial Services
Whether you must use Schedule E or Schedule C (profit or loss from small business) to report your business tax situation depends on the activities of your business. In general,
- If you rent buildings and provide basic services, such as heat and light, trash collection, etc., report your rental income and expenses on Schedule E (Part 1).
- If you provide what the IRS calls "substantial services" mainly for your tenant's convenience, report your rental income and expense on Schedule C of your Form 1040, or Form 1065 if your business is a partnership.
The IRS says you are considered to provide services for occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Substantial services include such things as regular cleaning, maid service, and changing linens, but not furnishing heat and light, cleaning public areas, trash collection, and more.
Providing substantial services and being considered a business owner also means you must pay self-employment taxes on this income.
Home-Sharing Business Considerations
If you are running an Airbnb-type home-sharing business with no substantial services provided, you would use Schedule E to report your rental income. If your Airbnb-type business involves substantial services (like breakfast or transportation), it would be taxed as a business, using a business tax form depending on your business type.
It's difficult to determine the status of an individual tax situation because each one is unique. If you are starting in a residential real estate or Airbnb-type business, get advice from your tax professional about your tax status.
Before You Complete Schedule E
Schedule E is one of many schedules that are part of a personal tax return. It is used to report the income from several sources. The form is in several parts, one for each type of income.
If you have income from several businesses or rental properties, you can enter them all on Schedule E by listing them in the appropriate section (up to three rental properties, and up to four partnership or S corporation businesses). You can use an additional sheet if there are too many to list directly on the form.
Part I: Income from Rental Real Estate and Royalties
In this section, you'll report income or loss from individual properties that you own. You will need to separate fair rental days (days when the property was rented for a fair market price) and personal use days. Income and expenses must be included in detail for each property.
The Qualified Joint Venture - A Special Partnership Case
If you and your spouse both materially participate in a jointly owned and operated rental real estate business, you may elect to be treated as a qualified joint venture (QJV) for tax purposes. The election allows you to skip filing a partnership tax return on Form 1065 and instead, file on your joint tax return using two Schedule C forms, one for each of you
To make the election for your jointly owned rental real estate business, check the QJV box in Part 1, item 2 A, B, or C, of Schedule E. Then you must divide all line items between you and your spouse according to your respective interest in the venture.
If you own property that is not a trade or business, you don't qualify for the QJV election. There are other qualifications for electing this QJV status. Read more about the Qualified Joint Venture and check with your tax professional before you check the election box on Part I of Schedule E.
Part II: Partnerships and S corporations
If your business is a partnership, multiple-member LLC, or S corporation, there's a three-step process to reporting your income as a partner or owner.
Step 1: Calculate and report business net income:
- Partnerships and multiple-owner LLCs, calculate and report business income and expenses on Form 1065, showing total income, expenses, and net income (profit). This includes income from rental real estate, reported on Form 8825 Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
- S corporations calculate and report business income and expenses on Form 1120-S
Step 2. Separate out income, deductions, and credits for each owner, depending on the written agreement for each business type and whether the income was passive or nonpassive.
Step 3: Prepare a Schedule K-1 for an individual owner, with the information included on Schedule E.
- 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.
Schedule E on Your From 1040
Enter the combined total income from all sections of Schedule E on Line 17 of Schedule 1-Additional Income and Adjustments to Income. Then enter all totals from Schedule 1 on Form 1040, line 6.
Consult a Tax Professional
Schedule E is a complicated form. 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.