Schedule E for Supplemental Income and Loss Explained
For Partnerships, S Corporation Shareholders - Schedule K-1 Income/Loss
IRS Schedule E - Supplemental Income and Loss is a form that reports on supplemental income or loss 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.
What is Supplemental Income?
The IRS lists several types of income on the first page of Form 1040. Wages and salaries are first, listed on Line 7. Then other types of income, including income from interest and dividends and from a small business (filed on Schedule C and entered on Line 12 of the 1040 form ) are included.
Line 17 of the 1040 form asks for other types of income, from "Rental real estate, royalties, partnerships, S corporations, trusts, etc." This is supplemental income, and it is first entered and calculated on Schedule E and then entered on the tax return on this line. Other types of supplemental income from Schedule E are entered on other lines of the personal tax return.
Types of Business Ownership Reported on Schedule E
Schedule E includes income or losses for individuals from:
- S corporations
- Rental real estate
- Estates and trusts
- And other similar entities.
Schedule E works the same way for an S corporation owner, an LLC owner, and a partner in a partnership. There is a slightly different Schedule K-1 for an S corporation owner, but the process is still the same.
Would an LLC Use Schedule E?
A single-member LLC would probably file a Schedule C and not Schedule E. An LLC with multiple owner files a business tax return as a partnership, so this business type would prepare a Schedule E for owners. If the LLC is taxed as a corporation, it would file a corporate tax return and no Schedule E would be needed.
How Schedule E works with Schedule K-1
The purpose of Schedule E is to take Schedule K-1 income from a business owner and include information about whether the income was active or passive (was the owner actively involved in the business). Passive income is treated in a different way by the IRS (explained below).
To understand Schedule E you must first understand Schedule K-1, so let's back up a little to look at the process. Let's use the example of a partnership that is filing its federal income tax return. First, the partnership 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.
Let's say the partnership as a whole had net income of $120,000. Each partner would report $60,000 on his or her individual K-1. Then, the 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 is Part 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, are 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.
For More Information on Schedule E
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.