Schedule E for Supplemental Income and Loss Explained

Completing Schedule E
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IRS Schedule E - Supplemental Income and Loss is a form that reports on income or loss from several 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:

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

In this article, we'll focus on partnerships, S corporations, and rental real estate businesses. For estates and trusts, you can find information from the IRS about Form 1041, the income tax return for estates and trusts.

Corporations don't use Schedule E, because it's not part of a corporate tax return, and corporation owners are shareholders whose income comes from dividends.

Sole proprietors and one-owner LLC's don't use Schedule E, because they report business income on Schedule C,

If you are running an Airbnb-type home-sharing business, you would use Schedule E to report your rental income. If your Airbnb-type business involves substantial services (like breakfast), it would be taxed as a business, and the tax form you use would depend on the specific business type.

How to 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 of a business owner, not of the business.

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 3 rental properties, and up to 4 partnership or S corporation businesses). You can use an additional sheet if there are too many to list directly on the form.

Part I of Schedule is for Rental Real Estate

  1. Enter information about the property. You will need to keep track of the number of days you rented each property and the number of days you used the property for personal use.
  2. Note the QJV designation, which stands for Qualified Joint Venture. A QJV is a business owned by two spouses that qualifies for separate tax reporting for each spouse. In this case, each spouse would file a separate Schedule E. Read more about how a QJV works and how you and your spouse might qualify.
  3. Enter income and expenses for each property.

Part II of Schedule E for 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.

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.

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).
  • 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. For a partnership there should be a partnership agreement; for a multiple-member LLC, there should be an operating agreement. For an S corporation, there should be an operating agreement or corporate by-laws. Each owner receives a Schedule K-1 for their share of the income, expenses, credits, and other items.

Step 3: The Schedule K-1 for an individual owner is then included on Schedule E.

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.

More on 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). The Schedule K-1 for the partner or S corporation owner (slightly different versions of this form) is then included in Schedule E.

From the partnership tax return on Form 1065, the partnership net income is divided between the partners according to the requirements set out in the partnership agreement or S corporation operating agreement or bylaws as to the number 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. 

If your partnership or S corporation has income from rental property, use Form 8825 instead of Schedule E to report income and expenses from rental real estate.

Losses and Passive Activity

If your rental activity or business has a loss, you will need help with the special rules and limitations for losses.

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. 

For More Information on Schedule E

Here is the most recent Schedule E form, and the Instructions for Schedule E

Disclaimer: 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.