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.
What expenses are deductible on Schedule E? ›
Some of the expenses that are deductible include advertising costs, fees you pay to a management company, repair costs, and mortgage interest payments for the property. In addition to reporting rental property income, Schedule E is also commonly used by taxpayers who are partners of a partnership.Who needs to fill out Schedule E? ›
If you earn rental income on a home or building you own, receive royalties or have income reported on a Schedule K-1 from a partnership or S corporation, then you must prepare a Schedule E with your tax return.Is Schedule E income considered earned income? ›
Schedule E is part of IRS Form 1040. It is used to report income or loss from rentals, royalties, S corps, partnerships, estates, trusts, and residential interest in REMICs (real estate mortgage investment conduits). Schedule E is for “supplemental income and loss,” and not earned income.Is Schedule E self-employment? ›
Is Schedule E subject to self-employment tax? Generally, no, schedule E is not subject to self-employment taxation. At the same time, if you own a short-term rental and provide substantial services (above and beyond the norm that most landlords provide), you may potentially trigger self-employment taxes.What expenses are 100% tax deductible? ›
- Furniture purchased entirely for office use is 100 percent deductible in the year of purchase.
- Office equipment, such as computers, printers and scanners are 100 percent deductible.
- Business travel and its associated costs, like car rentals, hotels, etc. is 100 percent deductible.
Common expenses for running a business for which you can take a deduction include advertising, employee benefits, insurance, legal and professional services, telephone and utilities, rent, office supplies, wages, dues to professional associations, and subscriptions to business publications.
Ways the IRS can find out about rental income include routing tax audits, real estate paperwork and public records, and information from a whistleblower. Investors who don't report rental income may be subject to accuracy-related penalties, civil fraud penalties, and possible criminal charges.How is Schedule E income calculated? ›
To truly calculate the net rental income and expense from each rental property owned we start with the gross revenue and the subtract the total expenses – then we add back anything relating to the actual mortgage as well as “paper losses”.What is Schedule E vs Schedule C? ›
A Schedule C is for the reporting of business income and or losses, whereas a Schedule E is used to report rental income and or losses. The income that is earned that is reflected on your Schedule C is subject to self-employment taxes, whereas the income reflected on your Schedule E is not.What is a self rental on Schedule E? ›
What type of property is Self-rental. If Self-rental is the type of property selected, this indicates the property is rented to a trade or business in which you, the taxpayer, materially participated.
Is Schedule E same as 1099? ›
1099s. The first section of the Schedule E is about 1099s. Generally, businesses must file Form 1099-MISC if they've made more than $600 in payments to one or more independent contractors.Can you deduct meals on Schedule E? ›
For a limited time, business meals are 100% deductible under certain conditions. See Line 6 , later, for more information. Excess business loss limitation. If you report a loss on line 26, 32, 37, or 39 of your Schedule E (Form 1040), you may be subject to a business loss limitation.What are the 4 types of self employment? ›
The decision comes down generally to four main choices: sole proprietorship, a partnership, a limited liability company or a corporation.What deductions can I claim without receipts? ›
- Self-employment taxes. ...
- Home office expenses. ...
- Self-employed health insurance premiums. ...
- Self-employed retirement plan contributions. ...
- Vehicle expenses. ...
- Cell phone expenses.
If you financed a personal vehicle
If you bought this vehicle using a car loan, you won't be able to write off your car payment. However, you can write off a portion of your car loan interest. That's right — your loan interest counts as a car-related business expense, just like gas and car repairs.
Multiply your business miles driven by the standard rate (56 cents in 2021). This rate includes driving costs, gas, repairs/maintenance, and depreciation. Do NOT deduct these costs separately.What are five 5 types of expenses that are eligible for deduction against rental income? ›
Rental Income Deductible Expenses
Property loan interest. Fire insurance premium. Expenses on rental collection. Expenses on rental renewal, including the stamp duty.
You generally can't deduct meal expenses unless you (or your employee) are present at the furnishing of the food or beverages and such expense is not lavish or extravagant under the circumstances.How much rent income is tax free? ›
A person will not pay tax on rental income if Gross Annual Value (GAV) of a property is below Rs 2.5 lakh. However, if rent income is a prime source of income then a person might have to pay the taxes.How can I avoid paying tax on rental income? ›
- Purchase properties using your retirement account. ...
- Convert the property to a primary residence. ...
- Use tax harvesting. ...
- Use a 1031 tax deferred exchange.
What is the penalty for unreported rental income? ›
The IRS can levy penalties on landlords who fail to report rental income. If the failure to file is a legitimate mistake, the IRS will collect their "failure-to-pay" penalty, which accrues at a rate of 0.05 percent per month up to a maximum of 25 percent of the total tax due.Is Airbnb income Schedule E? ›
Usually, reporting home-sharing income from Airbnb or VRBO will go on a Schedule E; filing as a real estate business goes on a Schedule C. Reporting on a Schedule C means income is subject to self-employment tax.How do I estimate my taxable income? ›
In a nutshell, to estimate taxable income, we take gross income and subtract tax deductions. What's left is taxable income. Then we apply the appropriate tax bracket (based on income and filing status) to calculate tax liability.What do lenders look for on Schedule E? ›
Lenders typically use the Agency guidelines on Schedule E income, to calculate qualifying rental income. Under this methodology, the lender must add back any listed depreciation, interest, homeowners' association dues, taxes, or insurance expenses to the borrower's cash flow.How do you avoid self rental rule? ›
One way is to reduce their participation level in the operating activity so it fails the material participation tests. Then both the operating activity and the rental activity will be considered passive and the self-rental rule will not apply.What qualifies as a self rental? ›
Self-rental is an arrangement in which a business and property that it rents are both owned by the same person(s). It is common for a taxpayer to own an operating business and also own the accompanying real estate. That person has to materially participate in the operating company for the self rental rules to apply.How many days of personal use for Schedule E? ›
Personal use days means the days you used the property after it was placed in service (like a vacation property). Enter rented days as 105 and personal use days as 75. Do not include the vacant (but available) days in either field box.What is the 14 day rule for rental property? ›
You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for a number of days that's more than the greater of: 14 days, or. 10% of the total days you rent it to others at a fair rental price.What is the maximum rental loss deduction? ›
The rental real estate loss allowance allows a deduction of up to $25,000 per year in losses from rental properties.Can you deduct home office on Sch E? ›
Use form 8829 to calculate your home office deduction. If you use a home office to manage your rental property you generally cannot claim the home office deduction on your Schedule E. Direct expenses that only benefit the part of your home you use for your business are usually 100% deductible.
What meals are 80% deductible? ›
DOT Meals (80% Limit)
Interstate truck operators who are under DOT regulations. Certain railroad employees who are under Federal Railroad Administration regulations. Certain merchant mariners who are under Coast Guard regulations.
- Annual Tax Return (Form 1040) This is the most credible and straightforward way to demonstrate your income over the last year since it's an official legal document recognized by the IRS. ...
- 1099 Forms. ...
- Bank Statements. ...
- Profit/Loss Statements. ...
- Self-Employed Pay Stubs.
If you're self-employed, you can show proof of income in the following ways: Use a 1099 form from your client showing how much you earned from them. Create a profit and loss statement for your business. Provide bank statements that show money coming into the account.Can you be self-employed with no income? ›
None of them is a legal requirement to have self-employment income. If you practice a trade or business to make a profit, you're a self-employed business owner. If you make money at what you do but it's mostly for fun, then you're a hobbyist, the IRS explains.What self-employment expenses are deductible? ›
- Self-Employment Tax Deduction.
- Home Office Deduction.
- Internet/Phone Bills Deduction.
- Health Insurance Deduction.
- Meals Deduction.
- Travel Deduction.
- Vehicle Use Deduction.
- Interest Deduction.
- Standard Deduction.
- IRA contributions deduction.
- Health savings account (HSA) deduction.
- State and local taxes deduction.
- Medical expenses deduction.
- Home office deduction.
- Student loan interest deduction.
- Mortgage interest deduction.
The IRS allows you to deduct unreimbursed payments for preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, prescription medications, appliances such as glasses, contacts, false teeth and hearing aids, and expenses that you pay to travel for qualified medical care.Which expenses are not tax deductible? ›
- Personal deductions. No deductions are available for interest or taxes paid to tax authorities. ...
- Charitable contributions. ...
- Education expenses. ...
- Medical insurance premium. ...
- Personal allowances. ...
- Business expenses.
Are Meals Deductible If You're Self Employed? If you're self-employed, you can deduct the cost of business meals and entertainment as a work expense when filing your income tax. The cost of business meals and entertainment can be deducted at a rate of 50 percent.What deductions can reduce self-employment tax? ›
- You can take deductions for common business expenses like employee wages, insurance, rent and utilities on business space, legal fees, advertising, and office expenses. ...
- Income from an S corporation is not considered self-employment income and isn't subject to self-employment tax.
How do I get the biggest tax refund? ›
- Select the right filing status.
- Don't overlook dependent care expenses.
- Itemize deductions when possible.
- Contribute to a traditional IRA.
- Max out contributions to a health savings account.
- Claim a credit for energy-efficient home improvements.
- Consult with a new accountant.
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.What are not qualified medical expenses? ›
They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation. Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care.What is the IRS rule for deducting medical expenses? ›
Medical Expense Deduction
On Form 1040, medical and dental expenses are deducted on Schedule A, Itemized Deductions. You can deduct only the amount of your medical and dental expenses that is more than 7.5 percent of your adjusted gross income shown on Form 1040, line 38.
2022 Standard Deduction
In addition, in 2022, you can only deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI), found on line 11 of your 2022 Form 1040. For example, if your AGI is $50,000, the first $3,750 of qualified expenses (7.5% of $50,000) don't count.
Unfortunately, self-employed people generally can't write off their groceries. For an expense to be tax-deductible, it must serve a legitimate business purpose. It's unlikely that groceries relate to your business unless you're a food vendor of some kind. That said, business meals can be deductible.