Breaking Down Your Schedule E

When people hear you’re a small business owner, they often think about how nice that must be! To them, you’re the boss, making huge decisions as big money comes rolling through the door. They assume you have a carefree lifestyle, taking luxury trips whenever or buying expensive pieces of furniture to fill your elaborate home. If only they knew the actual truth.

Yes, being a small business owner and entrepreneur means you’re the boss, but that doesn’t mean you have lots of money to spend. However, it does mean you’re the one dealing with your business taxes. You’re the one who’s responsible for filling out and filing all of your taxes. Struggling with that task?

Don’t worry! We’re going to talk about an important tax form you might need to complete for your small business -- the Schedule E.

As always, if you experience any problems while filling out your Schedule E, please contact your tax consultant. They are more than willing to provide you with whatever you may need as they have lots of experience dealing with complicated tax forms. If you don’t have one, consider hiring one! Besides tax forms, they can help you with other tax-related issues you may have. Do your research and schedule a phone call or video meeting with a dependable tax consultant in your area.

Understanding the Schedule E tax form:

Wondering if you should file a Schedule E? Well, this specific form allows you to report supplemental income and loss related to rental real estate, royalties, estates, trusts, partnerships, and S corporations. Just so you know, supplemental income is usually considered passive income, which is vital information for rental real estate investors who generate passive income. Some businesses are passive when the owner doesn’t participate in the operation of the activity on a regular, continuous, and substantial basis.

So, if you own real estate that you rent out to tenants or rent out space in the home you’re currently living in, you need to fill out a Schedule E. Since the IRS doesn’t view you as self-employed, you don’t need to worry about the Schedule C tax form unless you provide your tenants with additional services or manage rental properties as your main business activity. If that’s the case, you may be required to file a Schedule C rather than Schedule E.

For partners and shareholders of S corporations:

To the individuals who are partners or shareholders of an S corporation, you also need to report your share of business income on Schedule E. You’ll receive a Schedule K-1 that reports your income, losses, and deductions. When preparing your own Schedule E, you must use the figures from your K-1, which will “flow-through” to your personal income tax return. These items are then taxed with all other income you receive that you didn’t report on Schedule E.

Learn your limitations on Schedule E losses:

When engaging in an activity for profit, the IRS limits your deductible loss at the amount you invested into the business. For example, let’s say you invested $50,000 and at the end of the year, you lost $60,000. The IRS only allows you to deduct your $50,000 as you’re not responsible for reimbursing the partnership’s $10,000 in losses.

The final step -- filing your Schedule E:

While you’re filling out the Schedule E, make sure you’re only completing the relevant parts that document the type of income or loss you experienced. To help you better understand what that means, if you have partnership income, just fill out the section that applies to partnerships. Other than that, leave everything else blank. When you’re finished, attach the Schedule E tax form to your personal Form 1040 and submit it by the filing deadline. Due to the ongoing coronavirus pandemic, check the IRS website to see if they extended the deadline as you might more time to file your tax form.

References:

Hall, Brandon. “The 2020 Ultimate Guide to IRS Schedule for Real Estate Investors.”

The Real Estate CPA, 8 June 2020.

“What Is a Schedule E IRS Form?” TurboTax.