Overview on Schedule E

What is Schedule E? Is John qualified to file Schedule E?

Schedule E is an annexure to Form 1040 which is meant for Reporting supplemental income and losses from Rental Real Estate, Royalties, Partnership, S-Corporation, Trusts and other sources i.e. Non – Active Income from Pass-through entities. The data from Schedule E is then transferred to Form 1040.

Given the information provided John could be qualified to file Schedule E as he is deriving an investment income, which is categorized as Passive Income.

What are the main purposes of filing Schedule E?

A schedule is a form that collects information about specific types of taxable income and activities. People who have simple tax returns may not have to worry about anything but Form 1040 (the main document that makes up a tax return). But if the return is bit complicated i.e. it involves investments, itemized deductions, business income, a schedule or two may be required.

If return deals with rentals, royalties or other types of real estate investments, one of those forms is Schedule E.

Schedule E is an IRS tax form that collects information about income that is earned or lost through:

?§???????? Real estate rentals,

§???????? Royalties,

§???????? Partnerships,

§???????? S-corporations,

§???????? Trusts,

§???????? Estates,

§???????? Residual interest from real estate mortgage investment conduits (REMICs).

?What types of income qualifies as supplemental income?

Supplemental income is generally money earned outside regular payroll paycheck. Examples include passive rental income, employee bonuses, extra commissions, or in a broad sense even side income. Each type of supplemental income is subject to different tax treatments.

Supplemental income falls into a few categories:

1. Supplemental income (Schedule E income for supplemental income and loss)

This includes income generated from:

• Business (Partnerships and S corporations)

• Estates, trusts, and royalties

• Rental real estate and residual interests in real estate mortgage investment conduits (REMICs)

2. Supplemental income for employees:

Traditional employee could get income outside of your normal paycheck that may be considered as supplemental income. IRS considers these supplemental wages. Supplemental employee wages are wage payments that aren’t regular pay and could include:

• Bonuses: extra money from employer,

• Commissions: Some employers pay a portion of total sale to the employee who made the sale, i.e. commissions,

• Expense reimbursements: Fringe benefits like expense reimbursement are considered supplemental income,

• Overtime Pay: i.e. by working beyond normal number of hours per week as a non-exempt employee, employee can get overtime pay, which can be considered supplemental wages,

• Accumulation of Paid Time off (PTO): i.e. employer pays out for unused PTO,

• Retroactive pay increases / Back pay / Severance pay: i.e. wage changes over time, it may count as supplementary income,

• Prizes and award winnings and monetary incentive,

• Payments for non-deductible moving expenses,

• Tips: Service-industry professionals could earn extra tips from customers, which are considered supplemental pay,

• Taxable fringe benefits: Discretionary bonuses (including gift cards), income from exercise of non statutory stock options, taxable income from issuance or vesting of restricted stock, employer-provided cell phone (non-business use) and gym memberships qualify as supplemental employee income.

3. Independent contracting or side job supplemental income:

If assessee is working a side hustle, it can be a supplemental income.

?What part of the Schedule E form is dedicated to calculating the taxable profit or loss from John’s rental business for the tax year? Also, give a summary of this part.

The Form Schedule E is divided into Five Parts and Part I would be dedicated to calculating taxable profit or loss from John’s rental business for the tax year.

How should John report the rental income from each of his two rental properties on Form 1040 Schedule E? Which part of the form should be used for each property?

Schedule E (Form 1040) – Part I

Under 1a Property Address is to be filled

A

B

Under 1b Type of Property has to be filled

A

B

How should John report his expenses on Schedule E? Which lines on the form should he use for property taxes, mortgage interest, insurance, maintenance and repairs, utilities, and depreciation expense for each property?

?????? Property Tax – Line 16

?????? Mortgage Interest – Line 12

?????? Insurance – Line 9

?????? Maintenance – Line 7

?????? Repairs – Line 14

?????? Utilities – Line 17

?????? Depreciation – Line 18

Two Columns that would be used are A & B

Computation of net income or loss for each of John's rental properties for the year 2022 based on the provided income and expenses. Are there any net gains or losses?

Particulars

Property A

Property B

Income:

?

Rent Received

25,000

18,000

Expenses:

?

Insurance

1,000

800

Maintenance & Repairs

2,500

1,200

Mortgage Interest

4,500

3,000

Taxes

3,200

2,000

Utilities

1,800

1,200

Depreciation

4,000

3,500

Total Expenses

17,000

11,700

Gain / (Losses)

8,000

6,300

Total Net Gain

14,300