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Business Income Reporting on Schedule E: Tips from a CPA

business income

For business owners, business income reporting is a chore. It is, however, one of the most important tax preparations for reducing your overall tax liability on real estate income. This guide walks you through every part of Schedule E. 

Learn how to determine your taxable income from real estate ownership. Find out how to file your business real estate income jointly with a spouse. And, learn everything you need to know about reporting your qualified business expenses on Schedule E. 

How to Report Business Income on Schedule E

Schedule E specifies your business income or loss from supplemental income. For the most part, rental income is considered as supplemental for tax purposes. This guide walks you through each section, to determine your maximum deduction from rental property income. 

Determining if you have to issue 1099’s is the first step to preparing your Schedule E. In the past year, have you paid over $600 to contractors or vendors? If so – for the most part – you must issue 1099’s.

Have You Issued Any Form 1099’s to Contractors or Vendors?

Part-1, section-A of IRS Schedule E asks whether you have made any payments that necessitate issuing a 1099. Enter the physical address for each relevant property, and the property type. Next, determine your fair rental use days. 

What are Fair Rental and Personal Use Days for Business Income?

Part-1, section-2 asks you to determine how many fair rental days are in the mix during the taxable year. A “Fair Rental Day” is any day in which the property incurs rent or during which it is on the rental market. You do not, however, need to report rental income on any property that only incurs rent for 14-days or less.

A personal use day is not as cut-and-dry as it sounds, at first. A “personal use day” is any day in which the entire building or property is in use by the owner or the owner’s family. You do not have to report using a single unit within a multi-unit rental property or living at the same property in which you rent units. In this case, you will file, both a Schedule A and E, to split common expenses.

Is it a Qualified Joint Venture?

If you equally own property with a spouse, it is qualified joint property, except in a Community Property State. Community property states mandate the 50/50 split of jointly-held property in the event of divorce. These states include Arizona, Idaho, Nevada, California, Louisiana, Wisconsin, Texas, Washington, and New Mexico.  

So, if you live in one of these states, you do not have to fill out the Qualified Joint Venture section. If your joint venture is not in one of these states, you have to report income and loss on a partnership return or elect for status under a qualified joint venture. 

To qualify as a joint venture on your Schedule E, both spouses must be the sole owners of the venture, as well as provide material participation. Also, you must file a joint tax return with your spouse. If both these qualifications are satisfied, you can elect to file as a qualified joint venture. 

That Was Easy – What are the Next Steps?

Electing to file as a qualified joint venture keeps you from filing with partnership status. But, things can get complicated when figuring this out with your spouse, so don’t hesitate to consult a tax specialist. After you are done with this section of Part I on Schedule E, it’s onto reporting expenses! 

Learn more about reporting qualified business expenses to determine your income loss or gain from a rental property. Need a hand reporting business income? Contact a tax advisor right away for professional tax assistance.

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