This section provides information on the treatment of income from
certain rents and royalties, and from interests in partnerships and S
corporations. For additional information about business and investment
income, you may want to see the following publications.
Rents From Personal Property
If you rent out
personal property, such as equipment or vehicles, how you report your
income and expenses is generally determined by:
- Whether or not the rental activity is a business, and
- Whether or not the rental activity is conducted for
profit.
Generally, if your primary purpose is income or profit and you
are involved in the rental activity with continuity and regularity,
your rental activity is a business. See Publication 535
for details on
deducting expenses for both business and not-for-profit activities.
Reporting business income and expenses.
If you are in the business of renting personal property, report
your income and expenses on Schedule C or C-EZ. The form
instructions have information on how to complete them.
Reporting nonbusiness income.
If you are not in the business of renting personal property, report
your rental income on line 21 of Form 1040. List the type and amount
of the income on the dotted line to the left of the amount you report
on line 21.
Reporting nonbusiness expenses.
If you rent personal property for a profit, report your rental
expenses on line 32 of Form 1040. Enter the amount and "PPR" on
the dotted line to the left and include the amount of your deductible
expenses in the total amount you enter on line 32.
If you do not rent personal property for a profit, your deductions
are limited and you cannot report a loss to offset other income. In
the discussion Miscellaneous Income, later, see
Activity not for profit, under Other Income.
Royalties
Royalties from copyrights, patents, and
oil, gas, and mineral properties are taxable as ordinary income.
You generally report royalties in Part I of Schedule E (Form 1040),
Supplemental Income and Loss. However, if you hold an
operating oil, gas, or mineral interest or are in business as a
self-employed writer, inventor, artist, etc., report your gross income
and expenses on Schedule C or Schedule C-EZ (Form 1040).
Copyrights and patents.
Royalties from copyrights on literary, musical, or artistic works,
and similar property, or from patents on inventions, are amounts paid
to you for the right to use your work over a specified period of time.
Royalties are generally based on the number of units sold, such as the
number of books, tickets to a performance, or machines sold.
Oil, gas, and minerals.
Royalty income from oil, gas, and mineral properties is the amount
you receive when natural resources are extracted from your property.
The royalties are based on units, such as barrels, tons, etc., and are
paid to you by a person or company who leases the property from you.
Depletion.
If you are the owner of an economic interest in mineral deposits or
oil and gas wells, you can recover your investment through the
depletion allowance. For information on this subject, see chapter 10
of Publication 535.
Coal and iron ore.
Under certain circumstances, you can treat amounts you receive from
the disposal of coal and iron ore as payments from the sale of a
capital asset, rather than as royalty income. For information about
gain or loss from the sale of coal and iron ore, get Publication 544.
Interest in the property sold.
If you sell your complete interest in the oil, gas, or mineral
rights, the amount you receive is considered payment for the sale of
your property, not royalty income. Under certain circumstances, the
sale is subject to capital gain or loss treatment on Schedule D (Form
1040).
Part of future production sold.
If you own mineral property but sell part of the future production,
you generally treat the money you receive from the buyer at the time
of the sale as a loan from the buyer. Do not include it in your income
or take depletion based on it.
When production begins, you include all the proceeds in your
income, deduct all the production expenses, and deduct depletion from
that amount to arrive at your taxable income from the property.
Retained interest.
If you retain a royalty, an overriding royalty, or a net profit
interest in a mineral property for the life of the property, you have
made a lease or a sublease, and any cash you receive for the
assignment is ordinary income subject to a depletion allowance.
Partnership Income
A partnership is not a taxable
entity. The income, gains, losses, deductions, and credits of a
partnership are "passed through" to the partners based on each
partner's distributive share of these items.
Partner's distributive share.
Your distributive share of partnership income, gains, losses,
deductions, or credits is generally based on the partnership
agreement. You must report your distributive share of these items on
your return whether or not they are actually distributed to you.
However, your distributive share of the partnership losses is limited
to the adjusted basis of your partnership interest at the end of the
partnership year in which the losses took place.
Partnership agreement.
The partnership agreement usually covers the distribution of
profits, losses, and other items. However, if the agreement does not
state how a specific item of gain or loss will be shared, or the
allocation stated in the agreement does not have substantial economic
effect, your distributive share is figured according to your interest
in the partnership.
Partnership return.
Although a partnership generally pays no tax, it must file an
information return on Form 1065, U.S. Return of Partnership
Income. This shows the result of the partnership's operations
for its tax year and the items that must be "passed through" to
the partners.
Schedule K-1 (Form 1065).
You should receive from each partnership in which you are a member
a copy of Schedule K-1 (Form 1065), Partner's Share of
Income, Credits, Deductions, etc., showing your share of income,
deductions, credits, and tax preference items of the partnership for
the tax year.
Partner's return.
You must generally treat partnership items on your individual
return the same as they are reported on the partnership return. That
is, if the partnership had a capital gain, you report your share on
Schedule D (Form 1040). You report your share of partnership ordinary
income on Schedule E (Form 1040).
Generally, Schedule K-1 will tell you where to report each
item of income on your individual return. Retain Schedule K-1
for your records. Do not attach it to your Form 1040.
S Corporation Income
In general, an S corporation
does not pay tax on its income. Instead, the income, losses,
deductions, and credits of the corporation are "passed through"
to the shareholders based on each shareholder's pro rata share. You
must report your share of these items on your return. Generally, the
items passed through to you will increase or decrease the basis of
your S corporation stock as appropriate.
S corporation return.
An S corporation must file a return on Form 1120S, U.S. Income
Tax Return for an S Corporation. This shows the results of the
corporation's operations for its tax year and the items of income,
losses, deductions, or credits that affect the shareholders'
individual income tax returns.
Schedule K-1 (Form 1120S).
You should receive from the S corporation in which you are a
shareholder a copy of Schedule K-1 (Form 1120S),
Shareholder's Share of Income, Credits, Deductions, etc.,
showing your share of income, losses, deductions, and credits, of the
S corporation for the tax year.
Shareholder's return.
Your distributive share of the items of income, losses, deductions,
or credits of the S corporation must be shown separately on your Form
1040. The character of these items generally is the same as if you had
realized or incurred them personally.
Generally, Schedule K-1 will tell you where to report each
item of income on your individual return. Retain Schedule K-1
for your records. Do not attach it to your Form 1040.
Distributions.
Generally, S corporation distributions are a nontaxable return of
your basis in the corporation stock. However, in certain cases, part
of the distributions may be taxable as a dividend, or as a long-term
or short-term capital gain, or as both. The corporation's
distributions may be in the form of cash or property.
More information.
For more information, see the instructions for Form 1120S.
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