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 (Form 1040) or C-EZ (Form 1040). The
related 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 profit, include your rental expenses in the total amount you enter on line 32 of Form 1040. Also, enter the
amount and "PPR" on the dotted line to the left.
If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. In the discussion
of 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 income and expenses on Schedule C (1040) 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.
Sale of property interest.
If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of section 1231
property, not royalty income. Under certain circumstances, the sale is subject to capital gain or loss treatment on Schedule D (Form 1040). For more
information on selling section 1231 property, see chapter 3 of Publication 544.
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 of other interests in the property is ordinary income subject to a depletion allowance.
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.
Partnership Income
A partnership is generally 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.
Retain Schedule K-1 for your records. Do not attach it to your Form 1040.
Partner's return.
You must generally report partnership items on your individual return the same way 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 (Form 1065) will tell you where to report each item of income on your individual return.
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. Retain
Schedule K-1 for your records. Do not attach it to your Form 1040.
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 (Form 1120S) will tell you where to report each item of income on your individual return.
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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