This section provides information on the treatment of income from certain rents and royalties, and from interests in partnerships and S corporations.
Income from sales at auctions, including online auctions, may be business income. For more information, see Publication 334.
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, Business Expenses, for details on deducting expenses for both business and not-for-profit activities.
If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). The form instructions have information on how to complete them. taxmap/pubs/p525-002.htm#en_us_publink1000229286
If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. List the type and amount of the income on the dotted line next to line 21. taxmap/pubs/p525-002.htm#en_us_publink1000229287
If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. Also, enter the amount and "PPR" on the dotted line next to line 36.
If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. See Activity not for profit under Other Income in the discussion of Miscellaneous Income, later. taxmap/pubs/p525-002.htm#en_us_publink1000229288
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 or Schedule C-EZ (Form 1040). taxmap/pubs/p525-002.htm#en_us_publink1000229289
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 generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold.taxmap/pubs/p525-002.htm#en_us_publink1000229290
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.taxmap/pubs/p525-002.htm#en_us_publink1000229291
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 9 of Publication 535. taxmap/pubs/p525-002.htm#en_us_publink1000229292
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, see Publication 544, Sales and Other Disposition of Assets. taxmap/pubs/p525-002.htm#en_us_publink1000229293
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. taxmap/pubs/p525-002.htm#en_us_publink1000229294
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. taxmap/pubs/p525-002.htm#en_us_publink1000229295
A partnership generally 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. For more information, see Publication 541.taxmap/pubs/p525-002.htm#en_us_publink1000229296
Your distributive share of partnership income, gains, losses, deductions, or credits generally is based on the partnership agreement. You must report your distributive share of these items on your return whether or not they actually are 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. taxmap/pubs/p525-002.htm#en_us_publink1000229297
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. taxmap/pubs/p525-002.htm#en_us_publink1000229298
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. taxmap/pubs/p525-002.htm#en_us_publink1000229299
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, Deductions, Credits, etc., showing your share of income, deductions, credits, and tax preference items of the partnership for the tax year. Keep Schedule K-1 for your records. Do not attach it to your Form 1040.taxmap/pubs/p525-002.htm#en_us_publink1000229300
You generally must 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.
If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C or Schedule C-EZ (Form 1040). taxmap/pubs/p525-002.htm#en_us_publink1000229303
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. taxmap/pubs/p525-002.htm#en_us_publink1000229304
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. taxmap/pubs/p525-002.htm#en_us_publink1000229305
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, Deductions, Credits, etc., showing your share of income, losses, deductions, and credits, of the S corporation for the tax year. Keep Schedule K-1 for your records. Do not attach it to your Form 1040.taxmap/pubs/p525-002.htm#en_us_publink1000229306
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.
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. taxmap/pubs/p525-002.htm#en_us_publink1000229309
For more information, see the Instructions for Form 1120S.