! — 2025 Inst 1040 (Schedule E) (PDF)

CAUTION

If you elected to be taxed as a QJV instead of a partnership, follow the reporting rules under QJV , earlier.

You should receive a Schedule K-1 from the partnership or S corporation. You should also receive a copy of the Partner’s or Shareholder’s Instructions for Schedule K-1. Your copy of Schedule K-1 and its instructions will tell you where on your return to report your share of the items. If you did not receive these instructions with your Schedule K-1, see your tax return instructions for how to get tax forms, instructions, and publications. Do not attach Schedules K-1 to your return. Keep them for your records.

If you are treating items on your tax return differently from the way the partnership or S corporation reported them on its return, you may have to file Form 8082.

Special Rules That Limit Losses

If you report a loss from a partnership or S corporation, your loss may be reduced or not allowed this year. Apply the basis rules,

Passive activity loss rules. For more information about passive activity losses, see Passive Activity Loss Rules, earlier.

If you have a passive activity loss, in most cases you need to complete Form 8582 to figure the amount of the loss to enter in Part II, column (g), for that activity. But if you are a general partner or an S corporation shareholder reporting your share of a partnership or an S corporation loss from a rental real estate activity and you meet all of the conditions listed earlier under Exception for Certain Rental Real Estate Activities , you do not have to complete Form 8582. Instead, enter your (loss) in Part II, column (g).

If you have passive activity income, complete Part II, column (h), for that activity. If you have nonpassive income or losses, complete Part II, columns (i) through (k), as appropriate.

If you had a loss from the partnership or S corporation that was not allowed last year because of the passive activity loss rules, but all or part is allowed this year, see Line 27, later, for how to report it.

Excess business loss rules. If you report a loss on Schedule E from a partnership or S corporation engaged in a trade or business, use Form 461 to figure your excess business loss. Your excess business loss will not be reflected on your Schedule E; instead, it will be added to your income on Form 1040 and carried forward to a subsequent year as a net operating loss. For more information, see the Instructions for Form 461.

Domestic Partnerships

See the Schedule K-1 instructions before entering on your return other partnership items from a passive activity or income or loss from any publicly traded partnership.

You can deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership if you were required to pay these expenses under the partnership agreement. See Line 27, later, for how to report these expenses.

If you used loan proceeds to buy an interest in, or make a contribution to the capital of, a partnership (debt-financed acquisition), report your share of deductible partnership interest expense on either Schedule A or Schedule E, depending on the type of asset (or expenditure if the allocation is based on the tracing of loan proceeds) to which the interest expense is allocated. See Line 28, later, for more information about reporting these interest expenses.

If you claimed a credit for federal tax on gasoline or other fuels on your 2024 Form 1040, 1040-SR, or 1040-NR based on information received from the partnership, enter as income in column (h) or column (k), whichever applies, the amount of the credit claimed for 2024.

Part or all of your share of partnership income or loss from the operation of the business may be considered net earnings from self-employment that must be reported on Schedule SE. Enter the amount from Schedule K-1 (Form 1065), box 14, code A, on Schedule SE after you reduce this amount by any allowable expenses attributable to that income.

Foreign Partnerships

Follow the instructions below in addition to the instructions earlier under Domestic Partnerships .

If you are a U.S. person, you may have received Forms 1099-B, 1099-DIV, and 1099-INT reporting your share of certain partnership income because payors of income to the foreign

partnership in most cases are required to allocate and report payments of that income directly to each of the partners of the foreign partnership. If you received both Schedule K-1 and Form 1099 for the same type and source of partnership income, report on Schedule E only the income shown on Schedule K-1 in accordance with its instructions.

If you are not a U.S. person, you may have received Forms 1042-S reporting your share of certain partnership income because payors of income to the foreign partnership in most cases are required to allocate and report payments of that income directly to each of the partners of the foreign partnership. If you received both Schedule K-1 and Form 1042-S for the same type and source of partnership income, report the income on your return as follows.

Requirement to file Form 8865. If you are a U.S. person, you may have to file Form 8865 if any of the following applies.

You controlled a foreign partnership (that is, you owned more than a 50% direct or indirect interest in the partnership).
You owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
You had an acquisition, disposition, or change in proportional interest of a foreign partnership that:

a. Increased your direct interest to at least 10% or reduced your direct interest of at least 10% to less than 10%, or

b. Changed your direct interest by at least a 10% interest. 4. You contributed property to a foreign partnership in exchange for a partnership interest if:

a. Immediately after the contribution, you owned, directly or indirectly, at least a 10% interest in the partnership; or

b. The value of the property you contributed, when added to the value of any other property you or any related person contributed to the partnership during the 12-month period ending on the date of transfer, exceeds $100,000.

Also, you may have to file Form 8865 if you contributed property with built-in gain to a foreign partnership (or certain domestic partnerships) or to report certain dispositions by a foreign partnership of property you previously contributed to that partnership if you were a partner at the time of the disposition.

For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.

S Corporations

Distributions of prior-year accumulated earnings and profits of S corporations are dividends and are reported on Form 1040 or 1040-SR, line 3b.

If you used loan proceeds to buy an interest in, or make a contribution to the capital of, an S corporation (debt-financed acquisition), report your share of deductible S corporation interest expense on either Schedule A or Schedule E, depending on the type of asset (or expenditure if the allocation is based on the tracing of loan proceeds) to which the interest expense is allocated. See Line 28, later, for more information about reporting these interest expenses.

For all income effectively connected with the conduct of a trade or business in the United States, report only the income shown on Schedule K-1 in accordance with its instructions.
For all income not effectively connected with the conduct of a trade or business in the United States, report on Schedule NEC (Form 1040-NR) only the income shown on Form 1042-S (if you are required to file Form 1040-NR).

Your share of the net income of an S corporation is not subject to self-employment tax.

Line 27 If you answered “Yes” on line 27, follow the instructions below. If you do not follow these instructions, the IRS may send you a notice of additional tax due because the amounts reported by the partnership or S corporation on Schedule K-1 do not match the amounts you reported on your tax return.

Losses Not Allowed in Prior Years Due to the Basis or At-Risk Rules

Enter your total prior-year unallowed losses that are now deductible on a separate line in column (i) of line 28. Do not combine these losses with, or net them against, any current-year amounts from the partnership or S corporation.
Enter “PYA” in column (a) of the same line.

Prior-Year Unallowed Losses From a Passive Activity Not Reported on Form 8582

Enter on a separate line in column (g) of line 28 your total prior-year unallowed losses not reported on Form 8582. Such losses include prior-year unallowed losses now deductible because you did not have an overall loss from all passive activities or you disposed of your entire interest in a passive activity in a fully taxable transaction. Do not combine these losses with, or net them against, any current-year amounts from the partnership or S corporation.
Enter “PYA” in column (a) of the same line.

Unreimbursed Partnership Expenses

You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement. You can only deduct unreimbursed expenses on Schedule E that are trade or business expenses under section 162. Don’t report unreimbursed partnership expenses separately if the expenses are from a passive activity and you are required to file Form 8582; otherwise, do the following.

Enter unreimbursed partnership expenses from nonpassive activities on a separate line in column (i) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership.
If the expenses are from a passive activity and you are not required to file Form 8582, enter the expenses related to a passive activity on a separate line in column (g) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership.
Enter “UPE” in column (a) of the same line.

Gambling Income and Losses From Partnerships

If the partnership was engaged in the trade or business of gambling, report gambling winnings on Schedule E (Form 1040), line 28, column (k); and deduct gambling losses on Schedule E (Form 1040), line 28, column (i). Gambling losses from the partnership can only be claimed on Schedule E to the extent that, when combined with gambling losses from other sources (including other gambling losses reported on Schedule E (Form 1040) and gambling losses reported on Schedule A (Form 1040) or Schedule C (Form 1040)), they do not exceed all gambling winnings reported on your tax return (including, without limitation, winnings reported on

Schedule 1 (Form 1040), line 8b;
Schedule C (Form 1040);
Schedule E (Form 1040) See the Instructions for Schedule K-1 (Form 1065) for more information.

Note: If the partnership wasn’t engaged in the trade or business of gambling, report gambling winnings on Schedule 1 (Form 1040), and deduct gambling losses to the extent of winnings on Schedule A (Form 1040).

Line 28 For nonpassive income or loss and passive income or losses for which you are not filing Form 8582, enter in the applicable column of line 28 your current-year ordinary income or loss (after applying any special rules that limit losses) from the partnership or S corporation. Report each related item required to be reported on Schedule E (including items of income or loss stated separately on Schedule K-1) in the applicable column of a separate line following the line on which you reported the current-year ordinary income or loss. Also, enter a description of the related item (for example, depletion) in column (a) of the same line.

If you are required to file Form 8582, see the Instructions for Form 8582 before completing Schedule E.

Debt-financed acquisition. A debt-financed acquisition is the use of loan proceeds to buy an interest in, or to make a contribution to the capital of, a partnership or S corporation. You must allocate the loan proceeds and the related interest expense among all the assets of the entity. You can use any reasonable method.

For interest allocated to trade or business assets (or expenditures), report the interest on a separate line of your Schedule E, Part II. Enter “business interest” and the name of the partnership or S corporation in column (a) and the amount in column (i).

For interest allocated to passive activity use, enter the interest on Form 8582 as a deduction from the passive activity of the partnership or S corporation. Show any deductible amount on a separate line on your Schedule E, Part II. Enter “passive interest” and the name of the entity in column (a) and the amount in column (g).

For interest allocated to investment use, enter the interest on Form 4952. Carry any deductible amount allocated to royalties to a separate line of your Schedule E, Part II. Enter “investment interest” and the name of the entity in column (a) and the amount in column (i). Carry the balance of the deductible amount to Schedule A, line 9.

Any interest allocated to proceeds used for personal purposes is generally not deductible.

For more information on allocating and reporting these interest expenses, see Notice 88-37 in Cumulative Bulletin 1988-1. Also, see Notice 89-35 in Cumulative Bulletin 1989-1.

Owners of S corporation stock and debt. If you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in column (e) on line 28 and attach the required basis computation. For more information, see Basis rules for S corporations, earlier.