Let me pose a hypothetical. According to your understanding, as a sole proprietor you decide to rent your house out on weeks that you are on vacation and out of town. Let’s say you rent the whole house for 21 days/year. But, as a savvy entrepreneur, you keep all your days as “available” on your listing but with exorbitant rates intended to discourage bookings. Based on this- being “open for business” 365 days/year, but only acting as a business for 21 days, you’d get to deduct 100% of the following costs of your home from your tax liability:
-any home maintenance/upgrades/property management,
-any cleaning supplies or things arguably supporting your “business”,
-and anything else I didn’t just think of off the top of my head
This is a different scenario than just renting a room out. But fundamentally it’s the same thing. If your room for rent accounts for 30% of the costs associated with your house, and you deduct 100% of the expenses, you deduct 30% of the overall expenses you pay to have a home/run a business.
I am in no position to absolutely refute your assertion that be it sole proprietorship or LLC, that you can deduct 100% of costs invariably. But, I brought this exact same scenario to my tax accountant as I started to do a lot of Airbnb business and he was crystal clear that unless a distinct business entity is created that you can not deduct the costs of owning your home (when it’s acting as your home) as business expenses. And that in terms of a cost/benefit analysis of the work and reporting obligations of having an LLC, it would not be worth the savings of being able to deduct 100% of all costs until the renting income surpasses a certain threshold. I wish that was not true, but it would seem to pass the smell test of being the reasonable way for tax deductions to work- though I’ll admit that “reasonable” being a metric for analyzing how taxes work is a rare and usually useless standard.