Ellen is right. I think most conservative CPAS will advise you to go with the E. You have to actually be providing the services of a traditional B&B such as daily maid service and hot meals. Clearly many of us aren’t doing that.
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Maybe not…Schedule C requires self employment taxes (15.3%) be paid on net income in addition to any income taxes. Schedule E is passive income (no self employment taxes) which can be offset by passive losses PLUS, if you have a loss, there’s a special provision that allows you to offset up to $25K in “regular” income. Your accountant is looking at the whole picture for what minimizes your taxes.
I’m in the schedule C camp and in my non-expert opinion I believe the majority of Air hosts (not all) would file schedule C. But that’s not why I am posting. I have stated my opinion on that many times before. I want to post for anyone who is not taking depreciation and if the depreciation deduction is allowed. Sometimes the depreciation will be recaptured no matter if you elected to take the deduction or not. So double check with your tax professionals and see if it affects your situation.
I have a C and an E!! It’s a virtual alphabet soup on my return!
So I do pay the self employment taxes and social security and have done so for the last 25 some years.
@cabinhost what part of the two documents-- HR Block and the AirBNB Ernst Young reports do you think are in error? I would very much like to hear your arguments for why you think a Schedule C is the correct form.
[And yea, I have an A, B, 4-C’s, and then a bunch of forms with numbers. I will never have farm income so that letter will never be mine.]
I have not read those reports in detail in a long time. But I have read a lot on this subject and actually revisit the topic every few months. It’s so much information to absorb because all of the information is not just black and white.
I think one factor is length of stay - meaning if you do mostly rentals that are a week or less, versus a person who does short term rentals but rents to snowbirds for 1 - 3 months at time… I could definitely see an argument there that one “might” be more considered long term renting (schedule E), and the other would likely be considered hoteling (schedule C). Then again some owners require the snowbirds to have required cleaning every 2 weeks, and others do not require any cleaning. So some snowbirds may receive some sort of maid service.
Another issue is the substantial services. I don’t take the list literally. Yes, I don’t technically go in and provide maid service (during the stay), but I do consider providing clean towels for a week/made up beds/dish towels/sponges/cleaning supplies, etc. to fall under the category of “substantial services.”
In IRS publication 527 it gives examples of what is considered to be substantial services, and what is considered to be basic services. I am highlighting in bold below:
"Providing substantial services. If you provide
substantial services that are primarily for
your tenant’s convenience, such as regular
cleaning, changing linen, or maid service, you
report your rental income and expenses on
Schedule C (Form 1040), Profit or Loss From
Business, or Schedule C-EZ (Form 1040), Net
Profit From Business. Use Form 1065, U.S. Return
of Partnership Income, if your rental activity
is a partnership (including a partnership with
your spouse unless it is a qualified joint venture).
Substantial services do not include the
furnishing of heat and light, cleaning of public
areas, trash collection, etc. For information, see
Pub. 334, Tax Guide for Small Business. Also,
you may have to pay self-employment tax on
your rental income using Schedule SE (Form
1040), Self-Employment Tax. For a discussion
of “substantial services,” see Real Estate Rents
in Pub. 334, chapter 5."
Now if you go to IRS publication 334, you will find what I have pasted below. Notice after hotel, motel…there is etc. So this statement is not limited to only accommodations technically classified as a hotel/motel.
Real Estate Rents
If you are a real estate dealer who receives income from
renting real property or an owner of a hotel, motel, etc.,
who provides services (maid services, etc.) for guests, report
the rental income and expenses on Schedule C or
C-EZ. If you are not a real estate dealer or the kind of
owner described in the preceding sentence, report the
rental income and expenses on Schedule E. For more information,
see Pub. 527, Residential Rental Property (Including
Rental of Vacation Homes).
If you scroll further down in IRS pub. 334 then you will find this:
Hotels, boarding houses, and apartments. Rental income
you receive for the use or occupancy of hotels,
boarding houses, or apartment houses is subject to SE
tax if you provide services for the occupants.
Generally, you are considered to provide services for
the occupants if the services are primarily for their convenience
and are not services normally provided with the
rental of rooms for occupancy only. An example of a service
that is not normally provided for the convenience of the
occupants is maid service. However, providing heat and
light, cleaning stairways and lobbies, and collecting trash
are services normally provided for the occupants’ convenience.
So in the above, the IRS is providing examples of what is considered to be “normal” services for an occupant, and what would not be considered “normal.” And the list of examples is not intended to be exhaustive. Therefore, I consider providing tour guides, personal host recommendations, city manuals/brochures, and all those other things (to help guests get the most out of their vacation) to be concierge services. This is similar to the types of service hotels provide. Complimentary coffee maker and complimentary coffee is like operating a hotel, etc.
So now look at the rules guiding passive activity losses. Generally a “rental” activity is considered to be a “passive” activity. However, if someone wants to offset their passive activity loss against passive activity income…there are 6 exemptions to this under this particular section:
Exceptions to Rental Definition
There are six exceptions to the definition of rental. Under Reg. § 1.469-1T(e)(3)(ii), six types of activities normally defined as rentals, are treated as non-rental activities, i.e. as businesses, in most cases. As a result, the active participation standard and the $25,000 allowance do not apply. If the activity falls outside the rental definition, it is passive or non-passive based on whether the taxpayer materially participates. Following are the six exceptions:
-
The average period of customer use is 7 days or less. For example: condo rentals, short-term use of hotel/motel rooms, and businesses that rent videos/tuxedos/cars/tools, etc.
-
The average period of customer use is 30 days or less and significant personal services are provided with the rental. Examples: hotels and motels.
-
Extraordinary personal services are provided with the rental. Examples: hospitals, nursing homes and boarding schools.
-
The rental is incidental to a non-rental activity.
-
The taxpayer customarily makes the rental property available during defined business hours for nonexclusive use by various customers. Example: golf courses, health clubs and spas.
-
The taxpayer provides the property for use in a non-rental activity of his own partnership, S Corporation, or joint venture. The key word here is “provides,” not “rents.” For example: a partner contributes property in exchange for an ownership interest. This non-leasing transaction with the partnership is not a rental. Reg. § 1.469-1T(e)(3)(vii) states: “Thus, if a partner contributes the use of property to a partnership, none of the partner’s distributive share of partnership income is income from a rental activity…”
Some CPA’s will use the 7 day rental rule as the determing factor in whether or not the owner should file Schedule C versus Schedule E. Other CPAs argue that the 7 day rule only pertains to the passive activity loss section. Either way…I just thought it would add some perspective.
The law is entirely open to interpretation and the most important aspect is knowing how well you can defend yourself in case of an audit.
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Unless you’re a real estate professional, Schedule E is most likely the correct form.
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@cabinhost. Thank you for taking the time to post these relevant IRS documents. I had read all of them before, but it was nice to get your commentary on them. Not too worried about an audit. I filed my first Schedule C in 1976 when I was still in high school and one every year since. Somehow I have always flown under the radar which I like to think is because I have reported every bloody penny I have ever made.