US hosts-do you use schedule E or C to report airbnb income? I would think schedule E, but wanted to see if anyone has been told differently by their tax advisor or their research.
I use schedule E
I wanted to do C and was forced (okay, advised) to do E. In the end it’s better if you ever want to refinance or anything. You don’t want your mortgage holders to see that you are running a commercial activity from your home. And they will because they always ask for tax returns.
At the risk of stating the obvious, a Schedule E is part of your tax return and would have to be provided when applying for a mortgage.
I am still researching this but one of the issues with a schedule E is that you it seems that you are depreciating your asset, which is great if you are a real estate developer [you can do 19 years minimum without paying any taxes!] but is bad when you do sell your property since your capital gains on the sale of the property are increased by the amount of depreciation that you have taken.
I keep reading the tax code, and the papers that have been written about this part of the code, and I still can’t quite figure out which schedule is better for me, and legal. [I actually know which one would be better, but that is actually irrelevant.]
But so is Schedule C. I’ve been doing Cs for 25 years as a self employed writer.
It appears to me that this is a grey area. There are CPAs who specialize in STR who post on this forum who can answer better.
I can just tell you that when my CPA presented my completed taxes, she told me that to be eligible as C, a real B&B deduction it had to meet certain criteria, like a real inn does. That is, you are serving meals and providing daily maid service…etc etc… Of course, a few of us on this board could say this, but I would not be one of them!
Depreciation which decreases your taxable income every year. When you sell, assuming you are not selling at a loss, you pay depreciation recapture on the amount of the gain (delta between net sales proceeds and adjusted basis) which is attributed to the depreciation you took. That rate is 25% I believe. So it is not really a bad thing, unless your marginal rate is less than 25% when you take the deduction. It is an interest free loan from federal gov’t.
Also depreciation isn’t that exciting or maybe not even applicable for a developer, since they don’t hold properties.
Around here they do. They develop the property, rent it out for 17 years and when the depreciation is gone, they sell. It is a very lucrative way to make a living. Basically, they never show a profit, though they are making tons of money. It is a very effective way to build wealth. We knew tons of folks that were doing just this in Dallas, Atlanta, and the Research Triangle, all places we have lived.
My tax guy said “E” thought what I read said “C”.
I host in my home.
Depreciation increases my expenses, reducing my taxes, but will have to be accounted for when/if we sell.
I keep a running total of what I estimate my taxable income from air will be -
income, less direct expenses, less a portion of fixed expense (property tax, insurance), then I sock away a portion of that so I can pay my taxes in April.
I haven’t filed quarterly as I haven’t made enough, but will next year just so I don’t have to worry about a tax bill at YE. Plus, HOPEFULLy I will make much more next year.
Generally speaking, and realizing that each situation can be different based on all the facts, a property rented for more than 14 combined days will be Schedule E if you did NOT provide “substantial services” to guests. “Substantial services” include maid services (cleaning the rental portion or property while occupied), concierge services, meals and entertainment. Depreciation is allowed regardless of Sch E or C. The life of the asset recovered changes. For example, Sch E uses a 27.5 year life on the building (assuming residential rental property). Sch C would use a 39 year life if the property is deemed to be nonresidential rental property. Again, these are general rules and in no way suggests this is right for your situation. This is not tax advice and is merely a discussion of general IRS and tax considerations. firstname.lastname@example.org if you need income, GET or TAT services.
Right!!! This is what my own Hawaii CPA told me, but you have explained it better.
So, having some bread and yogurt, no other services, takes you from a Schedule E to a Schedule C? Argh!
Found this as well:
no… the other way around!
Schedule C == substantial services of which one is providing food
Schedule E == no substantial services
E is your standard house rental deduction…you are NOT cleaning daily, providing meals, etc.
C is Profit or Loss from a business. Yogurt won’t count!
I’m no CPA so don’t quote me!
Apparently… since E doesn’t require you to pay social security tax… some Air users have been using it to get out of that.
With C… you do have to pay it… so…
There could be pros and cons to each…
Bottom line though. My CPA told me NO… NO schedule C! And gave me as many deductions as she could for E. Which put me in an unfavorable tax situation. ughh!
There are some very good reasons to use a Schedule E for me and Social Security/Medi payments are not the most important thing in my case. However, that is a significant factor. I already file several Schedule Cs so, I understand that form intimately.
Just trying to find a reason to justify using the E.
I think you CAN and SHOULD use the E if at all possible… LOL… this is not tax advice, not do I play a CPA on TV.
I have read A LOT on this subject and the schedule E, C subject is highly debated…even amongst CPAs. In my non - expert opinion, I think most Air hosts should file schedule C. The IRS code is a grey area for transient rentals.
Given the option of saying I am providing non-substantial services versus “substantial” services - I would have to go with the latter - even if I am not cooking breakfast and making the bed every day. The fact that we provide SO much for our guests convenience…we are more hotel - like: towels, shampoos, clean linens, coffee supplies, snacks, tour guide books, local restaurant recommendations, spices to cook with, robes, hair dryers, dvds, board games, etc. - these are not typical things one would find when renting out an accommodation long term from a landlord.
Also, you may want to check out the rules regarding passive activity losses and what qualifies as a passive activity in order to qualify for the loss. Under that particular tax section there are six exemptions to what qualifies as a “rental” activity. One of those is if the average stay is less than 30 days with substantial services provided. Another is if the average length stay is 7 days or less. Some CPAs argue the “7 day rule” should be used to determine whether you file schedule C or E. Other CPAs will say the “7 day rule” only applies to the passive activity loss section.
This will be my first year with taxes, so I haven’t had a detailed discussion with my CPA yet. Has anyone amortized their start-up costs? I invested in furniture and upgraded my sink countertops and faucets, so this would put me in a loss the first year. Usually you can amortize over 5 years but I’m not sure if that can be done with both a Schedule C or E, or if it forces you into one or the other.
I already have 3 other schedule Cs so I know that form pretty well and would prefer to use it. I have been known to drive guests to work so that would count as a substantial service.
Depreciation applies to both. Usually if cost is less than $500 CPA may say just to expense it.