USA / Schedule C vs Schedule E

Regulations/Tax Issues
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We started doing Airbnb hosting this year and I looked into whether we needed to file for Schedule C vs Schedule E on our taxes for later this year. Did some research and when I follow the flow chart from H&R Block, I think that we have to follow Schedule C - all our rentals are less than 7 days and we spend quite a bit of time doing Airbnb. In fact, I joke to my wife that Airbnb is the most active passive income I’ve ever done.

Digging deeper into the tax differences between Schedule E vs Schedule C. Schedule E is mainly for rental income - the buzzword here is “passive income”. Schedule C is for businesses or “active income”. According to US tax law, you can only deduct passive losses from passive income. But you can use active losses to deduct from active income.

The reason why this is interesting to me is that we both have W2 income which the IRS would consider to be active income. As a Schedule E, we would only be able to deduct as much passive losses as we had passive income. However as a Schedule C - if we can take those losses and deduct them from our W2 income.

I’m really surprised that more people don’t talk about this tax difference. With this in mind, we’re going to make sure that we basically never make a profit and that we document any expense that we possibly can. We’reat The point where we basically spend 40% of our income in taxes - so why not?

Anyway - wanted to share this. I see some people really fight being classified as a Schedule C because they want to avoid paying themselves 15% and getting taxed on that. Not us though - we’ll do Schedule C all day long.

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You should also be providing substantial services like a hotel to use schedule C.

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Not professional advice here, just information for discussion purposes, but be careful about “never making a profit.” The IRS rule of thumb is you should be showing a profit 3 out of 5 years (horse breeding/racing 2 out of 7 years), or you may have to defend that your business is not a hobby and you were entitled to all those expense deductions. For a hobby, you can deduct expenses only up to revenue, no loss against other earnings (unlike Schedule C and up to $25,000 of passive Schedule E income depending on your income level) and no loss carry forward to future passive earnings (unlike passive Schedule E income).
I agree C vs E is a gray area. I’ve seen the rule of thumb that 7 days or less average is too “active” for Schedule E. I do C because I leave substantial breakfast and snack items, provide restaurant and sightseeing recommendations, and perform occasional other services to guests (lent gardening tools to one who was visiting a family gravesite, offer extra cleaning for longer stays, etc.) – and I’ve seen how serious IRS can get about unpaid employment taxes. One other tax-advantaged thing you can do on Schedule C is hire minor children to paint, clean, etc. and expense their wages, without having to pay payroll taxes for them.

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