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Business & farm
I do appreciate your helping me understand this and apologize why it's taking so long for me to "get it." I think I'm starting to understand our disconnect. You keep saying:
"For a sole propritorship, one must go out and actually "do something", usually on a recurring basis to actually 'earn' the money they are paid."
But I did explain that I do "do something" in my last post. This is a *short-term* vacation rental. I have a management company in Florida that maintains the calendar, takes calls from potential renters, does the billing, and has contracted maids, but my wife and I approve rent discounts, hire plumbers to fix shower faucets, pay the mortgage/electricity/AmazonPrimeVideo/HOA bills every month, purchase appliances when they fail and hire contractors to install them, and we go there several times per year to improve the unit (new paint, new furniture, scrubbing the tile floor and sealing the floor grout annually, new TV, etc.). We also seek out tenants. I spend more hours per year on this condo than I do on my air purifier business.
I just looked up what the IRS says regarding rental property and they do say that you usually claim rental property income on schedule E (just as you said), but the IRS also says:
"Schedule C (Form 1040), Profit or Loss From Business
Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer.
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. 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 don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For more 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 chapter 5 of Pub. 334."
We do provide laundered linens and maid service between tenants, plus we provide Amazon Prime Video, WiFi, and some basic staples like coffee, sugar, etc. I pay the management company for those services because I live 1000 miles away.
I'm going to read Pub 334. I'm a little concerned about self-employment, but so far TurboTax has done all the calculating of tax for me and I'm confident they are creating a schedule SE if I need it. I do have a W2 income and probably max out the Medicare and Social Security deductions via my salary.
Also, you confused me when you said (three posts ago):
"Income from rental real estate is non-passive and therefore gets reported on SCH E as a part of your personal 1040 tax return."
I think you meant to say "passive income."
Again, this is not a "just go to the mailbox and get a check from an annual tenant" business.
You wrote: "Now, you're referring to your air purifier business as a partnership, whereas earlier you stated it was a sole proprietorship. "
I was referring to paying bills of the rental property from our personal checking account (mixing personal and business finances). I only brought up the sole proprietorship air purifier business because I spend fewer hours per year working on that business and there's no dispute that it's non-passive income. I heard that same story about giving new lawyers LLC liability cases to build confidence. I only heard that after I had already created the LLC.
Thanks for your effort in explaining this. I want to get away from the partnership because I don't want to manually do the 1065, 8825, 4562, and K-1 forms and am too cheap to buy both TT Home and Business and also buy TT Business for the partnership income.
My understanding of why I want this to be considered a non-passive income is because my salary is a non-passive income and if I have a $15,000 loss in 2022 and this is a passive income, I can only carry forward the loss to a subsequent profit from this or another passive income, right? If it's a non-passive income, then I can take the $15,000 loss in 2022 against my 2022 W2 income, correct?
