@elizben wrote:
...Can someone please shed some insight on this?...
You almost certainly received a request for a Schedule C because you reported the rental income as earned income. Had you reported it on Schedule E in the first instance, you would most likely not be facing this issue. In short and in sum, if I were in this predicament, I would file a Schedule E with a letter of explanation and hope that methodology would appease the IRS.
With respect to this entire issue, if you ask 3 different tax professionals you will get 5 different answers and the reason is simply because the Code, Regulations, Publications, and Instructions are vague, at best, and wide open to interpretation.
Publication 527 states:
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.
Instructions for Schedule E state:
If you provided significant services to the renter, such as maid service, report the rental activity on Schedule C or C-EZ, not on Schedule E. Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, or similar services.
I.R.C. §469(j)(8) states:
The term “rental activity” means any activity where payments are principally for the use of tangible property.
Treas Reg. §1.469-1T(e)(3)(ii)(A) states:
The use of tangible property is not a rental activity if, on the average, the period for which each customer uses the property is seven days or less. (paraphrased).
If you read the instructions, code section, and regulation above carefully, you will most likely come to the conclusion that the only possible obstacle to clearly reporting short(er)-term rental income on Schedule E (rather than Schedule C) would be the Treasury regulation taking average rental periods of customer use of seven days or less out of the definition of "rental activity".
However, note that the Internal Revenue Code (promulgated by Congress) absolutely takes precedence over Treasury regulations. Thus, solely in my opinion, where payments are principally for the use of tangible property and no significant or substantial services are provided for the tenant (renter), then the income should be reported on Schedule E.
