I own a few rental properties, should i use schedule C or schedule E? what are the advantages/disavantages of both?

[Yaby]

I have a full time job while a part time real estate professional selling residential properties as well as actively managing my 4 rental properties. I formed a LLC last year and transfered all 4 rentals into my LLC.

Am I able to report these rental income in schedule C for 2020? If I use Schedule C, how do I transfer rental depreciation previously reported on Schedule E to now Schedule C?

[Critter-3]

Ok ... does your RE income go thru the LLC as well as the rents ?  Did you incorporate the LLC ?  Did you get professional guidance before making this change and get educated in all the pros and cons ?    

And why would you EVER want to move passive income normally reported on a Sch E  to  a Sch C where you must pay SE taxes on the profits ??? 

[AmeliesUncle]

---

@Yaby wrote:

I have a full time job while a part time real estate professional selling residential properties as well as actively managing my 4 rental properties. 

Am I able to report these rental income in schedule C for 2020?

---

Rental property (real estate) only goes on Schedule C if you provide "services" (such as maid service or meals) to the tenants.  Otherwise, it goes on Schedule E.  It is not a choice.

[glennmsmith58]

Hi Mary, 

I'll quote your very helpful  answer above for clarity;

No, you must provide more than basic services to tenants. Housekeeping, linen service, maid service and meals are examples of substantial services that would require a landlord to use Schedule C. In essence, once you start providing substantial services, you're not just renting property; you're running a hotel or boarding house. Those count as businesses -- thus the requirement for Schedule C. Landlords must also use Schedule C if they rent property as part of their business as a real estate dealer.

Our city requires us to have a business license to do short term rentals under 30 days.  I've seen that the IRS rule is that the average rental period is less than 7 days (if no substantial services are provide).  Our average rental period was between 7 and 30 days.  https://www.taxpros.org/blog/short-term-rental-special-treatment/41678 .  We did a schedule C for our first year, 2019.  Does any of these facts require us to do a sched C for 2020; having less than 30 day average rental period,  having been forced to obtain a business license, the fact that we filed sched C for 2019?  Regarding the 2019 sched C, must we amend 2019 taxes to switch over to a schedule E for 2020?

The last question may make the others moot for 2020. If we provided basic staples for the kitchen like salt, sugar, etc., does that count as substantial services?

Thanks,

Glenn

[ErnestoF4]

It depends on the level of service being provided. If you are providing a level of service like a hotel or even a bed & breakfast you will report the activity on a Schedule C.

If you are simply providing a room with no other type of service it would be reported on a Schedule E. If you decide to report on a Schedule E for 2020, it is recommended to amend 2019 if the level of service was the same in both years.  

Please take a look at this link for more information on short-term rental activity: 10 Tax Tips for Airbnb, HomeAway & VRBO Vacation Rentals

@frenchguy1

[DLB26]

I own 1 rental property and it is used to provide 100% of my income. The business is registered as a legal business in my city and state and I file quarterly income taxes with the state and of course, federal taxes in April.

I do not provide daily "hotel service".

This year do I use a  Schedule E, as I have been for the past 6 years, or can I change to Schedule C so lenders will be able to process my PPP loan application?

I've applied for several PPP loans from different lenders, but they all ask for my Schedule C, which I cannot provide. I send them my Schedule E, but they just reply back to me to submit a Schedule C instead.

I know that Short Term Rental businesses are allowed to receive a PPP loan, but how can I get it if I don't have a Schedule C ?

Thanks

[AmeliesUncle]

Unless you provide "services" (such as maid service or meals) to the tenants, it goes on Schedule E.  You can't choose to put it on Schedule C just to apply for a loan (that would be loan fraud).

[DLB26]

Thank you for your reply, @AmeliesUncle I figured that would be the answer, but I just thought I'd try.

I know several hosts who had their taxes changed to Schedule C, to get the PPP loan, then amended them back to Schedule E. That just seemed unethical (and scary) to me, so I just gave up on the PPP loan.

It's a pity the SBA doesn't change their forms to allow for Schedule E.

So tired of STR's businesses being treated as the "red haired step child". I work my a** off, 7 days a week, 15 hours a day (and I'm paid well for it,) I employ several employees, but no one considers my business a "legitimate" business... Ok, rant over. lol

[AmeliesUncle]

---

@DLB26 wrote:

I know several hosts who had their taxes changed to Schedule C, to get the PPP loan, then amended them back to Schedule E. That just seemed unethical (and scary) to me, so I just gave up on the PPP loan.

It's a pity the SBA doesn't change their forms to allow for Schedule E.

---

Wow, that is scary.  And the fact that they later amended truly shows that they KNOW they are fraudulently doing it.  If they were to be caught, the penalties can be crazy.

It is not the SBA, it is Congress.  That is how they wrote the law.

[DaveF1006]

Yes, i would not recommend changing the from Schedule E>Schedule C>and back to Schedule E. Not only it is unethical, there can be dire consequences that can occur if you were audited.

[DLB262021]

I agree @AmeliesUncle . I'd rather mess with the Taliban than the IRS. And two of the people who did this are lawyers. They both claim it's legal as long as they amend back to Schedule E when they do the actual "final filing" of their taxes.I'm not sure exactly what they mean by the "final filing"... It seems "fishy" to me, but then again, it's the program that is messed up. On the hand, to me, it's up to the "powers that be", to fix the mistake in the system, not go around it.

Also, my accountant has been adamant that she wouldn't go for the Schedule C for me, as she thought it would bring me problems.

As for the way the law was set up, I was discussing this issue with my congressman and he said while STR's were included in the bill, the SBA was left in charge of implementing the fine details of the program, (the paperwork and forms, etc.) 

When I speak with the SBA they say it's on the lenders.

When I speak with the lenders, they say it's on the SBA.

I think you can see where this is going.

[AmeliesUncle]

---

@DLB262021 wrote:

As for the way the law was set up, I was discussing this issue with my congressman and he said while STR's were included in the bill, the SBA was left in charge of implementing the fine details of the program, (the paperwork and forms, etc.) 

---

Your congressman was incorrect.  It was Congress that did it.

First, let's back up and define what you mean by "Short Term Rentals".  If "services" are provided, it is a business on Schedule C (and eligible for PPP).  And self employment tax applies to any profit.  If "services" are NOT provided, it is a rental on Schedule E (and not eligible for PPP).  Self employment tax does not apply.

In the CARES Act (which first started the PPP), Congress wrote that "the term ‘eligible self-employed individual’ has the meaning given the term in section 7002(b) of the Families First Coronavirus Response Act".

In part, section 7002(b) says "the term ‘‘eligible self-employed individual’’ means an individual
who— (1) regularly carries on any trade or business within the meaning of section 1402 of such Code".

Section 1402 of the Code is Self Employment Tax (Schedule C, not Schedule E).

[DLB262021]

Honestly, I don't know who is correct here @AmeliesUncle in terms of what you are writing here and what I was told by my congressman, but that is an aside.

STR rental owners were meant to be included in the PPP process. Perhaps, a mistake was made somewhere along the lines, this is something that neither of us know, but it was the CEO of Airbnb who went to Congress and fought for STRs to be included. Since 99% of STR don't provide "hotel services" (as defined by the IRS,) and hosts file on Schedule E, someone clearly dropped the ball by not adding forms for Schedule E on the PPP loan.

[NayJack713]

Do the same Schedule E vs. Schedule C rules apply if you don't own the rental property? Properties are on lease to own arrangement, but are rented out and generating income. Can I report on Schedule E and just dont report depreciation expense? Or is it more appropriate on a Schedule C?

[Critter-3]

Depreciation is NOT  optional on either form... it is a requirement.     A rent to own belongs on a Sch E  unless you are in the business of doing rent to own properties.