Both SCH C and SCH E *are* businesses. The SCH C reports non-passive income and SCH E is for passive income. Generally, rental property is passive income and that's why it's reported on SCH E.
For rental property, if you provide services to the tenant, that are directly beneficial to the tenant, then you can report that as SCH C income. Things that are directly beneficial to the tenant would be services such as daily maid service, meal prep and the such. In other words, the same services a Holiday Inn hotel offers.
Things that are not directly beneficial to the tenant are things like yard care. You're gonna cut the grass weather there's a tenant in the property or not.
SCH C income
Advantages - SCH C income can be used to figure your maximum allowable contribution to a ROTH or tax deferred retirement account, such as an IRA or solo 401(k).
- SCH C income can be included when figuring your maximum social security payments you get when you reach retirement age.
- SCH C real estate assets are depreciated over 39 years, vs 27.5 years for SCH E rental property. This keeps the yearly depreciation lower, meaning less to recapture and pay taxes on in the year you sell the property; depending on precisely when you sell the property.
Disadvantages - SCH C income, in addition to paying the "normal" tax on that income, is also subject to the additional 15.3% self-employment tax; which is basically the employer side of your Medicare and Social Security tax.
SCH E Income
Advantages - You do not pay the additional 15.3% self-employment tax on that income
- SCH E rental property generally operates at a loss every year; especially if you have a mortgage on the property. That means you pay no taxes on the rental income.
Disadvantages - Can not include this income when figuring your maximum allowable contribution to a ROTH or tax deferred retirement account.
- Is not included when figuring your maximum social security payment when you reach retirement age.
- The higher depreciation recapture in the year you sell means you pay more taxes in the year you sell. This pretty much offsets not having paid any taxes on the rental income for all those years you operated the property as a SCH E rental property.
