If you own a vacation rental home choosing the best tax option can provide significant tax savings.
A rental activity can be reported on a Schedule C or Schedule E when filing your tax return. However, your rental activity determines which Schedule is used when filing your taxes.
A sole proprietor uses schedule C to report the profit and loss from a business. Hotel owners are generally required to report their rental activity as a business because it is more like a business than renting a residential home.
Schedule E is normally used to report the profit and loss from a rental house which is considered to be a passive activity.
Sole Proprietors are required to be use Schedule C when reporting their profit or loss. Sole proprietors are pay self-employment tax and income tax. Self-employment tax is a tax consisting of Social Security and Medicare taxes.
The self-employment tax rate is 15.3% of net earnings. Reducing your self-employment tax can have a significant impact on your tax liability.
If you usually have a rental loss and own another business, reporting your rental activity on a Schedule C will help to reduce your self-employment tax. Reporting your rental activity on a Schedule C will increase your self-employment tax if you typically have a business profit.
If you have taxable income on the rental, Schedule E is the best option because you don’t pay any self-employment taxes on Schedule E profit.
The IRS does not allow a landlord to choose their Schedule depending on which one provides the most tax benefit. Tax laws determine whether a rental activity is reported on a Schedule C or Schedule E.
The services provided by the landlord determine whether the rental activity is reported on a Schedule C or Schedule E. If the services offered are substantial, the rental profit is subject to the self-employment tax.
The supplying of maid service, for example, constitutes a service. However, cleaning of public entrances, lobbies, and trash collection are not considered services that subject the rental profit to self-employment tax. The IRS has advised that rentals of living quarters are not subject to self-employment tax when no services are provided for the occupants.
If your rental property has a profit, it is better to report the rental activity on Schedule E to avoid paying self-employment.
You can determine whether your rental activity is reported on a Schedule C or Schedule E by the services that you provide when renting your vacation home.
This article provides the essential concept for determining which Schedule offers the best tax strategy. For more details regarding which activities classify a vacation home rental as a Schedule C or Schedule E, contact a tax professional with expert knowledge.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. David can be reached at (865) 363-3019 or contacted by email at email@example.com