Do you have a beach or mountain home that you rent out?
If the average period of rental is less than 30 days, you likely have a choice—either
claim the income and expenses on Schedule C, or
claim the income and expenses on Schedule E.
When Is Schedule C a Good Choice?
If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property).
If you show taxable income on the rental property, Schedule C is not good because it causes you to pay self-employment taxes.
When Is Schedule E a Good Choice?
If you show taxable income on the transient rental, Schedule E is best because you don’t pay any self-employment taxes on Schedule E income.
If you show a loss on your transient rental and you materially participate, you can deduct your losses against all other income, but those Schedule E losses do not reduce self-employment income.
Okay, now you know how to play the game.
IRS in Summary Mode
In recent advice, the IRS stated that rentals of living quarters are not subject to self-employment tax when no services are rendered for the occupants.
But if services are rendered for the occupants, and the services rendered
are not clearly required to maintain the space in a condition for occupancy, and
are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent,
then the net rental income received is subject to the self-employment tax.
Entertainment Facility: Perk for You, Your Net Worth, and Your Employees
Imagine this: your Schedule C business buys a home at the beach, uses it solely as an entertainment facility for business, pays off the mortgage, and deducts all the expenses.
Now say, 10 years later, without any tax consequence to you, you start using the beach home as your own.
Is this possible? Yes. Are there some rules on this? Yes. Are the rules difficult? No.
Okay, so could you achieve the same result if you operate your business as a corporation? Yes, but the corporation needs to rent the property from you or reimburse you for the facility costs, including mortgage interest and depreciation—because you want the title to always be in your name, not the corporation’s name.
The beach home, ski cabin, or other entertainment facility must be primarily for the benefit of employees other than those who are officers, shareholders, or other owners of a 10 percent or greater interest in the business, or other highly compensated employees. In this situation, you create
100 percent entertainment facility tax deductions for the employer (you or, if incorporated, your corporation), and tax-free use by the employees.
The employee facility deduction is straightforward. It has three splendid benefits for the small-business owner:
1. You deduct the facility as a business asset.
2. Your employees get to use the facility tax-free.
3. You own the property and can use it personally without tax consequences once you no longer need it for business use. (Note that when you sell, you will have a gain or loss on the sale and some possible recapture of depreciation.)