Airbnb hosts have two options for declaring rental income on their tax return. Each presents its own benefits and drawbacks, so the best choice for you will depend on several factors. In this post, I’ll look at both options in a Schedule C vs Schedule E comparison so you can decide the best option for your rental income.
What is Schedule C?
Taxpayers use the Schedule C form to report a business’s profit or loss for the year. It’s typically included with your personal income tax return, also known as Form 1040. All businesses must file a Schedule C with their taxes, even if they operate as sole proprietorships or disregarded entities, like single-member LLCs.
A Schedule C form breaks down expenses into various categories, such as advertising, rent, supplies, etc, and balances them against the business’s total income. Claimed expenses must be considered “ordinary and necessary” to be deductible.
Pros
- Offset ordinary income with deductible expenses.
- Option to further reduce taxable net income with retirement contributions
- Net income can help you qualify for social security benefits when you retire.
Cons
- Net income is subject to a hefty 15.5% self-employment taxes
- Income is also taxed at your ordinary income tax rate.
What is Schedule E?
Form Schedule E reports passive income or losses from sources like rental properties and royalties. If you don’t have hands-on involvement with your rental, you can use Schedule E to report your income. However, you will need to keep track of the number of days the property is rented each year, as well as income and expenses related to the rental.
Pros
- Income is not subject to self-employment taxes.
- You could qualify to deduct up to $25,000 of passive losses each year.
- Allows you to offset other passive income with losses.
- You can carry unused passive losses forward to future years.
Cons
- Losses cannot offset ordinary income.
- You must fill out a separate Schedule E for each property.
- You cannot use the net income from the property to qualify for retirement contributions.
Schedule C vs Schedule E: Considerations for Airbnb Hosts
Most taxpayers can maximize their benefits by reporting losses on Schedule C and reporting income on Schedule E. However, your choices could be limited by the type of rental operation you’re running and your level of involvement with the business’s day-to-day operation.
Here are the best use cases for each form.
Schedule C
Generally, report Airbnb activity on Schedule C is advantageous if the average rental period for your property is less than 30 days and you provide substantial services to the renter.
Schedule E
Schedule E is the best options for passive rental income where you do not offer substantial services to renters. Substantial services can include concierge services, meals, or housekeeping, but the IRS hasn’t issued specific guidance on the interpretation of this term. If in doubt, consult with a tax advisor.
Should Airbnb Hosts Use Schedule C or Schedule E?
Typically, homeshare hosts will be better off reporting their Airbnb activity on Schedule E. Hosts with total incomes less than $150,000 can claim up to $25,000 of rental losses against their ordinary income, and you can avoid self-employment taxes on the property’s net income. However, rental income reported on Schedule E may be subject to net investment tax for high-income individuals.
A Warning on a Potential Audit Trigger
Switching your rental income reporting between Schedule C and Schedule E frequently may attract the IRS’s attention. If you change which way you report, you could receive an IRS inquiry or, even worse, an audit.
Always ensure that you meet the requirements for the option you use each year and keep documentation to support your claim in the event of IRS scrutiny. Try to stay consistent to minimize the chance of any issues.
Final Thoughts on Schedule E vs Schedule E for Airbnb Hosts
In general, Airbnb hosts who rent out their entire home on a short-term basis will file under Schedule C, while those who rent out just a part of their home or who also have long-term tenants will file under Schedule E. Additionally, there are some other nuances between the two schedules, so be sure to speak with an accountant or tax professional before you decide which one is right for you.
Shared Economy Tax specializes in taxes for Airbnb hosts and other sharing economy entrepreneurs. Consequently, our veteran tax experts can answer your toughest tax questions and help you save. Get started today with a one-on-one strategy session with one of our tax pros, and see how much you save!
