Many things set Airbnb hosting apart from other rental properties. Let’s discuss this big difference: some Airbnbs qualify as non-passive income and are reported on Schedule C. Furthermore, this post will cover Schedule C vs Schedule E for Airbnb hosts in detail.
Schedule C vs Schedule E: What Are They For?
Let’s look at Schedule C and Schedule E and see how they function.
What is Schedule C?
Schedule C is a form that businesses use to report their profit or loss for the year. You file a Schedule C form as part of your personal income tax return. In addition, businesses must complete Schedule C if they are sole proprietorships or single-member LLCs.
Businesses can deduct various expenses on Schedule C, including advertising, rent, utilities, insurance, supplies, and employee salaries. When deducting an expense, the expense must be considered “ordinary and necessary.” This means that the expense must be expected and accepted in your industry, and it must help run your business. Additionally, Airbnb hosts can deduct expenses like internet, cellphone, property taxes, and more.
- Offset ordinary income with losses.
- You may be able to make retirement contributions if you have net income.
- Net income can help you qualify for social security benefits when you retire.
- Net income on a Schedule C is subject to self-employment taxes which are currently 15.5% in addition to your income taxes.
- Income is taxed at your ordinary income tax rate.
What is Schedule E?
You should use Schedule E to report income or loss from rental properties and royalties. If you don’t have hands-on involvement with your rental, you should use Schedule E to report income. Furthermore, you need to report the number of days the property is rented each year. You’ll also need to declare your income and expenses from the rental.
- The income is not subject to self-employment taxes.
- Depending on your income, you may be able to deduct up to $25,000 of passive losses each year.
- Offset other passive income with losses.
- Carry unused passive losses forward to future years.
- 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.
How Does It Affect Homeshare Hosts?
Deciding whether to report your Airbnb operation on Schedule C versus Schedule E will have a significant impact on your taxes. The total impact will vary based on your income and expenses from the operation along with your other sources of income.
Most taxpayers will benefit from reporting losses on Schedule C and from reporting income on Schedule E. However, the proper reporting of the operation on your income taxes depends, not merely on which option results in lower taxes, but also the type of rental and your involvement in the day-to-day operation.
How Should I Report My Homeshare Income?
There are several factors that determine which schedule you should use to report your Airbnb hosting activity. It must be remembered, that the term substantial services has not been quantified by the IRS, and you should check with your tax professional to determine if your involvement qualifies.
Generally, you should report your Airbnb activity on Schedule C if the average rental period for the property is less than 7 days or if the average rental is less than 30 days, and you provide substantial services to the renter.
Schedule E fits the bill for rentals, with an average rental period of seven days, and you do not provide substantial services to the renters. For example, substantial services would include concierge services, meals, or housekeeping.
Should Homeshare Hosts Use Schedule C or Schedule E?
Typically, homeshare hosts will be better off reporting their Airbnb activity on Schedule E. Certainly, hosts with total incomes less than $150,000 can claim up to $25,000 of rental losses against their ordinary income, and all hosts will benefit by avoiding self-employment taxes on their net income. Rental income reported on Schedule E may be subject to net investment tax for high-income individuals.
Other Considerations for Home Share Hosts
It’s tempting to choose the reporting option that benefits you the most at tax time. As a matter of fact, it’s important to remember that switching your rental between Schedule C and Schedule E may be a red flag for the IRS.
Of course, you should ensure that you meet the requirements for the schedule you use each year and have documentation to back up your claim in the case of an audit.
Schedule C vs Schedule E: Final Thoughts
If you’re thinking about becoming an Airbnb host, it’s essential to understand the difference between Schedule E and Schedule C when it comes to taxes. Hence, you should use Schedule E for rental income and Schedule C for business income.
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.
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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!