Suppose you provide “Substantial Services” to your guests – in addition to a nice place to stay. The income you make needs to be reported on a Schedule C. You’ve elevated your activity to that of a business, which significantly impacts how your short-term rental is taxed.
Schedule C Substantial Services
Here are some examples of services that would be considered “substantial”:
- Cleaning of the rental each day while the same guests occupy the property.
- Changing bed sheets and other linens each day while the same guests occupy the property.
- Concierge services.
- Conducting guest tours and outings.
- Providing meals and entertainment (like providing breakfast each morning).
- Providing transportation.
- Providing other “hotel-like” services.
The Good News
Good News: If you’ve created a Schedule C business with your short-term rental and produce a tax-deductible loss, you can combine it with any other self-employment income and minimize your overall self-employment tax. IF you don’t have other self-employment income, the loss is considered an ordinary loss and deductible against any other income and essentially is an ‘above the line deduction.’
Another good news is that if you generate ‘net income’ with the operation, you will likely qualify for the 199A deduction against the income.
The Bad News
Bad News: Any schedule C substantial services profits you generate are subject to self-employment taxes like any other small business operation. However, as I have taught for years, all is not lost, and the S-Corporation can come to your rescue and significantly mitigate any SE Tax.
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