Airbnb change from Schedule C to E

[Gene V]

I have a new client that been reporting an Airbnb on Schedule C--after interviewing him, I decided that he is not providing substantial service and he should be reporting the income on Schedule E.

Question: What is the best way to change his depreciation from the 39 years to 27.5 years. I'm thinking of terminating the Schedule C and starting the depreciation over on Schedule E after prior depreciation adjustment.

What do you think

Thanks in advance

[Burke]

Is he providing this room rental in his home? Is it less than 7 days average? If he cleans the rooms and provides toiletries, linens, etc. then I would be careful about changing it. Even if he does not provide meals, does he offer anything else?

[frankie123]

We have something similar but it is a Town house, rented to various people a week at a time to 3 months. His attorney set his LLC up as a partnership which he does not want . As far as providing any thing, I doubt it. Have not had chance to talk with him about that yet as he just started this 2018. His problem - He does not want to pay SE tax, which as P/S or Schedule C he would and not providing anything don't think a Schedule E will work. Thought about suggesting "S" Corp" .

[Burke]

We have something similar but it is a Town house, rented to various people a week at a time to 3 months. His attorney set his LLC up as a partnership which he does not want . As far as providing any thing, I doubt it. Have not had chance to talk with him about that yet as he just started this 2018. His problem - He does not want to pay SE tax, which as P/S or Schedule C he would and not providing anything don't think a Schedule E will work. Thought about suggesting "S" Corp" .

As an S-Corp, you would then be dealing with salary and still paying SE tax. In your situation rentals are NOT less than 7 days average, but does he clean the place upon tenants vacating? Or do the renters pay a cleaning fee? Does he also live in the townhouse? Is a management agency involved? Or does he handle all bookings, security deposits, etc, etc? Nobody wants to pay SE tax, but this situation may qualify for Sche E treatment depending on all the facts. Who is the other partner?

[TaxGuyBill]

Question: What is the best way to change his depreciation from the 39 years to 27.5 years.

The Regulations give you the option to either (a) Re-start depreciation using the current year as the "placed in service" date and use 27.5 years *OR* (b) continue to use the original "placed in service" date and continue to use 39 years.

https://www.law.cornell.edu/cfr/text/26/1.168(i)-4#d

[Gene V]

The Regulations give you the option to either (a) Re-start depreciation using the current year as the "placed in service" date and use 27.5 years *OR* (b) continue to use the original "placed in service" date and continue to use 39 years.

https://www.law.cornell.edu/cfr/text/26/1.168(i)-4#d

Thanks for answering my question--I was wondering when someone would answer the question---I do appreciate Burke and Frankie123 input.

[TAXNJ]

Thanks for answering my question--I was wondering when someone would answer the question---I do appreciate Burke and Frankie123 input.

Agree. Especially with the reply poster providing a source reference to support your scenario decision.

[frankie123]

Thanks folks for your answers. I have found another fly in the mix. Who ever filed for his LLC (SC SOS) on line evidently filed on line for the federal ID # as a P/S. In talking with him and now looking at his paper work he did not want a P/S. He thought he was just Sch E, I ask him did you not read the IRS letter, yes but didn't know what it meant. Since he is late filing the P/S can this ID # be discarded. I know you can file, I think, its 8832, to change classification but since it is late is that possible. He really would like to add this new property with other rentals on Sch E and plans to move all rentals into some kind of trust by next year ((ugh) . If anyone has any idea please let me know. The lawyer that did all the work on the purchase told him he would have to do the 1065 this year. I have checked all dates and the LLC status & ID# was granted 2 months after his purchase of property is that possibly an anchor I can grab. Thanks

[TaxGuyBill]

Has the EIN actually been used for anything? If not, I would call the IRS (first try the Practitioner Priority Line) and ask them if they can just void that EIN like it never existed, as a Partnership never existed.

[Anarchrist]

He does not want to pay SE tax, which as P/S or Schedule C he would and not providing anything don't think a Schedule E will work.

If he's not providing anything, why wouldn't a Sch E work?

If it's truly a rental, it's not self-employment. If it's partnership, the rental gets reported on 8825 and Sch K, not page 1 of the 1065.

[frankie123]

Thanks folks. The bottom line on the whole thing is, as a P/S he is late and will get hit with a $400 penalty. I told him last night we could try a Reasonable Cause letter which I have been able to use to get penalties abated. Since he was unaware who ever filed this for him was doing a P/S and he thought his return what ever it would be was due 4/15/19 just might work. Yes I know about the 8825 I have a client with somewhere in the neighborhood of 40 rentals that go on that form. This would work for him as far as I know (now) nothing but rentals are involved. I really appreciate you folks taking your time to answer my questions.

[TaxGuyBill]

[QUOTE=frankie123;n298097The bottom line on the whole thing is, as a P/S he is late and will get hit with a $400 penalty. [/QUOTE]


But is it actually a Partnership? Merely applying for an EIN does NOT create a Partnership.

If he is the only one involved, there never was a Partnership and the EIN for such a non-existent Partnership should be voided.

[Anarchrist]

I was just about to ask the same question as Bill. Are there partners?

I had a situation last year were the taxpayer was going to start a partnership, got an EIN, claimed it was a LP on the EIN application, did activity under the "partnership" EIN, but never got any partners until the next year. I put the activity on the taxpayers return but didn't prepare a 1065. On his return I included a Sch C with the name and EIN of the partnership and following explanation listed in Part V of the Sch C:

"SCH C IS INCLUDED TO REPORT xxx xxxxx PARTNERS, LP (EIN xx-xxxxxxx). SEE FORM 8275 ATTACHED FOR FULL EXPLANATION."

and the disclosure below on 8275:

"Taxpayer (xxxx xxxx) applied for & received a EIN for a limited partnership (xxx xxxxx PARTNERS, LP), but the entity didn't exist as a partnership in 2017 as the taxpayer was the only member. Additional partners were not brought into the partnership until 2018.The only income generated in 2017 under the LP's name & EIN were short term capital gains from a brokerage account w/ InteractiveBrokers (EIN: 13-3863700). Those gains are being reported on the taxpayer's form 8949 & schedule D attached. Since the LP only had one member, no partnership existed. To prevent a one "partner" partnership tax return being rejected by the IRS, no form 1065 was filed. Since the income in a partnership would flow-through to the members to be reported on their tax return and a single member entity such as a SMLLC is a disregarded entity, that income, as stated above, is being reported directly here on the taxpayer's 1040."

[Lion]

ABC qualifies for an exception to the penalty you charged under IRC Section 6698(a)(1), because all two (2) partners, XZ, 222-22-2222, and YZ, 333-33-3333, reported all their shares of income and deductions timely on their joint 2008 income tax return Form 1040. Therefore, the partnership meets the criteria specified in Rev. Proc. 84-35, which says in part: “A domestic partnership composed of 10 or fewer partners and coming within the exception outlined in section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so required by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.”

We trust that you will remove the penalty due to reasonable cause for small companies.