Income from renting BILLBOARD space subject to S.E. Tax?

[MeadowYak]

I've taken on a new client who owns a couple of billboards outside of his state of residence. He uses a third party to do all the leasing and maintenance and changing of the advertisements, etc...They send him a check every month. He pays the county taxes and permitting fees and about once a year he takes a trip out there to inspect the boards and make sure they are still in good shape. I would immediately look at this as passive income but in reviewing his 2021 return I see his previous tax preparer always put this income (about $10k a year) on a schedule C and he paid Self employment taxes on it.
After doing a little reading on it I am more confident I have it right. I'm a tax preparer but not a CPA or enrolled agent. I'm worried I am missing something or misinterpreting something, but it sure doesn't seem like this would meet the trade or business criteria needed to pay S.E. Tax. Any strong opinions here? If I switch him do you think its a red flag? He recently had a kid and his spouse works so basically now he's a stay at home parent. This is really his only income contribution to their joint return and it'd be nice to not be paying that extra $1k plus in SE tax if he doesn't need to.

Thanks for any insights

[TaxGuyBill]

You need to look at the activity itself, not just what he does.

A couple of 'keys' to determine if it is a business are (1) the ongoing effort to produce income, (2) the regularity and/or continuity of the activity.

https://www.irs.gov/businesses/small...ess-activities

To me, it solidly fits that it is a Trade or Business. The income-producing activity itself (advertising) goes 24 hours a day, 365 days a year. That seems very regular and continuous. And the ongoing leasing, maintaining and changing advertisement support that.


I think what you are thinking of is if your client "Materially Participates" in it or if his activity is merely "passive". *IF* his participation in the Trade or Business is passive, some rules change. However, I'm not aware of a Sole Proprietor being exempt from SE tax merely because he is passive (I have read comments claiming that, but personally I have never been able to find any citation for it or any support in IRC 1402 or its Regulations).

[MeadowYak]

Thank you! I appreciate that perspective and I appreciate the explanation. It's probably the perspective used in the past. I'll likely stick with the Schedule C.

[Lion]

Doesn't his QBID more than make up for his SE tax?

[FEDUKE404]

Ownership and maintenance of the billboards pretty much makes it a slam dunk for a Schedule C activity. This is quite different from someone who receives "rent" for allowing a third party to erect / maintain a billboard on his land.
I might be a bit careful for claiming travel to "inspect" the billboards. Probably OK if reasonable in nature and frequency.
BTW: Not knowing the state(s) where the billboards are, but there likely will be a need to file a non-resident tax return for income generated in the non-resident state(s).

[TaxGuyBill]

Doesn't his QBID more than make up for his SE tax?

They wouldn't be anywhere near each other.

QBID means 20% less is subject to income tax (well, with a few adjustments). So if they are in the 22% bracket, then QBID saves 20% of that, or about 4.4%. Much less than SE tax.

[Snaggletooth]

Ownership and maintenance of the billboards pretty much makes it a slam dunk for a Schedule C activity. .

I am the odd vote, which is not unusual for me. This is RENT and not subject to SE tax, unless it is a self-rental. If she were renting a house and she "owned and maintained" the house, would it be Schedule C? Schedule E sounds more appropriate.

Additionally, any profit would be QBI as well since it is almost certain that the renter of the billboard is a business itself.

[Twin Turbo Z]

I am the odd vote, which is not unusual for me. This is RENT and not subject to SE tax, unless it is a self-rental. If she were renting a house and she "owned and maintained" the house, would it be Schedule C? Schedule E sounds more appropriate.

Additionally, any profit would be QBI as well since it is almost certain that the renter of the billboard is a business itself.

Tend to agree. If the taxpayer is just renting the land and is not active in the business of acquiring advertisers, then E. We have several who lease/rent land to advertising firms. All on schedule E.

[kathyc2]

The billboard is personal property not real estate. Personal property rents go on Sch C.

[FEDUKE404]

Tend to agree. If the taxpayer is just renting the land and is not active in the business of acquiring advertisers, then E. We have several who lease/rent land to advertising firms. All on schedule E.

I'm sorry, but I just don't see the scenario described as merely "renting the land."

[MeadowYak]

Thanks all!

The travel to inspect the billboards is just once a year, sometimes less. The billboards are located in New Hampshire so no state tax regardless. The Taxpayer owns the land and the actual billboard. HIs involvement is limited to paying the taxes and permit fees, and inspecting the actual billboard for any issues roughly once a year. An advertising firm finds advertisers and mails the taxpayer a check (and annual 1099 MISC). I see both sides of this topic and appreciate each of you taking the time to offer your insights during a busy time of year.

[Twin Turbo Z]

I'm sorry, but I just don't see the scenario described as merely "renting the land."

Sorry missed the point where original post said "Client owns a couple billboards" We have clients who rent out land that "Advertising Companies" rent from them and get 1099misc for rents. That is Schedule E.

[FEDUKE404]

Sorry missed the point where original post said "Client owns a couple billboards" We have clients who rent out land that "Advertising Companies" rent from them and get 1099misc for rents. That is Schedule E.

Yup. I've had a couple of clients over the years who owned large acreage farms conveniently split by I-95. The owner and the sign companies signed some paperwork, and all income from such went directly to Schedule E as "rental." The only expense, except for some occasional legal fees directly related to the activity, was a determination of the allocation of the farm property tax. (The "farm" stuff otherwise went to Form 4835 as the owners did not participate in any farming activities but rented the land to others for the actual "farming" activities.

[Maribeth]

Also had a client that had a small piece of land in the city, could not be built on, too small. Rented it to billboard company and received rents for years. All went on Schedule E.

[Rapid Robert]

Someone wrote above "The billboard is personal property not real estate. Personal property rents go on Sch C."

I see two problems with that. First rental of personal property does not automatically go on Schedule C, instead it goes on Schedule 1 unless it is a trade/business.

Second, the billboard is not necessarily personal property.

"Other inherently permanent structures [i.e. real estate] also include outdoor advertising displays for which an election has been properly made under section 1033(g)(3)."

See 1.856-10 Definition of real property.

https://www.law.cornell.edu/cfr/text/26/1.856-10