Know the Three Ways the Tax Law Treats Personal Property Rentals
Here are some key points about renting personal property, which includes equipment, vehicles, and furniture. The tax treatment differs from real estate rentals, and how you classify the rental activity will affect how you report income, expenses, and potential self-employment tax.
Classification of Personal Property Rentals
The tax code treats personal property rentals in three ways:
- Business. If your primary purpose is to earn income and the activity is continuous, it is considered a business. You must report the income on Schedule C, subject to self-employment tax.
- For-profit activity. If the rental is profit-motivated but sporadic, it’s a for-profit activity. You report the income on Schedule 1. There’s no self-employment tax.
- Not-for-profit activity. If the rental activity is primarily for personal reasons (e.g., for recreation), it is considered not-for-profit. You report the income on Schedule 1, but cannot deduct expenses related to the activity.
Renting to Your Own Business
If you rent personal property to your own business, the tax implications depend on the business structure:
Sole proprietorship or single-member LLC. Rentals between you and your business are not taxable events.
Corporation, partnership, or multi-member LLC. Renting to your business is a taxable event. The business can deduct rental payments, and you report the income on your tax return.
For C corporations, this can help avoid double taxation, as rent payments are taxed only once as income to you.
Self-Rental Rule
The “self-rental” rule applies to renting personal property to a business in which you materially participate. The rule works like this:
- If the rental activity produces net income, it is characterized as non-passive income, meaning you can’t deduct passive losses against this income.
- If the rental activity creates a loss, the loss continues as a passive loss, which you can offset only with passive income.
Key point. Self-rental gives you the worst of both worlds—passive classifications.
Grouping
You can avoid the self-rental rules with the grouping election. You may group your property rental with your business when the group forms an appropriate economic unit and
- the rental activity is insubstantial relative to the business activity, or vice versa, or
- each owner of the business activity has the same proportionate ownership interest in the rental activity.
Caution 1. The tax code prohibits grouping real and personal property rentals.
Exception. If you rent the business building or office unit to your business and such rental includes furnished offices, the prohibition on combining activities does not apply. You can group with the business activity under the grouping rules above.
Caution 2. The self-rental grouping election does not work with a C corporation.
If you want to discuss personal property rentals, please call me on my direct line at 408-778-9651.
By Leon Clinton