Joint Venture Schedule C Rental Activity

 Have you calculated the average period of customer use per Reg Sec 1.469-1(e)(3)(iii)?  If it's rented close to year-round, I'm guessing Sch E may be correct.  (Cleaning between stays, as opposed to daily maid service, IMHO would not rise to the level of "significant personal services," and linens / furniture / utilities aren't "personal services" at all.  So you've only got a 7-day hurdle, not a 30-day hurdle.)

The quick answer is no PS will not split it for you. You should put half on Sch C for the summer daily rentals and half on Sch E for the monthly rentals. You will have to enter the asset w/s for depreciation on each C and E, and put 50% in as the amount to be depreciated.

Assuming you meet the tests as stated by Phoebe.

 I don't have any particular knowledge in this area, but it's not clear to me that you'd split it at all.  You're either over 7 days, considering the year as a whole, in which case it all goes on E (or E-equivalent, see below).  Or you're under 7 days, considering the year as a whole, in which case it all goes on a normal C.  The sales tax issue isn't relevant for the 1040.

Note also that the proper way to show a husband-wife joint venture real estate rental, which would go on Sch E if owned 100% by either, is 2 Schedules C with the box on Part 1, Line 1 checked, no SE tax, and the "normal" limitations on rental losses.  Assuming that the presentation on the prior returns was otherwise-acceptable, I personally would not be amending to switch from Sch E to Sch C just to fine-tune the presentation.

Thank you for your prompt advice.  I'm getting more detail on the duration of the rentals, but likely given the longer rentals in the winter, the "average" will be more than 7 days and Schedule E is correct.  I don't understand your comment about SE tax though.  The rules state that SE is taxable for SE if (and only if) it is reported as a joint venture on schedule C.  Looks like I can avoid that in this case if we can get the 7 day average.    But just wondering for future cases in case I'm missing something.

Phoebe is referring to a husband - wife joint real estate venture. It is properly reported on 2 schedule Cs rather than 1 schedule E and there is a box to check in Part I line 1 of schedule C to indicate that it is a joint real estate venture not subject to SE tax. If the average rental period is less than 7 days then you would not check this box since the income would be subject to SE tax.

Wow, now I am really confused.  So, no need to amend the old years just to fix the presentations, but, going forward they should be reporting on two schedule Cs as an "E" equivalent (i.e. no SE Tax)?  This would mean that the majority of married couples with regular rentals would be filing two schedule Cs instead of E?  I have yet to see any prior year return prepared by CPAs done this way.  (My practice specializes in Expat returns, so I am mostly taking on cases for folks who move overseas and are changing from their state-side CPAs).  All the MFJ rentals are on Schedule Es. 

Does the IRS really care about this?  If so, why are so many CPAs filing on Schedule E instead of C for their clients?  (I suppose that is a loaded question, but I'm just trying to get a handle on the situation as I made the same mistake and will need to convert over all the rentals next year to make sure I do this correctly.)  Thanks for sharing your ideas.

>>>Does the IRS really care about this? If so, why are so many CPAs filing on Schedule E instead of C for their clients?<<<

I suspect that most CPAs (myself included) didn't know that you could suppress the SE tax calculation on Sch C. 

If I correctly understand your situation (a dubious assumption), the US tax is the same either way. If so, there is no reason to amend just to pick up style points from the IRS.  Maine could be a problem, but only if the tax differential is material -- I'd say, in the hundreds of dollars.

Thank you for the time and thought you put into this.  The property is not their second home or vacation property.  Just a house they bought and rent.   As I said in an earlier posting, I have yet to see a return prepared by another preparer (independent CPA, EA or Big 4) that puts a regular rental property onto Schedule C as a joint venture, but I wasn't sure what kind of animal of was dealing with here b/c of the short term periods.

Thanks for excel trick too.  Did not know that!

 Nansea (since you asked for a pick-apart ;) ), you do technically get 2 Schedules C for a husband-wife real estate joint venture.  Sch E is technically incorrect.

As I mentioned originally, I personally would not amend for the presentation issue.  Since the Sch E isn't linked to any particular name (husband, wife, or both), I personally have no issue with anyone putting the activity on one Sch E, rather than 2 Schedules C.  We've discussed it in our local practice group, and the consensus seemed to be "Since you get the same answer either way, and two Schs C is stupid and more effort and increases the chances for error, I'm not going to do it right."  But the Sch E presentation is technically wrong.

 Phoebe: With all due respect, I think you should discuss this further in your group. Generally, it's not a good idea to "choose" to do the return "wrong" because there actually are good reasons for the right way. All tax law (from the IRS)  is based on a simple clear intention. I know people don't want to believe that but if you find the intention you will find the right way to handle it. Occasionally the IRS screws it up temporarily but very soon either they, or Tax Court, fix it. (There are always a few exceptions.)

I believe that I am right, Sch. E is the correct form and Sch. C is not. In this case I have two points.

1. Just because the client has a definition doesn't make it the legal one according to income tax law - this is an ordinary single rental, not actually a "joint venture" business.

2. The reason for the new "husband and wife joint venture" rule is specifically to allow both to receive credit to their social security account.

http://www.irs.gov/businesses/...;

On May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.

..... This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based.

Not sure why I'd want to discuss it further with our practice group, since it's not like I'm winning a convert in you any more than I did with them. ;)  Their tax returns are their tax returns, and if they choose to do 'em wrong-in-presentation-only, it's no skin off my nose.

Tax law isn't made by the IRS.  It's made by Congress, whose intentions I personally would not describe either as simple or as clear.  Yes, there are chunks of the tax code that you don't have to learn by rote, because they make sense if you understand the underlying logic.  But then there are things like the distinction between basis and at-risk, and self-employment tax for LLC members.  Or the situation where 3 Circuit Courts interpret a regulation one way, 2 interpret it another way, and your circuit hasn't ever considered it.

Having (eventually) gone back and re-read the OP more carefully, I think I saw the "split the Sch C" and mis-read it as "this is a joint activity," rather than "I want to put the >30 day piece on one Sch C and the <30 day piece on a second Sch C to make the state return easier."  So if this is rental real estate owned by one person, I agree that there's no QJV and no Sch C.

However, you also seem to have assumed jointly owned, and IMHO joint ownership of real estate is either a state-law general partnership (1065), or a qualified joint venture (2 Schs C on the 1040), or possibly-but-unlikely a true joint venture (similar to when unrelated people own undivided interests in the same piece of real estate, with the tenants paying each owner separately, and each owner separately paying the bills, which would be 2 Schs E on the 1040; one for each owner).  While I don't disagree that splitting the Social Security credit may have been one motivation for the QJV rules (fixing an inequity between community property states and non community property states IMHO being the overriding motivation), the Sch C instructions specifically anticipate that jointly-owned real estate would go on the Sch C.  Likewise, the Sch E instructions tell you that your options are QJV or 1065.

GEEEEEZ! Isn't it enough to just get the damn tax right?

You're right Phoebe - Congress is as clear as mud ........ but the IRS is the only government agency that tries real hard to interpret things clearly to a specific intention - give us a portion of your work after the real cost it took to earn it and if you didn't have to work to earn it, you must be retired, so keep more. The rest of Treasury......not so good........SEC.... clearly influenced by high priced lawyers with lifetime perks (oh, that would be Congress)........ most regulators - the public goods are our buddies retirement....... and progressively worse. So, I do appreciate the IRS. Not that I'm prepared to let them get away with anything either.

And Archie, your point is exactly right - the important thing is exactly to get the damn tax right! People can continue to demand less corruption and more professionalism in the Congress that they vote in or out. But people should not have to pay taxes they don't owe out of fear or confusion; or pay less than is due, like the rest of us law abiding citizens have to, by cheating.

I'll study a little deeper in case I missed something in the actual new code. But a word about instructions - they are just the first draft. While they are meant to get you doing it right, over the years I've seen that they take a bit of public testing to get clear, and form instructions are never fully complete in themselves. And sometimes it's a public service to point that out to the forms drafters - very, very politely - but I've done it many times and watched them change the instructions over the course of a season or up to 3 years (sometimes more). The reason is - those forms have to get from the last session of Congress (October) to the software developers (used to be bulk printers) and available by the beginning of January. That's a tight turn around worthy of the best entrepreneurs.