Know the three ways the tax law treats personal property rentals.

Vehicles, furniture, equipment and anything you use in your business that is not real property fixture or real property is called personal property. Rental of personal property is different from real property rentals when calculated for tax purposes.

Tax treatment of personal property rentals

The tax treatment of personal property rentals by individuals depends on how the activity is classified, and this includes:

- Business
- For profit activity
- Not for profit activity

Business

You can term rental activity as a business if your primary purpose is to earn income or profit and you are involved in rental activity with regularity and continuity. For this, you do not have to work full-time at a business, but at the same time, it cannot be sporadic activity.

When personal property rental is treated as a business, the income and expenses are reported on IRS Form 1040, Schedule C. Profit or Loss from Business. This rental income is subject to self-employment tax, like proprietorship income. It differs from real estate rental income, which is not subject to self-employment tax.

For instance, Jason is a freelance film and television production crew member, operating as a sole proprietor. His income consists of 45 percent from labour and 55 percent from equipment rental to production companies. The rental activity is a business. The equipment rental income is reported on Schedule C and is subject to self-employment tax.

For Profit Activity

For-Profit-activities are engaged in to earn money but don’t rise to the level of a business. The income from a rental-for-profit activity is reported as other income on Form 1040, Schedule 1, line 8l. The expenses from the activity are reported on Schedule 1, line 24b, as an ” above-the-line” adjustment to income. The activity is not a business; there is no self-employment tax.

For instance, Dansby owns a vintage car he rents to film production companies twice or thrice a year. The activity is profitable but too sporadic to constitute a business. The income and expenses are reported on Form 1040, Schedule 1. He pays no self-employment tax on this rental income.

Not-for-profit activity

Personal property rentals given for recreation or pleasure, or sports are not-for-profit activities, primarily if they are engaged in activities other than profit-making. Expenses from not-for-profit activity are not deductible during 2018-2025. Starting in 2026, unless the law is changed, these expenses will be deducted upto the amount of hobby income as a personal itemized deduction on IRS Schedule A to the extent they exceed 2 percent of the taxpayer’s adjusted gross income.

Form 1040, Schedule 1, line 8j is used to report income from not-for-profit activities. The income is not subject to self-employment tax,

For instance, Lisa is an avid angler and owns a fishing boat. She rents her fishing boat to her brother-in-law every year, charging you only enough to cover the cost of the gas. This is clearly a not-for-profit activity. Lisa can’t deduct her expenses and reports the income on Schedule 1.

Renting personal property to your business

If your business is organized as a sole proprietorship or a single-member LLC taxed as a sole proprietorship, you and your business are a single taxable entity. Rentals between the business and you are ignored. It is like taking money out of one pocket and placing it in the other—no taxable event exists.

If your business is a corporation, partnership, or multi-member LLC, renting personal property to the business is taxable. If the business is a pass-through entity, the business deducts the rental expenses, reducing your income. The rental income can be reported on Form 1040, and depreciation and other expenses can be deducted. Myriad tax rules can apply, as discussed below:

C Corporation

These rentals can benefit C corporation business as they are a separate taxpaying entity. C corporation earnings are taxed first as income to the corporation and then again as they are distributed as dividends to the shareholders.

The corporation can deduct the rental expenses if the corporate profit is in terms of rent rather than distribution. The rent payments are taxed only once, as income to you.

For instance: Mark is the sole shareholder and an employee of ABC, Inc. a C corporation that owns and operates a dry-cleaning business. Mark personally owns the dry-cleaning equipment owned by the business. He also rents the equipment to the corporation that pays him a fair rental amount every month. The income is taxed only once when Mark receives it. ABC Inc. deducts the rental payments as a business expense.

Employee shareholders can also take money out of their C Corporation in the form of employee salary. Salary is not taxed twice, as the corporation can deduct it. However, payroll taxes must always be paid on employee salary.

Self-employment taxes

Personal property rental income is not subject to self-employment tax if the rental activity is a for-profit activity. The income and expenses are reported on Schedule 1, and no self-employment tax needs to be paid. Rental income will be subject to self-employment tax if the activity rises to the level of a business rather than a for-profit activity, and then it must be reported on Schedule C.

Rental business?

Whether rental of equipment or other personal property is a business or a for-profit activity is a fact-specific determination. Factors to be considered include whether the lessor

Has a significant investment in the property
Maintains the property and provides insurance
Replaces the property on a regular basis
Leases property to others besides the business
Is the only person allowed to use the property
Has entered into a formal lease agreement with the business and
Is paid a fair rental price for a property

Self-rental rule

The self-rental rule applies to the rental of personal property to a business in which you materially participate. The rule works like this:

If the rental activity produces net income, it becomes non-passive income, which means 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.

Grouping

You can avoid the self-rental rules with the grouping election. Group your personal property rental with your business when the group forms an appropriate economic unit and

The rental activity is insubstantial in relation 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, except if you rent your business building or office unit to your business and such rental includes furnished offices. In this case, the prohibition on grouping activities does not apply, and you can group with the business activity under the grouping rules stated above.

Caution 2

The self-rental grouping benefit does not work for a C corporation.

Takeaways

Tax treatment of personal property rentals depends on whether they qualify as a business, a for-profit activity, or a not-for-profit activity.
If a rental is a business, income is reported on Schedule C and subject to self-employment tax
Renting equipment or other personal property to a C corporation is a way to profit from the business without being subject to double taxation.
Personal property rentals are ordinarily passive activities