Contributed by PhillipB, FreeTaxUSA, Tax Pro Agent
Among the many gig economy options, renting your car or car sharing is growing in popularity. With this new and innovative way to earn money, those who are renting their vehicles may wonder how they report their income and expenses. This article will help you know how to report your car rental or your car sharing business.
How should renting personal property be reported?
How this income should be reported hinges on two main questions:
- Whether or not the rental activity is a trade or business.
- Whether or not the business is conducted for profit.
This leaves three potential ways to report the income and expenses.
- If the rental activity is also a trade or business, report the income and expenses on Schedule C. This will be the cleanest way of reporting the income and expenses to the IRS, however there will be self-employment tax for any net income from the rental activity.
- If the rental activity is for profit but it is not a trade or business, the income would be reported on Schedule 1 (Form 1040) line 8l, and the sum of all rental expenses would be reported on line 24b of Schedule 1 (Form 1040).
- If the rental activity is neither for profit or a trade or business, the income would be treated like hobby income and expenses.
Is my rental activity for profit?
While it may seem simple to just say I am renting my personal property to earn money and get a profit, proving it to the IRS is not that simple. The IRS has laid out the following nine factors to determine if virtually any activity is carried on with a profit motive:
- Do you carry out the activity in a business-like manner?
- You put time and effort into the activity.
- The money from the activity is needed for your livelihood.
- Losses are beyond your control, or the losses are normal for the start-up phase of this business.
- You change methods and strategies to improve profits.
- You are knowledgeable, or you hire advisors who are knowledgeable, in how to make the activity profitable.
- You have had success in making a profit in similar businesses.
- The activity is profitable in some years.
- You can have a reasonable expectation of making a profit from the assets in the future.
None of these factors alone are definitive in determining a profit motive. Consider the validity of each factor to your circumstances and weigh the balance of all factors that are valid in your scenario. If you decide your rental activity is not for profit, you will report the income as other income.
Is the rental activity a trade or business?
The IRS has not provided clear guidance on whether you would consider a for-profit rental activity a trade or business. However, there are a few factors from the profit-motive list that are the most applicable in determining whether you have a trade or business.
- Do you rent your property on a regular and consistent basis? You put a lot of time and effort into renting your property.
- Do you depend on the rental income as part of your livelihood?
- Do you carry on the activity in a business-like manner?
If the answer is yes to most of these factors, there is a good chance the activity should be reported on Schedule C as a trade or business.
Can I report my personal property rental income on FreeTaxUSA?
It depends.
If you decide your personal property rental activity as a trade or business, you can use FreeTaxUSA to report your income and expenses. Follow this menu path: Income > Business Income (Schedule C).
If you decide the activity doesn’t have a profit motive, you can report the income by following this menu path: Income > Uncommon Income > Other Income > Answer yes to Miscellaneous Income > Enter the description “Personal Property Rental Income” and enter your total income as Amount Received. You will not be able to deduct expenses.
Unfortunately, FreeTaxUSA doesn't support reporting expenses from a personal property rental activity that is not a trade or business.
Given the fact that your expenses may be substantial in this situation, you may want to hire a local tax preparer or use another method to file your return.
