Storage Units - Sch C or Sch E?

[SensibleandHourly]

Hello everyone, are we having fun yet? 

Only six more days to go!!! 

So, I have an existing client who came to me several years ago with a Sch C for his storage Unit business and a Sch E for commercial rentals. He has since sold off all of his commercial rentals, and last year, I filed a Sch C for his storage units. I've always considered him active but now that I am working on his return now, I'm wondering if I should rethink that. He does plenty of book-keeping for the business as there are 60 units, as well as snowplowing and maintenance, but doesn't keep track of how many hours he spends on the business. He is also not interested in depreciation. Any thoughts as to how other preparers for storage unit business owners handle this decision would be greatly appreciated. 

Thank you, 

Dawn 

[BobKamman]

Only six more months to go!  April 15 is just another fine spring day, since the invention of Form 4868.  But to answer your question, I had a client who owned a storage rental (business?  but is that the right word?) many years ago.  Sold it at a profit.  Like many, it had a resident management couple who kept an eye on the place and dealt with new and departing tenants.  They lived in a small apartment on location, which was part of their compensation.  We put it on Schedule E.  It was 100 miles away from where he lived, and he rarely visited.  The place ran itself, with good on-site management.

I compare this to the issue of trailer mobile-home parks, where the question is how much service is provided to tenants.  And then those are also compared to Airbnb's, for no good reason.  

I visited my own self-storage unit Monday, for the first time in months.  I noticed about 20 vehicles parked in the fenced-off area behind the building.  Mostly RVs; an old school bus; some collector cars.  A boat.  Those tenants are just paying to rent a few square yards of pavement.   

Why do you mention depreciation?  Wouldn't it be the same, either way?

[qbteachmt]

"He is also not interested in depreciation."

Were you not including this already? Business property placed in service is depreciated and depreciates. He might not be interested, but that doesn't stop it from happening.

[SensibleandHourly]

Thank you, and you're right about the depreciation.

But, still not sure about Schedule C vs Schedule E...... He is definitely there often but is it often enough? 

[BobKamman]

What does "being there" have to do with it?  The guy who owns a duplex and rents out the half where he doesn't live, is certainly "there" a lot of the time. 

In a 1998 Tax Court case (Harris), IRS argued that the $25,000 limit on passive activity losses applied to a self-storage building.  The judge agreed.  If you aren't going to let me take a loss, I'm not going to pay you SE tax if I show a profit.  

[Just-Lisa-Now-]

Is it just an unmanned storage lot or does it have an office and someone that manages the front office (signs up new customers, shows them the units, sells moving supplies, etc) it during business hours?  

[SensibleandHourly]

Good morning, Lisa, The owner does all of those tasks, although he doesn't sit behind a desk all day waiting for someone to show up. But, basically, he is a one man show - sign-ups, billing, maintenance, plowing, clean-up for those who default, etc. I'm sure some weeks, he doesn't do much other than the books, and other weeks, he is fairly busy with it. I've never had him show me a calendar to see if he is actively working this business 500+ hours a year. Frankly, I would be surprised if he isn't, which is why I haven't ever questioned it, But I was just thinking, perhaps I should re-assess, and wondered how other tax preparer's make that determination and/or guide the clients. 

Thank you!

Four more days, 

Dawn

[Just-Lisa-Now- · Accepted solution]

Hes running a business, this is Sch C.

[SensibleandHourly]

Thank you, Lisa!

[BobKamman]

sign-ups, billing, maintenance, plowing, clean-up for those who default, etc.

All of which the owner of a residential apartment building might be doing also, and reporting rental income on Schedule E.  The key fact here that has been omitted is, how many units are there?  The office complex where I rent has several dozen single-story buildings spread over many acres.  A full-time maintenance man and a part-time property manager.  It's still just another rental LLC.  

[SensibleandHourly]

HI Bob - sixty units. 🙂 

One more day! 

Dawn 

[BobKamman]

So let's say instead you have a client who owns a 60-unit apartment building.  Average tenant turnover is a year, and it takes a day to close out lease with old tenant, inspect the place, show it, investigate a new tenant application and complete the lease.  So there are sixty days of work involved, but you're not going to put it on Schedule C, because that's just what Schedule E landlords do.  Now you have a client who manages 60 storage units, average stay is six months, takes half a day to do the same work.  Only reason you're going to put it on Schedule C is "that's the way it's always been done."  

These owners talk to each other and eventually, someone is going to point out that the donations to the Social Security Trust Fund are strictly voluntary.  

[BobKamman]

From the magazine the owners read:

One of the most common tax mistakes self-storage owners make is to report activity from their company on Schedule C (Profit and Loss From Business) rather than Schedule E (Supplemental Income and Loss). Again, this comes down to understanding the differences between active and passive income. Here are a few things you should know:

• Again, income from a self-storage facility (rental income) is considered passive.

• Active income is reported on Schedule C, while passive income is reported on Schedule E.

• If you report you income on Schedule C, you’re paying unnecessary taxes!

• Active income is subject to self-employment tax, while passive income isn’t.

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