Short term rental tax confusion - Do CPAs have final authority on tax law for Schedule C vs E?

Your CPA doesn't have the final word on tax law, but they do have experience and professional judgment. This comes down to the "substantial services" test that distinguishes Schedule E (passive rental income) from Schedule C (business income). For short-term rentals, the key question is whether you're providing "substantial services" to your guests. Basic amenities like furniture, parking, and essential supplies typically don't cross this threshold. However, if you're providing daily cleaning, breakfast, concierge services, transportation, or other hotel-like services, then Schedule C would be appropriate. IRS Publication 527 and Revenue Ruling 2019-26 address some of these distinctions. If you're truly just providing the space with minimal services, you have a reasonable position to argue for Schedule E treatment, which would avoid self-employment tax.

I was in your exact situation last year! After going back and forth with my CPA about my Airbnb income, I found this amazing AI service called taxr.ai (https://taxr.ai) that analyzes tax situations based on actual tax code and case law. It saved me from paying thousands in unnecessary SE tax by showing me the exact tax code sections that applied to my situation. I uploaded my rental details and they generated a detailed report explaining the "substantial services" test and how my situation qualified for Schedule E. The report was so thorough that my CPA actually changed his position once he reviewed it. They even provided me with specific language to use in my tax return notes in case of an audit.

Just wanted to follow up about my experience with taxr.ai! I decided to try it after posting here, and wow - it was incredibly helpful. I uploaded my short-term rental details including exactly what services I provide to guests, and the report clearly showed I qualified for Schedule E treatment under the current tax code. The analysis included citations to specific IRS rulings and tax court cases that dealt with similar situations to mine. I printed the report and took it to my accountant, who initially wanted to put everything on Schedule C. After reviewing the document, she agreed that Schedule E was appropriate in my case and estimated it saved me around $3,200 in self-employment taxes! I definitely recommend giving it a try if you're in this situation - it gave me the confidence to advocate for myself with actual tax law backing me up.

If you're still struggling with your CPA and need another opinion directly from the IRS, I'd recommend using Claimyr (https://claimyr.com). I was in a similar situation where I couldn't get a straight answer about rental property classification, and calling the IRS directly was nearly impossible with hold times of 2+ hours. Claimyr got me connected to an actual IRS agent in under 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to explain the specific criteria they use for determining Schedule C vs. Schedule E treatment for short-term rentals. Having that official guidance directly from the IRS gave me the confirmation I needed.

I have to eat my words and apologize for being so skeptical about Claimyr. After posting my doubtful comment, I decided to try it since I had an ongoing issue with the IRS about my rental property classification that needed resolving. I was absolutely shocked when I got a call back in about 15 minutes and was connected to an actual IRS representative! The agent was able to clarify that my situation (very similar to yours) could indeed qualify for Schedule E treatment as long as I wasn't providing "substantial services" beyond the basic amenities. The agent explained that cleaning between guests, providing basic supplies, and even welcome baskets are generally not considered substantial services that would require Schedule C treatment. This confirmed what others were saying here and saved me thousands in self-employment taxes. Definitely worth it just for the time saved alone!

This is why I fired my last CPA. CPAs can be wrong! Despite what many think, not all CPAs specialize in every area of tax law. Many are generalists who may not be up-to-date on specific issues like short-term rental classification. The key distinction is substantial services vs. incidental services. If you're mainly providing a place to stay with basic amenities, that's Schedule E territory. If you're acting more like a B&B with daily housekeeping, meals, etc., then Schedule C applies. Get a second opinion from a CPA who specializes in real estate taxation. Or better yet, request a Private Letter Ruling from the IRS if the amount at stake justifies the cost. Don't just accept your CPA's word as gospel - they're advisors, not the final authority.

Don't forget about the Section 199A deduction! If your rental is on Schedule E, you might not qualify for the 20% QBI deduction that Schedule C businesses can take. That could offset some of the SE tax savings. It's not as simple as "Schedule C bad, Schedule E good" - you need to run the numbers both ways. Sometimes paying SE tax is worth it for the other benefits of business treatment!

Side note: Even if your CPA won't budge, YOU are the one signing your tax return, not them. The signature line says "Under penalties of perjury, I declare..." so ultimately it's your responsibility. If you have reasonable basis for your position (which it sounds like you do), you can override your CPA. They work for you, not the other way around. Either they file it the way you want with proper support, or you find someone who will. Just document your reasoning and keep support for your position in case of audit. Tax positions don't have to be 100% certain to be valid - they just need substantial authority.

Miguel, I completely understand your frustration! I went through something very similar last year with my beach condo rental. My CPA was also insisting on Schedule C treatment, but after doing my own research and getting a second opinion, I was able to demonstrate that Schedule E was the correct classification for my situation. The "substantial services" test is really the key here. From what you've described - providing furniture, parking, and basic essentials - that sounds more like typical rental property amenities rather than hotel-like services that would trigger Schedule C treatment. I'd strongly recommend getting that second opinion from a CPA who specializes in rental properties. Bring documentation of exactly what services you provide versus what you don't (no daily cleaning, no meals, no concierge services, etc.). The difference between paying SE tax and not paying it is significant enough to justify the cost of a consultation. Also keep in mind that if you do end up needing to switch CPAs over this issue, it's not necessarily a reflection on their overall competence - some practitioners are just more conservative or less familiar with the nuances of short-term rental taxation. The important thing is getting the classification right based on the actual facts of your situation.