Discussion:Booth rental in hair salons

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Discussion Forum Index --> Tax Questions --> Booth rental in hair salons


LILY (talk|edits) said:

20 January 2007
Is booth rental in hair salons considered commission or rental income. If rental income, is it subject to Self-employment taxes? I would appreciate documentation, if possible. Thank You

Solomon (talk|edits) said:

20 January 2007
Publication 4161. May be Tim will import this publication.

Yogafan00 (talk|edits) said:

20 January 2007
I just clicked on the link and did not worked.

Yogafan00 (talk|edits) said:

20 January 2007
I get it...it hasn't been uploaded....sorry. How do you edit your own post?

Tdoyle (talk|edits) said:

January 20, 2007
I'm working on the Publication now...

Solomon (talk|edits) said:

20 January 2007
Until Tim imports it, you can go to the IRS site and read it or download it to your computer. To edit a post, click on "edit this page" at the top.

JR1 (talk|edits) said:

January 20, 2007
Go to the Edit this page tab, scroll down...just be careful to not take out the {}'s unless you get both the beg and end ones, which would delete your post. For editing, just stay between them.

Tdoyle (talk|edits) said:

January 20, 2007
I've created a Quick Link Page for this item.

Deback (talk|edits) said:

January 20, 2007
Unfortunately, that publication doesn't answer the original question. I treat all income received by a hair salon owner as subject to SE tax.

Solomon (talk|edits) said:

20 January 2007
If 4161 does not answer the question, then we are still looking for a definitive source for the poster.

JR1 (talk|edits) said:

January 20, 2007
Used to have these as clients and trying to remember how we handled it. I think that rental income should be separated, after all, we're making the case for the lessees that they are in their own biz and paying legit rent, right? So the rental income should be just that, but suspect that many if not most salons just count it as commission income.

Deback (talk|edits) said:

January 20, 2007
The IRS site has nothing for "beauty shop", "booth rental", or "chair rental", when using the advanced search, in relation to this question. Hair salons are in the business of providing services for hair, nails, etc. They are not in this business for rental purposes, even though they circumvent paying employment taxes to those hired to perform these services by treating them as "chair rentals." I believe commission income is the correct answer, until I see something in writing that proves otherwise.

Death&Taxes (talk|edits) said:

20 January 2007
I've only been on the other side, the renter that is, but here we have the shop owner who could be renting space h/herself and having five chairs, but renting two of them out. We cannot deduct the rent paid out to the Shopping Center on Sch C without reducing or treating as income the chair rental in the same place, else we'd be playing around with SE Tax.

Deback (talk|edits) said:

January 20, 2007
Commissions, page 25, top right of page, in Publication 334, under "Guidelines for Selected Occupations." It's close but not quite the correct answer.

Deback (talk|edits) said:

January 20, 2007
DT - I think you're saying we should include chair rental income in gross income and not as rental income, right? <grabbing an Excedrin>

Death&Taxes (talk|edits) said:

20 January 2007
I would enter it on Line 6 Sch C; I know I have a photographer who receives space rental for space in her studio and that is what I do. In the case of the beautician it is not a case that she is renting space, but rather an asset, but I suppose you could reduce the rent expense by it. Of course, if the building is owned by the shop owner that does not work, but I do think the important point is my point about SE tax. As I noted in another discussion, cash businesses are not my favorites so take what I say with a grain of salt. My dog's groomer has a sign, "Sorry, We cannot take personal checks," so the first time I was there I whipped out plastic. "We don't take them either." Nice way to work, huh?

Solomon (talk|edits) said:

20 January 2007
Of course, reporting the rental space on E as non-passive would avoid SE tax if that would fly. If that were done, would it necessarily be unlawful avoiding (don't like that word} SE tax? I need one of your pills Deb.

Deback (talk|edits) said:

January 20, 2007
I think so, Solomon, since the primary purpose of a hair salon is to provide services and not to provide rentals.

Death&Taxes (talk|edits) said:

20 January 2007
Renting tangible personal property [chair], not space.

Deback (talk|edits) said:

January 20, 2007
Well, the tangible personal property [chair], does take up some space. We started with a booth, went to a chair, then space, and back to chair.

Solomon (talk|edits) said:

20 January 2007
When renting personal property and not being in that business, then could that income go on Line 21? That is where it would go under normal circumstances.

JR1 (talk|edits) said:

January 20, 2007
I think I'd be inclined to book that rental income against the rent expense, as D&T suggests. I don't believe it matters a whit what the primary purpose of the business is, rather what the relationship is between the tenant and the landlord. The same thing happens in auto body shops, or used to anyway. But a reduction of rent expense seems the most logical.

Deback (talk|edits) said:

January 20, 2007
I've never thought about doing that--guess I've never related chair rental income to building rental expense. I just include all income on the income line and include all expenses on the expense lines. Guess I like to show the total picture on a tax return--in case the IRS has looked at the bank deposits, which would be more than the income reported.

Lhhesscpa (talk|edits) said:

20 January 2007
I found an IRS MSSP training guide on barber and beauty shops in RIAs Checkpoint (but not on the IRS website). It identifies booth rental as a revenue source separate from service and retail. Here's a partial quote: "Salon revenue can be comprised of several sources or just one. Sources of revenue can include, but are not limited to, service revenue, retail revenue, and rental revenue. Normally, a salon's income will be broken down by type of revenue." Nothing is said about expenses. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Deback (talk|edits) said:

January 20, 2007
Did the MSSP state which form to use to report the booth rental?

JR1 (talk|edits) said:

January 20, 2007
That actually makes sense to me, again, holding to the form and substance that this is a genuine tenant relationship...

Death&Taxes (talk|edits) said:

20 January 2007
Tenant relationship does makes sense to me too, but as Deb notes, where. I cannot believe my salon owner can pay 16K rent and put that on Sch C, and then pick up 6K in rental income elsewhere on the return. The form and substance says it all belongs to the business of running a salon.....cheaper to rent the chair out than hire another operator.

1040man (talk|edits) said:

20 January 2007
I have a client that rents space as a HAIR STYLIST. She rents space and there a other gals that also rent space in the building. My client has me send her landlord a 1099-Misc for her rent paid each year.

Lhhesscpa (talk|edits) said:

20 January 2007
Deb, unfortunately I didn't see anything that would be helpful. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Blackwel (talk|edits) said:

20 January 2007
Are the stylists renting a space, a set amount each week, mo, etc OR are they paying the shop owner a % of their receipts??? Doesn't it matter?

Deback (talk|edits) said:

January 20, 2007
Doesn't matter, Blackwel. Some salon owners charge a % of the receipts for the chair or just a flat amount. The question is where to report the "chair rental" income received by the salon owner...Sch C or E.

Blackwel (talk|edits) said:

20 January 2007
It seems to me that I read a long time ago that they were employees and would they therefore not be renting?

Lhhesscpa (talk|edits) said:

20 January 2007
Deb, I think one important factor to consider is whether the salon owner is providing significant services. It is analogous to the situation with hotels vs. residential rentals vis-a-vis condos. If substantial services are provided I would think that reporting on Sch. C is appropriate. Examples of substantial services might be advertising and other promotional efforts, telephone, credit card merchant account, fixtures and janitorial. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Deback (talk|edits) said:

January 20, 2007
Larry - I think that is exactly what I was trying to say in my first response to this question. I agree with you.

JR1 (talk|edits) said:

January 20, 2007
But now you're changing the question. IF rental, then where. Not whether rental, which is an entirely different discussion, not much different than any other employee/independent discussion. These can be rental relationships, so that's what the topic is, subject to further hijack without prior notification.

Deback (talk|edits) said:

January 20, 2007
You guys change the question all the time in other threads! The question was: Is booth rental in hair salons considered commission or rental income? If rental income, is it subject to self-employment taxes?


To me, knowing which schedule to enter chair rental income on will tell me if the income is subject to SE tax or not--or vice-versa. I still vote for commissions--or just include it in gross income on Sch C.

Death&Taxes (talk|edits) said:

20 January 2007
Once again, I go back to the overall picture of the salon, which is what Larry is saying in his last, maybe without realizing it. The owner has an empty chair which she rents to bring income from cutting and styling hair. I bet the sign for the shop only has one name. The cleaning people the owner hires clean under the rented chair too, and I bet the renter uses the owner's linen. Schedule C either as income or reduction of expense.

Solomon (talk|edits) said:

20 January 2007
I vote for personal property rental income (not being in the personal property rental business) going on Line 21 of 1040 with no associated expenses. If there were associated expenses, they would go on Line 36 with a description of PPR.

Deback (talk|edits) said:

January 21, 2007
Solomon - Are you answering the poster's original question or the question you posted later on in this thread?

Solomon (talk|edits) said:

21 January 2007
I think both.

Kathyt (talk|edits) said:

21 January 2007
I say rental on a schedule E, renting a space in a salon just like a business renting a little booth in the mall. I had to research this once for a client of mine and I found the answer but I can't remember off the top of my head where I found it, I thought it was the MSSP Larry mentioned but I'm not sure. Anyway what I remember is that the answer depends on several things, is the person really renting a chair, or is a commission - it depends - does the person have their own phone, make their own appointments, use their own supplies and products? Is the person really self employeed, renting a space in a shop, does the person pay a set amount for the space, or does the person pay a percentage of sales? Does the person take care of her own sales? If the person is really working for the salon, or working for herself? If the person is working for herself, then it's rent. If the person is working for the salon, then the person is an employee. I can't see this being subject to SE tax for the person who owns the salon if the person is really just renting the space. When Jackson Hewlet sets up tax shop in Walmart are they paying rent for that space or commission? That's rent the way I see it. I think this is the same situation.

Solomon (talk|edits) said:

21 January 2007
If it is space, I agree with Kathyt. If it is a chair, I agree with my prior post - assuming no employee/employer relationship. Perhaps the original poster should clarify.

Death&Taxes (talk|edits) said:

21 January 2007
My memory of the ones I have seen was that it was a percentage of sales; the reason a person would do it was to build their own following and go off elsewhere, or be hired on better terms elsewhere. Thus I recall a shop with a big sign "Jeff is here." I am also sure that circumstances differ with each instance, but if Sch E it raises another issue and that is, why shouldn't a portion of the rent paid for the premises then go to Sch E to net it out. At least that answers the self-employment dodge question.

Deback (talk|edits) said:

January 21, 2007
Here are some more questions (but no answers):

Salon Publications

Deback (talk|edits) said:

January 21, 2007
Click on Beauticians and Employment

Deback (talk|edits) said:

January 21, 2007
Beauty Salon Articles that probably don't answer the question:

Ways & Means Committee Article

Ricardian Rent Theory Revisited

Deback (talk|edits) said:

January 21, 2007
Extending Ricardian Rent Theory

Deback (talk|edits) said:

January 21, 2007
A non-authoritative answer, finally:

Fiducial Small Business Update, TOP TAX QUESTIONS OF THE MONTH


Search for: chair rental

Death&Taxes (talk|edits) said:

21 January 2007
"The rental of the space is incidental to the provision of the services. As such, the chair rental would be considered to be a trade or business and not a real property rental." Incidental, that was the word I was searching for, and note in that case, there were more chairs being rented than operated by the owner if I read it correctly. Enough....time to watch "Waking Ned Devine" which is fast becoming a favorite around here.

Deback (talk|edits) said:

January 21, 2007
Beauticians Guide in Washington State

What activities are taxable under service and other activities B&O tax?

Income derived from providing haircuts, coloring, permanents, manicures, massage therapy, booth/ chair rental, etc., is taxable under the service and other activities classification.

Solomon (talk|edits) said:

21 January 2007
The only authoritative concepts I can bring to mind that would require Sch C for the chair/booth rental are Reg. 1.469-4 and Reg. 1.469-4T. Granted the regs pertain to PAL's. Were it possible to extend these concepts to the matter at hand, the problem is that the aggregations in those regs. which would create an appropriate economic unit are elective - not mandatory.

Kathyt (talk|edits) said:

21 January 2007
Let's look at the question on your Fiducial Small Bus Update; the answer doesn't say it is subject to SE tax for all chair rentals, only for the person asking the question. The person asking the question provided a receptionist to make appointments, a hair washer, clean up services and supplies. The answer said the rental of space is incidental to the provision of the services. In this person's case, yes it is SE taxable, sch C. In my post I said it depends on a lot of things. If a person has their own phone, makes their own appointments, sets their own fees, buys thier own supplies, that's another story. Not SE taxable in this case. I have a couple of clients who do this and I am convinced in my client's situation it is not SE taxable, but you have to look at all the facts, it's not as simple as the question from the original post. And just because Washington taxes it as a service doesn't mean the IRS considers it SE taxable.

Solomon (talk|edits) said:

21 January 2007
I am going to sleep agreeing with Kat - facts and circumstances. Boy, what a topic.

Deback (talk|edits) said:

January 21, 2007
I realize all of this, Kathy. I'll agree that chair rental is not always subject to SE tax and that it depends on each salon owner's situation. Your first response was Schedule E, and then you went on to say that it depends on several things. There is no correct answer to Lily's original question right now, because we don't have all of the facts for her particular situation. And she has not responded since asking the question, so we are having to make assumptions about her situation.

Chase (talk|edits) said:

21 January 2007
Hello: I'm working on a salon today with this very situation. I am still not clear as to the appropriate placement of the nail chair rentals. The manicurists make their own appointments, buy their own supplies, etc. Of course, any money paid to the hair salon is going into the bank account so I had planned on making the income equal the bank deposits (cash business, of course :)) But now maybe that's not appropriate?

Death&Taxes (talk|edits) said:

21 January 2007
I just don't see how you can move the income to Schedule E without moving a prorated share of the expense for that same space to Schedule E also, which might include proration of rent, cleaning services, contents & perhaps liability insurance and the like. Can't have it one way for income and another for the expense; that is why the term 'incidental to the providing of services' is used, so that we don't get into a game of measuring.


 btw, A CPA and I rent a room in a bankruptcy lawyer's office in Philadelphia for a flat monthly fee.  There is no door for the room; it sits between the owner's office and his screener's office.  We use his reception room and can use his conference room and the kitchen, our clients are buzzed in by their intercome system and I know my co-renter takes calls on his phones.  Our names are on the door.  Our lease is totally informal though he bills us monthly.  He pays the suite rent, insurance and City occupancy tax.  Our rent is incidental to his services. [actually I've sent him three clients but run the other way when he wants to set me up with one of his problem children....I tell him, 'call Grace' the CPA]

Deback (talk|edits) said:

January 21, 2007
I agree, D&T. What a nightmare it would be to figure which expenses should be prorated and what percentage of those expenses to prorate on Schedule E (and I don't think circumventing the SE tax in this case would pass an IRS audit). I believe the only situation where chair rental income should be reported on Sch E is when the owner does not participate in the business (except for owning or renting the building), the beauticians buy and sell their own products, and his sole source of income is from chair rentals. In that rare case, his total income and expenses would be reported on Sch E. I don't personally have any beauty shop clients with this situation.


Unrelated: I just found an old court case relating to whether beauticians were employees or independent contractors. This case is not related to the question in this discussion, but I'm posting the link for any who are interested.

CHARLES R. CLARKE, d.b.a. MAXI’S TODAY’S HAIR

There are also about 50 PLRs on this same subject. It's definitely a facts-and-circumstances issue. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Kathyt (talk|edits) said:

21 January 2007
I see your point about the proration of expenses, I had not thought about that. I am just cetain that I have researched this before, I just can't remember on who or I'd look in the file. I was trying to find something on the IRS site yesterday but I came up empty. I looked for Publication 3518 Beauty, Barber, & Cosmetology Industries; but it seems to have vanished even though it is referenced in pub 4161. I really thought it was in the MSSP but I can't find it. Larry you said you found it, can you link us to it?


Note: It's in RIA's Federal Tax Coordinator which is a subscription service, so I can't put a link to it here. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Tdoyle (talk|edits) said:

January 21, 2007
A Quick Link Page for Publication 3518 has now been added to TaxAlmanac.


- Tim Doyle, TaxAlmanac Moderator - Talk to me 10:35, 21 January 2007 (CST)

Kathyt (talk|edits) said:

21 January 2007
Thanks a lot Tim, I looked everywhere for that Pub. Well it does say that if you rent a booth - a 1099-Misc must be issued if rent paid to a non-corporate landlord is over 600. It doesn't say put on a E not subject to SE but I think that is implied if they are saying the booth renter needs to send a 1099 to the landlord for rent.

Tdoyle (talk|edits) said:

January 21, 2007
You're very welcome. FYI - I just did a Google for Publication 3518 and found those two sites that had it. Now that TaxAlmanac has the page that links to them, it should be easier to find in the future.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 11:13, 21 January 2007 (CST)

Deback (talk|edits) said:

January 21, 2007
Since the IRS no longer has Pub 3518 available, I believe the IRS replaced Pub 3518 with Pub 4161, even though Pub 3518 is mentioned in Pub 4161.

But these publications don't answer the original question. The answer can be found in the instructions for Schedule E and the instructions for Form 8582, although there is no specific mention of chair rentals in a beauty shop. Specifically, what is a rental activity and what is a passive activity?

Also, and more importantly, read the paragraph on page E-3, Schedule E Instructions, under "Personal Property." I would consider chair rentals to fit with this description of personal property, with examples of equipment and vehicles listed.

Deback (talk|edits) said:

January 21, 2007
Publication 4161 does state this, which is the real answer, in simple terms:

Self-employed (salon or barbershop owner, booth renter, independent contractor) you are responsible for filing and paying all of your own taxes. This would include filing your federal income tax Form 1040, Schedule C, and Schedule SE.

Death&Taxes (talk|edits) said:

21 January 2007
As much as I agree with you, I do think the Service means 'rentee'~~like lessee~~not the person renting the booth to the operator. I think they are trying to sweep up everyone and make sure all pay taxes. Publication 4161 reads more like 'Cosmetology for Dummies.'

Solomon (talk|edits) said:

21 January 2007
Right, not in the business of renting personal property, then Lines 21 and 36 on 1040. The salon is not in that business.

Deback (talk|edits) said:

January 21, 2007
D&T - Are you referring to the text I copied and pasted from 4161? If so, it specifically states "salon or barbershop owner."


Correct, Solomon. The salon is not in the business of renting personal property. Renting chairs, booths, or space to self-employed beauticians is a part of the entire beauty shop business, and the income from the incidental rentals should be reported on Schs C and SE.

Death&Taxes (talk|edits) said:

21 January 2007
I think is what I was reading, but I notice a comma after barbershop owner, booth renter, independent contractor and took that to mean the renter was a separate person. I can see your point also!!!!


Could you imagine if maybe ten of us or so were renting space in the 'Tax Preparation Mall of America,' our booths lined up next to each other. There'd be clients walking from one to the other getting opinions and comparing prices? The noise level would drown out a 747 taking off.

Kathyt (talk|edits) said:

21 January 2007
I found the MSSP by doing a google search but I don't know how to link it, but it said about the same thing as pub 3518. What do you think about how it refers to the salon owners as landlords who should be issued a 1099 for rent over $600? If Pub 3518 is still in existance, I'm not sure, as Deb said it's not available on the IRS site even though it's mentioned in Pub 4161. Anyway, don't you think that if the IRS is referring to them as landlords who should be issued a 1099 for rent that it strongly implies schedule E?


Lhhesscpa (talk|edits) said:

21 January 2007
It's here. Wonder why it's not on the IRS website. -- Larry Hess, CPA, Albuquerque, NM - Talk to me


Deback (talk|edits) said:

January 21, 2007
No, I don't, not based on everything else I've read about "being incidental to the business", etc. In 32 years, I've never heard or read that a beauty shop owner who receives chair rental income from the beauticians should report that income on Schedule E. In fact, I've never even considered reporting it that way.

Lhhesscpa (talk|edits) said:

21 January 2007
Personally, I think some of the arguments for Sch. E are focusing on renting a chair as an object or a "chair" as another way of saying a space with benefits that include equipment such as a chair. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Deback (talk|edits) said:

January 21, 2007
I fixed Larry's MSSP link above, so it works now.

Deback (talk|edits) said:

January 21, 2007
So, what's your point, Larry? Schedule E or Schedule C for chair rental income?

Lhhesscpa (talk|edits) said:

21 January 2007
C

Deback (talk|edits) said:

January 21, 2007
There are other businesses that rent things as an incidental part of their business. When you rent a Home Depot truck to transport a shower door to your home (because it won't fit in your small car), do you think Home Depot reports that income separately on the rental income form, instead of including the income in their total income?

Kathyt (talk|edits) said:

21 January 2007
Larry I don't think it's actually a chair they are renting, I think it's a space with a chair on it, I pasted this from the MSSP, it doesn't answer our question at all but it refers to the rental as space, that's how I see it, as a space in a shop:

For example, New Jersey regulations do not allow the holder of a shop license to rent space (a booth or chair) to a nonemployee (an independent Contractor). In Oregon, rentals are allowed if the renter is an independent Contractor. In Florida, while salons and barber shops must obtain a license from the Board of Professional Regulation, a booth renter is not required to be licensed by the Board. However, Florida's legislation had a bill pending, at the writing of this guide, that would require booth renters to be licensed with the Board of Professional Regulation. The bill in Florida is a trend started in the salon industry to regulate their booth renters. Check with the state regulatory board to help facilitate in determining the independent contractor and employee issue.

Death&Taxes (talk|edits) said:

21 January 2007
And where is Lily; she started this!

In the MSSP, only when the salon owner has 'all booth rentals' is h/she classified as a landlord. I see no discussion of our issue except by the fact that it is not mentioned in the MSSP. To me omission implies the auditor should find everything on Schedule C. Note too that the Service does not delve into passive income issues, such as warning that some operators might try to use the rental against passive losses. The only point of interest I did note is in the glossary where it differenties between a chair rental and a space rental. Presumably space could be rented to a manicurist, but I think this incidental, and those who put rent on 'E' or Line 21 still must prorate the costs.


I did read one other thought that interests me, and that is that the operator renting the booth can also be earning commissions by selling the owner's products that are in the inventory, however, small that inventory is.  


Interesting fact in the Employee vs Subcontractor section is that in New Jersey a licensed owner cannot rent booths to others. Now I will know what to do when the people at Basic Cuts, with their $7 haircuts, approach me.

Deback (talk|edits) said:

January 21, 2007
Basically, renting a chair, space, or booth, is the right to do business in the owner's shop and the right to use the owner's chair, table, and floor space. Most beauty shops are this way, although, I think there may be shops where the ICs have to bring in their own chairs and tables.

The various state regulations really don't answer the question of which schedule to use to report the "rental" income.

It sure would be nice if the IRS addressed the different occupations with more details, so we wouldn't have to continue arguing about semantics!

Poorhouse Road (talk|edits) said:

21 January 2007
I've just read all the post and for what its worth here's my two cents. I do barbers and beauticians. Most of them have small shops with several extra chairs. They recieve a fixed rent each month for those chairs. Those chair's renters come and go, but their cost are always there regardless whether they have no chairs rented or several chairs rented. Rent is rent and they do nothing to earn that rent. The extra chairs are written off on Schedule E while overhead is written off on Schedule C.

Deback (talk|edits) said:

January 21, 2007
I wonder what answers we would get if each of us called the IRS (at 1-800-829-1040) three times and asked them the question about which schedule to use to report "chair rental" income?

Lhhesscpa (talk|edits) said:

21 January 2007
I think D&T & Deb have analyzed the issue the best. Take a look at Sec 1402 and Reg Sec 1402-1(a) that exempts from SE tax rents received from real estate. I can't see how the chair or booth rental can rise to the rental of real estate. I think it has to be part of trade or business activity. So, most likely, Schedule C is the right place to report it. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Death&Taxes (talk|edits) said:

21 January 2007
So much bandwidth, so little time. :)

Deback (talk|edits) said:

January 21, 2007
Well, I'm embarrassed to say this, but I just pulled out a folder for a S/E beautician, with a shop in her home, who rents a chair to one other beautician. From 1995 through 1999, I reported the rental income on Sch E, and from 2000 through 2005, I included the income in her total income on Sch C. I have no idea why I changed this for 2000, because there are no notes in the folder. It could be that I forgot to report the rent on Sch E for 2000 and just kept doing it that way ever since then. When I opened the 2005 program a few minutes ago, I saw a blank Sch E, with a description "Beauty Shop Chair Rental", and I thought to myself, "Oops!" So, now I have to find out which schedule is right!

Kevinh5 (talk|edits) said:

21 January 2007
Poorhouse, Rent is not always Sch E Rental Income - which is why we are having this discussion - the rental of personal property goes on Sch C, the rental of real estate goes on Sch E. The instructions for Sch E even say this.

Deback (talk|edits) said:

January 21, 2007
Good, Kevin. I think I'm going to continue using Sch C for the chair rental income. I know of one other client I have with this situation, and I've been reporting all of her income on Sch C since tax year 1976. I don't think any of my other beauty shops have chair rental income.


But if anyone finds anything in writing that specifies Sch E for chair rental income, I would definitely want to know about it. I still think the paragraph for Personal Property in the Sch E instructions does say it all.

Deback (talk|edits) said:

January 21, 2007
I finally got around to reading the MSSP that was posted earlier.


"Rental Revenue

If the salon has all booth rentals, the salon owner is a landlord. Verify the available space and the amount that is occupied."


I would agree with this, and is what I said earlier (way up there ^^^^^^). If the salon is comprised of all booth rentals, the owner would be the landlord, and I would assume the rental receipts would be entered on Sch. E.

Kevinh5 (talk|edits) said:

21 January 2007
OK, now let's expand the question - an Antique Mall rents "floor space" to various people who sell junk. The "tenants" pay $200 a month + 10% of all sales to the owner of the mall. The owner of the mall is the one operating the cash register and collects all sales, deducts the 10% commission and rent, and writes a check to the booth renter each month. There is no rental of personal property, but I think this rises to a trade or business, and therefore should be reported as gross receipts on Sch C. Any debate?

Deback (talk|edits) said:

January 21, 2007
I agree. But if the owner of the mall did not participate in any of the tenants' activities and just paid his bills for the mortgage, insurance, utilities, repairs, etc., then I believe the owner's gross receipts from renting the spaces would be reported on Sch E.

Death&Taxes (talk|edits) said:

21 January 2007
Agree with Deb: if each tenant had his own cash register and turned in a sales report to pay his commission, I'd turn it around.

Tdoyle (talk|edits) said:

January 21, 2007
It looks as though there are more MSSPs on this site that are not on the IRS website. Looks like we have more work to do to get Quick Link Pages for all of the MSSPs here on TaxAlmanac.


- Tim Doyle, TaxAlmanac Moderator - Talk to me 16:46, 21 January 2007 (CST)

Kathyt (talk|edits) said:

21 January 2007
I really like those MSSP's; I have found them very helpful in the past in various situations. I have to agree that in this situation, it does say if all spaces are rental... which as Deb said earlier is usually not the case. I just have it stuck in my head though that I researched this is the past and found the answer. I remember it because it was a new client and when she came to me with her prior year with the rental on E I had never seen this before, I thought the prior return was wrong, that this rental was a tricky way of getting out of paying employees, and that's when I researched it. I remember being very surprised at what I found. I can picture the lady's face clear as day but I can't remember her name so that I can pull her file and look in my notes. I know that in some cases rent could be SE taxable, in this case I still think they are renting more than a chair, but a space in the salon; still it does say ALL in the MSSP. Little bit off the subject, but what the heck, we've come this far, so has anyone ever had a construction worker who gets a W-2 or 1099 non employee comp for working, and a 1099 Rent for tool rental or truck rental? I used to get those all the time but I haven't in a while now. If you had one of these, what did you do with it? Personal property rental or SE taxable?

Death&Taxes (talk|edits) said:

21 January 2007
Personal property rental on Line 21, certainly not SE taxable. He is not in the tool rental business.


Don't feel bad; I had to do three years 1040X to eliminate SE tax on a deputy sheriff who was paid notary fees as part of her job a number of years ago, and I had to learn about it from her.

Skhyatt (talk|edits) said:

22 January 2007
I vote for Sch C. I don't see where you can split it off onto sch E. The person is in the business of cutting hair, not renting out property.

LILY (talk|edits) said:

28 January 2007
I am going to print out all these answers and sort thru them in order to determine a consensus.

I have not been around because it is year end payroll time and tax returns are beginning to drift in. I do appreciate the effort everyone has put into answering this question. I found the MSSP and have saved it to read in full later. On a video inventory vs purchase questions, I was referred to an IRS audit guide. Is there an IRS audit guide for this question? I need to bookmark and save the above discussion for later use. About my client, this is a new client who has just started the business in late December and I haven't heard back for her,yet. So I have little information regarding what is being supplied. I have a small problem. I set my nickname up and then discover I should have told who and what I am. On my page, it calls me Jane or John Doe. Moderator, please leave a message on my page and explain this to me. Thank you all for your hard work. Lily

XZiler8r (talk|edits) said:

21 February 2007
With my little expertise, I'd go with Sch C. I thought that Sch E page 1 was only for rental property rented out

Skhyatt (talk|edits) said:

27 November 2007
Riley, would be interested in your opinion on this topic. I believe the "booth rental" would be reported on sch C in this case.

Johnhuddleston (talk|edits) said:

27 November 2007
I think this is active income, not passive. There are cases on renting office space when other services are provided (e.g. library, reception, etc). Those cases indicate it is active and not passive. I believe this is space rented and not personal property (although there is a chair in the space). You are not really paying for the chair. It's not like they would let you bring your own chair. If the income is active, does that mean it is subject to SE tax. I'm not sure but I don't think so. I believe it is analogous to the office space cases. But as I recall, the issue there was passive/active. Maybe one of the cases does mention SE tax?

John Huddleston

Donniecastleman (talk|edits) said:

27 November 2007
Boy, you guys have beat this topic to death! I say Schedule C unfortunately because you're going to have a hell of a time splitting up your costs to deduct on either E or C, it all goes into active business ongoing income so it's C.

Kkubic (talk|edits) said:

26 March 2009
Ok . . . hopefully this will put the entire discussion to rest. Here is a link to the IRS publication titled "Federal Tax Guidlines for the Cosmetology and Barbering Industry". http://permanent.access.gpo.gov/lps46282/p4161.pdf

Good luck!

FLAcct (talk|edits) said:

26 March 2009
It's late - I'm tired - but I don't see anything in there that tells us if booth rental belongs on Schedule C or Schedule E. Do you?

Death&Taxes (talk|edits) said:

26 March 2009
Exhuming the dead, huh? It's flashy but says little to the question of the income in the hands of the salon owner.

Deback (talk|edits) said:

March 26, 2009
I'm not even gonna look at it, because I'm satisfied that personal property rentals are reported on Sch C. The instructions are clear on this.

Taxea (talk|edits) said:

26 March 2009
I have several clients that rent space, barber shops, tattoo parlors, beauty salons...I have always considered that the rental of these areas was a part of the business (not an ordinary rental) and have treated it as business income. After all the client went into the business with the express idea of renting out the other "booths". I say SE tax applies. Total rental of the building is an expense and the booth/chair/etc is rental income. taxea

Tsedtal (talk|edits) said:

9 April 2009
Well I have read all of this and have a different twist. I have a spa. They are a LLC and file a partnership return. There are 2 managers. Each operates their "business" independently, ie income, expenses etc. When they rented the space, they had it built out into 5 rooms. They occupy 2 and "rent" the other 3 out. The renters provide their own phones, credit card machines, make their own appts and set their own hours. One manager is an aesthetician the other is a cosmotologist. They have agreed to "run" their own businesses and split the "rent". They just started in 2008 and only have $1200 of "rent" income. I am trying to decide if the "rent" goes on form 8825 or if they should include this as active income. Is this any different because there are separate rooms? I do have a beauty shop that I inherited that has the rental of the chairs on the sch e along with the rental of the space next door. The pertinent expenses are allocated to the sch E. Any further direction on this is appreciated!

RoyDaleOne (talk|edits) said:

10 April 2009
REV. RUL. 57-110

S.S.T. 236, C.B. 1937-2, 399

Mssp: Beauty and Barber Shops:

Quote

Employee vs. Independent Contractor

  1. How many receptionists are employed? 
 
  2. How is the weekly/monthly rental rate determined? 
 
  3. How much is the weekly/monthly rental rate? 
 
  4. Does the individual rent a particular space? 
 
  5. Who is responsible for damage to the chair? 
 
  6. Is there a maintenance charge for the lease? 
 
  7. Are there price requirements for the lease? 
 
  8. Who maintains the individual's appointment book? 
 
  9. Who collects the money earned by the individual? 
 
  10. Who pays for the individual's supplies? 
 
  11. Who maintains the books and records of the individual? 
 
  12. Who pays for the phone system in the salon? 
 
  13. How many phone lines are in the salon? 
 
  14. Are there any manicurists? 
 
  15. Compensation? 
 
  16. Are there assistants who only wash hair? 
 
  17. How are the assistants compensated? 


Rental Revenue 
 
  If the salon has all booth rentals, the salon owner is a landlord. Verify the available space and the amount that is occupied. 


State Regulatory Authority 
 
  While the Service is not bound by State laws or determinations on this issue, State laws and regulations may be helpful to the examiner in analyzing the facts. The salon industry is regulated by each State Board of Cosmetology. Most states have a set of regulations. 
 

3. Booth Rentals -- Potential Non-filers

  With the increase in booth rentals, there is a strong possibility that the non-filing of Federal tax returns will increase. The State Board of Cosmetology should have information on which salons have rentals. The Board should also have a list of licenses in the shop at the last inspection. With this list check IDRS and identify the non-filers. 

RENTAL REVENUE - Source of income from leasing a specific area in a salon.

End of Quotes


I don't see how this activity is not a rental activity, the "landlord" must provide significant services, not normally provided, while this maybe possible, appointment taking, and hair shampooing, if provided as a part of the rental, are the two activities that could be significant services.

The rules of Section 469 as applied to rentals (including real or personal property) are difficult to escape. Where is Harry when you need him?

Utilities, security, cleaning, repairs, maintenance, payment of property taxes are all part of the normal activities of the rental business.

Also, note that the activities of the independent contractor can not be attributed to the landlord.

As an aside, my barber uses the appointment book along with other people and makes appoints for everyone, but the appointment book belongs to the landlord.

Regs. Sec. 1.469-1T. General rules

Tsedtal (talk|edits) said:

14 April 2009
Okay, maybe I am just brain dead. This has been the most difficult tax season I have suffered through in a while. Can't chalk it up to just one thing, but a multitude of little things. So back to my problem, I did not consider that if the rental and active business went on the same 1065 that both would be considered passive. Due to bonus depreciation, there is a loss on the "business" and the rental. They are now both limited as passive. Am I missing something at this late date and time?

Tsedtal (talk|edits) said:

14 April 2009
Sorry, brain dead and software issues. I figured it out.

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