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Portable Tenant Screening Report: A Comprehensive Guide
Discover the benefits and considerations of Portable Tenant Screening Reports (PTSRs), which offer a cost-effective, reusable screening option for tenants and require...
Unless you have set up your rental business as a corporation, an LLC treated as a corporation, or one of the other standard business structures, your small but mighty rental business will be defined as a sole proprietorship for tax purposes. What exactly is a sole proprietorship, you ask?
A sole proprietorship is a business that is operated by an individual owner. In short, a sole proprietor draws no distinction between the small business owner (you, the landlord) and the business entity (your rentals) for tax purposes, so you will pay your business taxes through your own personal taxes. Here are a couple of other reasons sole proprietorships are unique:
Because there’s no distinction between you and your rental business, sole proprietorships are considered a “pass-through business,” meaning the business’s profits or losses pass through to the owner’s personal tax return.
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As a sole proprietor landlord, it’s important to know which sole proprietorship taxes you’ll pay and how they might affect your rental business. Each type of tax has its own requirements for reporting and payment. The types of taxes are as follows:
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The main difference between reporting income from your sole proprietorship and reporting earnings from a job as an individual is that you must fill out two forms to successfully pay federal income tax for the year.
First, sole proprietors must fill out Form 1040, which is the standard individual tax return. This form reports personal income. But to report business income, landlords or sole proprietors will fill out an additional form known as Schedule C – which reports business profits and losses.
To complete the Schedule C form, calculate the taxable income of the rental business, including all income and business expenses. The outcome of this calculation (income minus expenses) is known as the net income (the amount of taxable business income).
This net income or loss of the rental business is entered on Line 31 of the Schedule C, along with the landlord’s other income or losses. If the business has a profit, then the figure is entered on Line 3 of the Form 1040. Losses may be used to reduce the landlord’s total adjusted gross income (the income before exemptions and deductions) on the tax return.
Sole proprietor landlords’ tax bracket and the amount of federal income tax owed will be based on your combined income from both forms – Form 1040 and Schedule C.
There’s no need to beat around the proverbial bush – tax deductions are every small business’s favorite part of doing taxes. Thankfully, there are several major deductions sole proprietor landlords can write off that will help reduce net business income, and thus, taxable income, which could equate to owing less in taxes. So when you’re filling out your tax forms keep these deductions top of mind:
We recommend always speaking to a tax professional for advice about your specific tax situation.
Yes, sole proprietor landlords are taxed at the individual tax rate, just like the owner was before starting their rental business. They report their business income and expenses on their personal income tax returns, rather than on a separate business tax return like a corporation or some of the other business structures would.
No, sole proprietorships do not have to pay a business license fee, seeing that they do not register their business with the state they’re located in.
Sole proprietors pay taxes on both their personal income and business income. Because the business itself is not taxed separately, sole proprietors pay taxes on business income on their personal tax returns.
Two of the top advantages of a sole proprietorship are minimal paperwork and no to low set-up costs. Additionally, sole proprietorships can be extremely easy to maintain as compared to other business structures.
Some of the disadvantages of a sole proprietorship include no liability protection, financing and business credit is harder to procure, and potential lack of financial control and difficulty tracking expenses.
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