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QUESTION DETAIL
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I'm sole proprietor of an art & tattoo studio in CT. I pay rent to a landlord, but I also charge a monthly rent to another artist for a portion of the space - a sort of sublet situation. I do not profit from this amount, but it helps to offset a portion of my expenses. He works independently and is not an employee of my business. I need to know how or if I need to report this as additional income. Currently, I file a Schedule C and report my entire rental amount on line 20b as a business expense. Should I be subtracting this sublet amount from my line 20b amount? Or should I be reporting it as supplemental income on a schedule E even though I do not own the property, I have no net gain from the amount, and I am not in the real estate business? Which way would be less taxable? I have already filed and would need to file a 1040x to address this, but I'd like to know which way is best.
ANSWER
The BIDaWIZ Team's Answer:
You should be reporting this income on Schedule E as a passive activity and allocate a portion of the expenses you pay that specifically relate to that sublet income on Schedule E. For instance, if your monthly rent is $1,000 and you sublet 20% of the space that is used exclusively for the other person and you charge X, you would report X as your income on Schedule E and your expenses as $1,000 X 20% or $200.
