Schedule C or E?


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We have this situation where wife's store had extra space so we took in two other sellers and made it a shared selling space. Took the other's share of rent and expenses and tossed it into Schedule C revenue. Guess from a self-employment tax stand point perhaps not the best way as opposed to using Schedule E However, they also received services from us so their payments were really in a way more of a fixed consignment fee than "rent", that is how I figured the tax people would look at it. However now we are planning on pulling wife's money losing operation out and turning the whole place over to one of our subleases. My plan at that point of conversion, since we would no longer be running a Schedule C business there, would be to shift the remaining sublease payments from them and lease payments we make to the owner to Schedule E as a passive activity. Does that seem to make sense even though we don't "own" the property? Besides shifting to Schedule E on conversion, one other thing I would like feedback on would be any problem deducting the passive loss since the sublease payments will not cover the lease payments and we don't actually "own" the property. We are basically cutting our losses on the wife's less than profitable business idea. I suspect with the Schedule C loss our AGI for 2009 will not be much over and maybe less than $100K depending on what happens on Schedule D.
 
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