Since Airbnb launched in 2008, home sharing has taken the world by storm. And with all fast-growing businesses, a lot of the success we’ve seen has come with its fair share of growing pains for Airbnb hosts. One major difficulty we hear from our hosts deal with (after a successful year) is Airbnb taxes and accounting. To make that just a little easier, below are some of the top tax and accounting items to consider in 2018 from Shared Economy CPA, the leading tax and accounting firm for home sharers.
For tax purposes, most shared economy workers are considered 1099 contractors. That means that from a platform’s perspective such as Airbnb, you are an independent contractor and you’re responsible for all taxes and expenses related to your business. As a result, if you earn more than $400 on any home sharing platform, you will need a report that income on your taxes and will be subject to self-employment taxes on net income after deductions.
On the one hand, there is a huge benefit to being a business, since you don’t get taxed on gross earnings, only net after all your deductions (see below for more information on deductions). On the other, this also means that you will have to save a portion of earnings to make sure you are able to pay the taxes you owe. Generally, taxes are due on April 15 every year, however, with 1099 income, you may also have to pay quarterly estimated taxes or else get penalized. You are required to pay quarterly taxes if you owe or are projected to owe $1,000 or more in taxes for the year. If you owed taxes on your home sharing business last year, you will also be required to make estimated taxes calculated as 90% of your prior year tax liability. Therefore, we recommend estimating your taxes throughout the year to monitor how much tax is owed and whether you are required to make a quarterly payment. A great way to do that is to work with a rockstar accountant who knows taxes and implications for vacation rental owners.
If you rent on Airbnb, the first step is to determine how much of your Airbnb gross income is taxable and whether it is taxable at all. For example, if you rent your own home for less than 15 days per year, you do not owe Airbnb taxes on that income. If you operate a rental you don’t live in, the rule is a little more complicated since you will also need to “live” in the property for 14 days and rent your property for less than 15 days per year.
Additionally, depending on the location of your property, you may also be liable to pay Transient Occupancy Taxes (TOT) depending on where you rent. If you are in fact required to pay TOT, Airbnb may automatically take those taxes out of your earnings but check your earnings statement, because that is not always the case. You do not have to put aside money for this tax if Airbnb withholds on your behalf, but it is important that you know Airbnb will take the money owed from your earnings up front. In certain cases, you may be required to report your earnings to your local city of finance even if Airbnb collects the TOT on your behalf (such as the cities of Las Vegas, Los Angeles, and Portland). However, we recommend that you check with your local municipalities’ department of finance to confirm.
There are many expenses required to keep your listing looking good, and ensure that your clients leave your Airbnb satisfied with their stay. Many of these expenses are in fact deductible. You’ll want to keep records of these for major purchases such as furniture and supplies. For Airbnb hosts who own their home, the biggest and often more complicated deduction has to do with the depreciation of your home. Depreciating your home helps determine how much of your asset’s value has been used up on an annual basis. You would take the total purchase price, assign a business percentage, then spread the cost over its useful life (as of 2018, 20 years). For Airbnb owners, the cost of remodeling or improving your property can also be depreciated for the business. This depreciation can allow you to claim a deduction on your Airbnb taxes for each year that you run your vacation rental business.
Additionally, you can find deductions on assets that you’re purchased solely for your Airbnb. You maybe be able to expense the full amount in a given year using what’s called the Section 179 deduction. This deduction allows you to depreciate the asset in the year of purchase, as opposed to over a number of years. Items that can be expensed in one year via the Section 179 deduction include:
The IRS established a safe harbor rule that allows hosts to deduct expenses that might otherwise be considered improvements and subject to depreciation. The safe harbor rule allows you to deduct a certain amount in a single year without having to record every receipt to support the deductions. To qualify for the safe harbor rule, your property must have an unadjusted basis of $1 million or less and the total amount of your expenses must also not exceed $10,000 or 2% of the property on a per building basis. This can be a substantial deduction to allow improvements to your rental.
On December 22, 2017 Congress enacted the Tax Cuts and Jobs Act which changed the tax brackets for the 2018 tax year. The new tax brackets essentially lowered that tax rate for some of the brackets, but not for all. Additionally, there was a standard deduction was doubled for all filers. While this deduction may seem beneficial across the board, that may not be the case for some taxpayers. The sharp increase in the standard deduction can make it harder to itemize deductions because the itemized deductions may not exceed standard deductions.
For those that live in states with high property taxes or high-income taxes, one major change is that the deduction for state and local income taxes is limited to a combined $10,000. Residents of high-tax states such as California, New York, New Jersey, and Florida (property taxes) will feel this the most. This new limit is $10,000 which means that you will not be able to deduct those taxes on your federal tax return.
Finally, with the TCJA, Congress created a “pass-thru” deduction which is 20% of qualified business income. That means that for all pass-thru businesses (including Airbnb), that you will automatically get a 20% reduction in taxable income, which is a significant reduction in tax for business owners that are set up either as a Sole Proprietor, Partnership, or S Corporation.