Here are just a few valuable nuggets we’ve put together after reading Optimize Your Airbnb.
by Miguel Alexander Centeno, Partner
As an advisor to Airbnb hosts across the country, we’re constantly asking, how can we add value for our clients? We spend hours keeping up with the latest changes in the short-term rental space so that we can show clients how to reap tax benefits from their investments and how to minimize their taxes once they’re starting to make money. Our number one goal is to make clients’ lives easier when it comes to accounting and tax. But we also get the question, 'What are your other clients doing that we should do?' And it wasn’t until I read Daniel Rusteen’s Optimize Your Airbnb that I realized there was so much more clients can do to make their lives easier as Airbnb hosts, beyond tax and accounting. After a client suggested the book, we felt that we had to share with our community, since we are now convinced: this book will make your life easier, your listing better, and your payouts bigger.
Here are just a few valuable nuggets we’ve put together after reading Optimize Your Airbnb.
Your more physical hosting style, that is how you handle issues, how you have your property set up, and how you clean up after the guests leave the property. Your Hosting style will heavily impact your reviews and your bookings.
Automate Your Responses
This automation applies to the early inquiries for guests that are looking for very basic information regarding your bookings. It is also able to automate communication with cleaning and check-in teams, making the process simpler for the host. Some of the software that is available allows hosts to generate electronic guidebooks, receive payments in advance, and monitor noise levels and guests within the property.
Communication is The Key
The messages that go back and forth from you and your guests need to be efficient and only information that the guest needs to know. This includes booking inquiries and confirmations, check-in and check-out messages, and review reminders. A completed host profile is keys for guests. If you are able to have a detailed yet short profile and description, the guests will trust you more which is often what will tilt them to your listing from others when they begin to narrow down their options.
Be Pet Friendly
Having a pet friendly listing will decrease your competition and pet owners often times stay longer than non-pet owners. They also have a tendency to leave higher reviews because they were able to bring a pet.
Be Clean, Really Clean
According to Daniel, cleaning is the #1 complaint for Airbnb guests which is why you need a cleaning team that is quick, timely, but also very effective. Your Airbnb needs to be perfect, so this is not an area that you want to budget.
Avoid Noise Complaints
I know a big worry that hosts have with they have guests is noise level and the amount of guests that are in the house. Often times, you will find out that your guests are throwing a party or making a lot of noise due to a noise complaint, but by then it is too late to solve the problem. Daniel discusses some hardware that can be installed in your house that can give you the host, complete peace of mind when it comes to noise and overpopulation in your property.
If your listing is suitable for an event, charge a commercial rate, or generally double your normal rate. Events are great because they often last only a few hours, so you’re getting double the payout in a fraction of the time.
You’ll want to check out Optimize Your Airbnb since Daniel’s expertise can translate to an overall better experience as a host. When you’ve streamlined your business, received raving reviews, and are wondering how to handle the tax and accounting of your success, check out our other posts for Airbnb hosts. Happy hosting!
Carsharing presents a great opportunity for people with cars sitting in their driveway and for entrepreneurs looking to compete with traditional car-rental services. In addition, there can be key tax benefits. If you've earned money this year from sharing your car on Relay Rides, Turo, or Maven, you should know that you may be eligible to take a deduction on your taxes for your vehicle.
The tax code's vehicle Section 179 deduction could potentially save you a lot of money on your taxes. Here is what it is and how to claim it on your 2018 taxes.
What Is Section 179?
A Section 179 deduction allows you to fully deduct the cost of a newly-purchased business asset. For carsharing users, this means that you can use Section 179 to deduct the cost of purchasing or leasing a new or used vehicle for your carsharing business. This in turn reduces your taxable income and your tax bill.
However, your Section 179 deduction amount must not exceed your net carsharing business income for the year. If it does, you are permitted to carryover the deduction to a future tax year.
Section 179 Business Use Rules
In order to qualify for the Section 179 vehicle deduction, you must put the vehicle in service (for business use) within the same year that you plan to claim the deduction. That means that if you plan to claim a Section 179 deduction in 2018, you must put the vehicle into service between January 1st and December 31st of this year. You must also use the vehicle that you would like to deduct for business more than 50 percent of the time over the course of the full 5-year depreciation period.
If at any time you use the vehicle for less than 50 percent of the time during the 5-year period, you will be required to repay the Section 179 deduction and your bonus depreciation. That is why it is vital that you keep track of your business mileage at all times.
Which Vehicles Qualify for Section 179?
Both new and used vehicles qualify for Section 179 deduction. What matters most is the weight and type of vehicle because the limits on the Section 179 are lower for passenger vehicles that have a gross vehicle weight rating (GVWR) of 6,000 lbs or less. Most passenger cars, including mid-size and compact cars, weigh less than 6,000 lbs, while almost all crossover vehicles, SUVs, trucks, and vans weigh more than 6,000 lbs.
However, the following vehicles are not subject to the passenger vehicle limit including:
Annual Auto Depreciation Limits
For 2018, the maximum Section 179 deduction for a vehicle in excess of 6,000 lbs is $25,000 if the vehicle is placed into service before December 31st. Starting in 2018, a business owner may also purchase up to $2.5 million in business property that qualifies for the Section 179 deduction each year. This means that you can potentially purchase or lease an entire fleet of vehicles to use in your carsharing business and claim deductions for several of the vehicles if your net business income is high enough.
How to Claim Section 179 Deduction on Your Tax Return
In order to correctly calculate your Section 179 deduction, you will need to accurately determine the GVWR of your vehicle. This information can be obtained by looking at the manufacturer’s plate or sticker found in the driver side door jamb of your vehicle.
To claim a Section 179 on your tax return for the current year or a carryover deduction for the prior year, you must complete and attach Form 4562, Depreciation and Amortization to your tax return. Make sure to add lines 9 and 10 to enter the deduction amount on line 12.
New for 2018: Heavy Vehicle Depreciation Bonus
With the new tax law, the rules for claiming Section 179 and the bonus depreciation for a heavy vehicle have changed. If you have a heavy vehicle with a GVWR of 6,000 pounds or more, you can now deduct 100 percent of the cost of the vehicle in one year if the vehicle was used 100 percent for business purposes after September 27, 2017.
Cars don't qualify for unlimited bonus depreciation so this is a special bonus that only business owners who have heavy vehicles can take advantage of. The deduction limit has also been increased to $1 million.
To help you better understand how to claim a Section 179 vehicle deduction, we’ve provided the following example for a heavy vehicle with a GVWR of over 6,000 lbs:
For example, let's say you purchase an SUV for $50,000 and put it into service on the same day on January 1, 2018. You then go on to earn $10,000 from carsharing this year using it 60% for business. Since you engaged in an income producing business, you will likely want to take related expenses including depreciation. Under the bonus depreciation rules, you can deduct 100% of the vehicles cost that you used for business, adjusted for the business percentage. You will be able to deduct $30,000 from your taxable business income this year, giving you a net loss of $20,000. That loss can offset income elsewhere, giving you a tax strategy to use under carsharing.
Most carsharing users buy or lease cars specifically for renting out on carsharing websites. In addition, the websites themselves often have guidelines on the number of miles that a vehicle can have and the year of the model.
Make sure you take all of these factors into consideration before you purchase or rent a vehicle for carsharing so that you can take advantage of the full depreciation schedule on your taxes. If you have other questions about carsharing, depreciation and other tax deductions, contact us for further assistance.
With the passage of the Tax Jobs and Cuts Act of 2017, 2018 brings a number of tax changes for both individuals and businesses. For 1099 contractors, it is especially important that you keep up with these changes so that you can ensure that your taxes are properly filed. To help you keep up with the latest changes, here is a list of the latest 2018 tax updates for 1099 contractors.
New Tax Brackets
For 2018, there are some adjustments to the tax brackets. However, there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35% and 37%. There is also a zero rate. The main difference for 2018 is that the new tax law essentially lowered the rates of some of the tax brackets.
Here is the breakdown by filing status. Pay attention to the differences between 2017's tax brackets and 2018's tax brackets below:
10%: $0 to $9,525
12%: $9,526 to $38,700
22%: $38,701 to $82,500
24%: $82,501 to $157,500
32%: $157,501 to $200,000
35%: $200,001 to $500,000
37%: over $500,001
Married Taxpayers Filing Jointly
10%: $0 to $19,050
12%: $19,051 to $77,400
22%: $77,401 to $165,000
24%: $165,001 to $315,000
32%: $315,001 to $400,000
35%: $400,001 to $600,000
37%: Over $600,000
Taxpayers Filing as Head of Household
10%: $0 to $13,600
12%: $13,601 to $51,800
22%: $51,801 to $82,500
24%: $82,501 to $157,500
32%: $157,501 to $200,000
35%: $200,001 to $500,000
37%: over $500,000
Married Taxpayers Filing Separately
10%: $0 to $9,525
12%: $9,526 to $38,700
22%: $38,701 to $82,500
24%: $82,501 to $157,500
32%: $157,501 to $200,000
35%: $200,001 to $300,000
37%: over $300,000
Standard Deduction Increase
The standard deduction for single taxpayers and married couples filing separately is $12,000 in 2018. This is an increase from $6,500 in 2017. For married couples filing jointly, the standard deduction is $24,000, up from $12,700 in 2017. For heads of households, the standard deduction is $18,000, up from $9,550 in 2017.
For 2018, the additional standard deduction amount for the aged or the blind is $1,300. This amount is increased to $1,600 if the individual is unmarried and is not a surviving spouse. Although this change won't give you a big reduction in your tax liability, anything that can reduce it is always welcome.
While the increase in the standard deduction may be good for some people since it lowers their taxes, it may not be the good for other taxpayers. That is because it makes it more difficult to itemize your deductions since your itemized deductions may not exceed the standard deduction.
Personal Exemption Eliminated for All Taxpayers
The new tax bill eliminates the personal exemption for all taxpayers. However, the significant increases in the standard deduction limits for 2018 give taxpayers some way to offset the loss of the personal exemption.
The new tax law eliminates the Affordable Care Act (ACA) penalty, beginning with 2019 tax returns filed in 2020. However, in 2018 this penalty still applies. For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is unchanged from 2017 at $695. The fee is calculated 2 different ways – as a percentage of your household income, and per person (at $695 each). You’ll pay whichever is higher up to a maximum of $2,085. You pay the fee when you file your federal tax return for the year you don’t have coverage.
If you don't pay the fee, the IRS will hold back the amount of the fee from any future tax refunds. There are no liens, levies, or criminal penalties for failing to pay the fee.
Payroll Tax Changes
Most 1099 contractors are responsible for paying self-employment taxes. There are some changes to the tax rates that you should pay attention to in 2018.
Social Security / Medicare
The total self-employment tax rate for 2018 is 15.3%. It consists of the following:
While the Medicare and Social Security tax rates remain unchanged and the wage base for Medicare remains unlimited as in 2017, the maximum wage base for Social Security taxes has changed. For 2018, Social Security taxes have a maximum wage base limit for 2018 of $128,400.
Federal Unemployment Tax (FUTA)
The wage base for FUTA remains at $7,000. The effective tax rate for 2018 is 0.6%.
New 20% Deduction for Pass-thru Entities
The new tax law has also created an unexpected boon for gig economy workers. Starting in 2018, if you provide a service as a freelancer or as a sole proprietor in the sharing economy, you will be able to deduct 20% of your income from your taxable income. Individuals who earn less than $157,500 and married couples who earn less than $315,000 qualify for the 20% deduction.
This deduction was created especially for sole proprietors, owners of partnerships and other “pass-through entities,” such as S corporations and limited liability companies (LLCs). Unlike C corporations, the business’ profits "pass through" the company's books directly to the owners. On the other hand, C corporations, which are ineligible for this deduction, must pay out profits through dividends to stock holds.
The tax law also offers a formula for determining eligibility beyond these thresholds: 50% of employee wages paid; or 25% of wages plus two percent of the value of qualified property at purchase. We recommend you ask a tax professional how your business qualifies for the 20% deduction.
New Limit on State and Local Taxes (SALT) Deductions
The cap on deductions for state and local taxes is now $10,000. This change will mostly affect 1099 contractors in states with high state income tax rates, such as California and New York. However, you could also be affected if you live in states that have high property taxes, such as New York, New Jersey, Texas, or Florida.
The Standard Mileage Deduction for 2018
The IRS has increased the standard mileage deduction for 2018 to 54.5 cents per mile. This is an increase of 1 cent from 2017. The standard mile deduction offers a way for you decrease your tax bill if you decide that you will itemize your deductions for 2018. When combined with the new 20% pass-through earnings deduction, this deduction could result in some significant savings on your tax bill.
Lower Mortgage Interest Deduction Limit
If you are married filing jointly, in 2018 you now have the option to take the mortgage interest deduction if your property is worth less than $750,000. This is lower than the limit of $1 million in 2017. While this may only affect a small number of taxpayers, it could add up to a decent percentage if you live in California, New Jersey, New York or a few other states.
Summary: The Net Impact For Taxpayers and What You Should Do
While the information about these tax changes is being made available in 2018, keep in mind that these changes will apply to your tax preparation for 2019 for the 2018 year, and won’t be necessarily applicable to tax preparation in 2018 for 2017. It is also important to remember that not all of the new tax rules will take effect immediately. Starting from this year, the changes will be phased in gradually. Some of the delayed changes as a result of the passage of the Tax Jobs and Cuts Act of 2017 will also be fairly complex.
In addition to the changes from the IRS, you will also need to review the 2018 tax changes for your state. Since these recommendations are general ones, you should check with your tax professional to make sure that you've covered all of the changes that will affect you in 2018.
As a practice, our firm is providing clients with a tax comparison that shows their same income under the 2018 rules. Generally, 90% percent of our clients show tax savings in the thousands. To understand the true impact of the 2018 changes, including with the pass-thru 20% deduction, contact our team by connecting with us here.
With all of the excitement about cryptocurrency, it might be easy to forget about the very real tax implications of buying and selling cryptocurrency. There is also still a lot of grey areas when it comes to certain types of transactions. As of 2018, all of the guidance on how to treat cryptocurrency for taxation purposes comes from a bulletin that the IRS issued in 2014, in which the IRS has opted to treat cryptocurrency as property, so there are capital gain (and loss) implications.
That means that if you make profits from the sale of your crypto, those profits are taxed. On the other hand if you incur losses, you may be able to deduct the losses and reduce your tax bill. Given that there are a myriad of ways in which you can transact in crypto, here is a quick rundown of how these different transactions need to be reported on your taxes.
Crypto miners use special software to solve math problems and are issued a certain number or fractions of a coin in exchange. Cryptocurrency mining is the process of adding transaction records to a coin's public ledger of past transactions or blockchain. While not all cryptocurrencies can be mined, some of the most popular ones such as Bitcoin and Ethereum, can be mined.
Some users of cryptocurrency may opt to mine coins for larger rewards instead of purchasing them directly. If you mine coins by using cloud-mining services or your own mining rig, the value of the coins that you mined will be considered as taxable income. Mined coins are considered ordinary income that is equal to the fair market value of the coin on the day that it was mined.
Some people like to trade between cryptocurrencies. If you trade Bitcoin for “altcoins,” such as Ethereum (ETH), in order to take advantage of better pricing or to have the ability to purchase certain altcoins that can only be bought with Bitcoin or Ethereum, each of your trades will generate a capital gain or loss.
Exchanging Cryptocurrency for Fiat Currency
Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes. If you exchange your crypto for fiat currency (e.g. Bitcoin for USD), this transaction will generate a taxable event subject to a capital gain or loss.
Depending on how long you held the crypto before spending it, you may be subject to either a short- or long-term capital gain. If you choose to spend your crypto to pay wages to your employees these payments must be reported by an employer on a Form W-2. These payments are also subject to federal income tax withholding and payroll taxes.
If you use crypto to pay for your other business expenses by making a payment to a U.S. individual or business with a value of $600 or more in a tax year, you will also be required to report the payment to the IRS and the payee via Form 1099 and Form 1096.
An airdrop is when the developer of a crypto project gives away free coins. As a part of the new project, the developer will issue a new coin or token. This is typically done as a marketing tool to get people interested in the developer’s new project.
When people sign up for the airdrop with their Ethereum or Bitcoin addresses, they receive a set amount of the token or coin being offered by the company on a specific date. They may also receive additional free coins or tokens for sharing news about the airdrop with others by recruiting referrals.
When it comes to taxes, airdrops are considered ordinary income on the day of the air drop. That means that the sale of the coins or tokens will trigger a capital gain when they are sold.
How to Prepare Your Taxes
Given that there is still little guidance from the IRS on how transactions via exchanges should be reported, taxpayers are required to self-report. As a result, we strongly recommend that you maintain detailed records of all of your crypto transactions at exchanges. Make sure to also speak to your tax professional about classifying exchanges correctly.
Most exchanges, except for Coinbase, do not issue 1099-K forms nor do they calculate the capital gains or cost basis for the trader. For U.S. tax purposes, transactions using crypto must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of crypto in U.S. dollars as of the date of payment or receipt.
Gains that are made from crypto assets that are bought and sold within a year or less are considered as short term capital gains. If you made gains from assets that were bought and sold after a year, these gains are considered as long term capital gains. Long term capital gains have different rates depending on your income tax rate of 0%, 15% or 20% (if you fall into the top income tax-bracket). However, as a result of the passage of the tax law, the thresholds have changed for 2018.
Here is an example of how to calculate a short term capital gain:
James earns $60,000 per year. He purchase 1 Bitcoin (BTC) for $10 on January 1, 2017 and sells it on November 7th, 2017 for $1,000. The cost basis of his purchase was 410 with a fee of 0.5%, $10.05. The sale income also included a transaction fee of 0.5%, so it was in total $995. Therefore, his capital gain was $995 - $10.05 = $984.95. Since he held his Bitcoin for less than one year, he is required to report short term capital gains on his tax return. The gain is added to any other income he earned from other sources and is taxed at his ordinary tax rate of 28%. James would pay $984.95 * 0.28 = $275.79 in additional taxes.
In some cases, the IRS bulletin can be somewhat ambiguous when it comes to certain types of transactions. As a result, it is probably best to consult a CPA for further assistance before preparing your taxes if you have performed any transactions involving cryptocurrency.
Best Ways to Minimize Taxes from Owning Cryptocurrency
Most of the concerns about the taxation of cryptocurrency stem from the taxes that are owed as a result of buying and selling. If you still want to deal in cryptocurrency and you wish to minimize your tax bill, the best solution is to simply buy and hold for more than 1 year.
By doing so you’ll avoid having to pay any taxes at the short term capital gain rate. Keep in mind that any transactions that you make regardless of whether they are on an exchange or not can impact your tax bill.
As a follow on to our post What is a 1099 and Why Does it Matter, we thought we’d publish a short post on receiving 1099's and filing 1099's for homesharers, which are due January 31 for the previous year.
For platforms such as Airbnb, you will receive a 1099-K if you hit the 200 transaction threshold or reach $20,000 in gross revenues (or “Gross Earnings” according to Airbnb). That means that if you have less than 200 reservations or less than $20,000 in gross revenues, you won’t receive a formal 1099-K from the platform. If you do receive a 1099-K, you’ll need to report the exact amount shown in box 1a as gross receipts on your tax forms and report any fees or commissions as deductions, separately. Any differences between the income shown on the 1099 and the tax form may flag your return for review.
Note that gross receipts do not equal payouts. Payouts are less commissions and fees, so you should look at your transaction history to see what was earned before those expenses. Even without a 1099 for smaller amounts, you will want to report gross earnings and not what was paid.
1099-MISC should be issued anytime you pay $600 in rents or services to contractors. You don’t need to issue 1099’s for personal purposes, only if you intend to deduct the expenses for business. You’ll issue this form to any individual, partnership, or Limited Liability Company (“LLC”). You don’t need to issue 1099’s to corporations.
Typically for homesharers, the top 1099’s that you’ll issue will be:
The cost of not filing
We definitely recommend filing 1099's since penalties for not filing can range from $30 to $100 per form and if it is deemed that you intentionally disregarded the requirement, you will face a minimum penalty of $250 per statement.
The IRS can disallow a deduction for contract work where a 1099 was required but not issued, so you could be looking at paying taxes on contract fees due to the lack of proper documentation. Keep track of payments to contractors in your accounting software or in a simple Excel or Google Sheet where you can easily add up totals per contractor.
HOW TO FILE 1099'S WITH THE IRS
First, you’ll want to issue a Form W9 to your contractors and use that information to fill out the 1099. We recommend issuing these before you have the contractor begin the work. It's much harder to get a W9 filled out after the year is over.
Unfortunately, you can’t simply print a 1099 online and send it to the IRS. You can only mail official 1099-MISC forms to the IRS since each form will contain its own unique document locator number. In fact, sending in the wrong forms carries a $50 penalty. You can pick up hard copies tat your local office supplies store (e.g., Staples or Office Max).
Indicate non-employee compensation in box 7. If you reimbursed your contractors for supplies, you'll need to indicate that in box 7 as well. The total should represent the sum of all payments made including parts and materials.
Check the IRS instructions for how to mail information returns or reach out to your tax pro for detailed advice.
We like to do a lot online these days, including ordering food, selling our services, paying our bills, and even checking our mail from our phones and our laptops.
As the government works to catch up with the digital age, we are starting to see the IRS adapt to our methods. Earlier this year, the Internal Revenue Service (IRS) launched IRS.gov, their new website.
And to get right to the point, there are two primary functions we recommend that everyone know how to use at a minimum:
Paying Your IRS Federal Taxes
Whether you’re calculating your income throughout the year to pay estimated tax before the quarterly deadlines or looking to pay your taxes once your tax return has been successfully filed, you can also pay online, using one of the methods below.
Direct Pay, debit, or credit card
Using the IRS Direct Pay system gives you a secure and free way to pay your owed taxes. You can either pay directly using your checking or savings account or schedule an advance payment process.
If you want to pay with your debit or credit card, you will first need to select a payment processor. This allows you to pay federal taxes online, but you will be charged a varied fee for processing that may or may not be tax deductible.
IRS2Go or E-filing
Using the IRS2Go application allows you to make your payment using Direct Pay with a debit or credit card. It can be downloaded for free from the Apple App Store, Google Play, or even Amazon. The app will also tell you when your return has been received and if you have a refund when you can expect to receive it.
If you are filing your federal tax return electronically, you may choose to file for a scheduled payment with your return. By using the Electronic Funds Withdrawal system, you can pay what you owe directly from your bank account. If you file with a tax professional such as our firm, we’ll ask you your preferred method and if you want to pay your taxes with the filing of your return.
With this method, you have the ability to choose the amount you will be paying and the date you will be doing so, as long as it’s on time. For certain software, you may or may not have to pay a processing fee, and you may also have the choice to pay using a debit or credit card.
You have a couple of other options, as well. You can use the Electronic Federal Tax Payment System (EFTPS) for paying your taxes online. Once you’re registered you are also able to pay by phone by calling 888-555-4477.
Paying by check or with a money order is also an option. You can do so by making your check, cashier’s check, or money order out to the U.S. Treasury. You will need to include your name, address, contact number, and your Social Security or Employer Identification Number located on the front of your choice of payment form. You should always remember to include the tax year and either the tax-related form or the notice number.
If you are unable to pay right away, you have the option to apply for a personal online payment agreement. The installment agreement is set up through direct debit using a direct debit plan to ensure that you don’t have to write and mail a check each month.
Finally, if you are unable to pay because you owe more than you are able to afford, you can try your luck with the Offer in Compromise system. Be aware, however, that not everyone is eligible, so you will have to see if you qualify using the Offer in Compromise Pre-Qualifier.
Paying Your Estimated Quarterly Taxes
Paying estimated taxes online for the simplicity of it, the quickness of the process, and the ease of due process, to be short.
To pay estimated taxes online, you can use the IRS Payments Gateway for any business taxes that will be owed at the end of the year.
Penalties for Late or Unpaid Payments
You must be extremely careful with paying your owed balance or you will face late penalties or penalties for unpaid balances.
Failure to file - you will be penalized if you have not filed your tax return by the due date for returns, or your extended due date.
Failure to pay - when you have not paid the reported taxes listed on your tax return in full by the due date - note that an extension for filing does not extend the time you must pay.
Failure to pay proper estimated tax - when you have not paid enough taxes throughout the year via quarterly estimated tax payments as calculated on your tax return. These penalties are assessed when you file your annual tax return if you fall under 90% of your tax liability.
Dishonored check - when your current bank does not honor your check or any other form of payment that may or may not have been set up by you for the purpose of paying your due balance.
Calculated penalties: what to expect
For a complete list of all the calculated penalties and more information on IRS penalties, you can visit the IRS Common Penalties page.
Downloading Your IRS Transcripts
The IRS’ transcript system is the central database at the IRS that shows what information has been received by the IRS. This includes reports on
Downloading your IRS tax transcript is extremely important for many reasons and is very easy to do. The information reflects your overall income profiles and your compliance with your tax obligation. This is what the IRS checks to determine what kind of taxpayer you are.
Keeping a record of your tax returns each year and also have the tax transcript can actually help you prepare for next year’s tax return.
You may also need this information if you are applying for a loan, starting a business, or buying a home. (Pro tip: Some unscrupulous business owners we’ve known have tried to get loans by preparing a second version of their tax return with higher income, while having filed a low-tax version with the IRS to minimize their taxes. Unfortunately for them, they found out that mortgage companies check the transcripts to see what was actually filed, and do not rely on the paper version they provide. Our advice is that if you plan to apply for a loan in the future, let your CPA or tax professional know).
If you are planning on applying for student financial aid, you will most definitely need a copy of your IRS tax transcripts.
It’s also extremely important that you know all of the information on your tax transcripts that the IRS knows, before you file your tax return. A major flag for the Service is when taxpayers underreport income. They don’t care if you overreport (even if it’s $1,000,000 more than they knew about!), however, if you’re short over $100, on income reporting, they’re going to let you know about it.
Knowing which transcript you need
Because there are different types of IRS tax transcripts, you will need to narrow down which one you are looking for before you opt to obtain yours.
A tax return transcript is your summary for a filed tax return, which includes items accompanied with schedules and forms that were previously filed by you. Changes that the IRS or you made after you have filed the original return won’t be reflected.
A tax account transcript is a summary of your marital status, the return type you filed, your adjusted gross income, and your taxable income. If applicable, it will also indicate any changes that the IRS or you made after filing your tax return.
A wage and income transcript shows all the records of income that the IRS has on file for the you and will include any reported W2’s, 1099’s, and 1098’s.
Obtaining your IRS tax transcripts
Getting your IRS tax transcripts is actually very easy to do. You are able to get a copy of them for the current year and up to the past three years.
Because your transcripts are free, you can use the Get Transcript application by verifying your identity and printing out a copy online immediately.
If you need further help, you can check the Fact Sheet for provided details on the process of completing the application process.
You can also opt for your IRS tax transcripts using Get Transcript by Mail or using the IRS2Go app.
Reviewing Before the End of the Year
Finally, no matter which tools you’re using, to effectively use these, you must do some sort of review of your taxes before the end of the year to figure out whether or not you want to go with changing your tax through tax planning or to consult with a tax professional.
While a consultation with a tax professional can cost a few hundred dollars, if you’re on top of your numbers, you can expect to save multiples over your investment if you’ve used these tools correctly. Tax professionals are able to spot certain things you may or may not have missed or had problems with during the process. It is also a good way to get clarity on some gray areas after an initial review and more specific guidance on the overall process of filing and paying.
Tracking your income and your expenses is the first and one of the most important steps in understanding your tax obligations. Accurately calculating your net income (earnings less deductions) will give you the clarity you need to determine whether you are required to make estimated payments and whether you will be subject to underpayment penalties, for example.
Calculating annual income
Whether you’re paid hourly, weekly, or receive a fixed salary for the year, knowing how much you’ve earned and how much tax you owe is the best way to anticipate requirements.
For those who are paid an hourly wage, estimate your weekly earnings by multiplying the amount you are paid an hour by the number of hours you are working each week.
Next, multiply the total amount by 52, which will give you your gross annual income, and then divide it by 12. This will give you your monthly average income, which is helpful for calculating quarterly income by multiplying that number by three.
If the number of hours you work each week varies, do your best to estimate the average number of the hours worked on a weekly basis. If you receive any commissions or bonuses, you will need to include these using your best estimate, as well.
If you receive non-hourly income, we recommend taking an average weekly amount (average of at least 6 weeks) and multiplying that number by 4.5 to calculate average monthly earnings. To annualize that number, simply multiply your average monthly earnings by 12.
TRACKING YOUR TAX DEDUCTIBLE EXPENSES
Once you calculate your income, the next step is to calculate your tax deductible expenses by the month and by the year.
The IRS code states that business tax deductions should be ordinary and necessary. Ordinary means that other similar businesses are also deducting those expenses. Necessary means that the expense helps you in your business. You just need to make sure to record these four critical things:
If you have credit cards you should also be making a separate spreadsheet for said purchases. In the end, you should have one for the purchases you make with cash or your debit card and one for the purchases you make with your credit card. This can even be a separate tab within the same spreadsheet, but be sure to track separately then add up in a summary of expenses tab.
So far we have talked about direct expenses. You should also be including indirect expenses. These include portions of your rent and utilities if you have a home-based business and potentially, your vehicle and other larger items. While there is no single formula for calculating indirect expenses -- each individual's fact and circumstances will differ -- we can generally say that a percentage based on some kind of "allocation factor" (e.g., square feet, hours worked, or other metric) will be applied to the larger total of expenses (e.g., rent, utilities, automobile expenses). Be sure to track these totals accurately as well as miles driven for business, days your sharing economy asset is rented (home or car), or the square feet in your home 100% dedicated to business. Talk to a tax professional about what a defendable approach would be for these items.
Your spreadsheets should be tailored to track your expenses on a monthly basis and made to help you reflect your monthly, quarterly, and/or annual, income. Generally, we advise putting away 30 percent of net income (after deductions). You can also use your calculator to understand whether you’re overspending or can afford to invest more in yourself through coaching, tools for your business such as software, extra help through virtual assistants, or in physical assets such as computers or office furniture.
Paying your estimated quarterly taxes
Now it’s time for the difficult part: paying. Once you have your net income, the next step is to pay your estimated tax. The best way to do this is online through the IRS.gov site through the IRS Payments Gateway. We typically have clients go through Direct Pay then select “Make A Payment.” Note that this payment requires paying through a bank account, however, we typically recommend it as payment is made to and recorded by the IRS directly. For estimated payments, make the correct selection under “Reason for Payment” as shown below.
penalties for late and unpaid payments
You must be extremely careful with paying your owed balance or you will face late penalties or penalties for underpayment penalties.
Penalties for failure to pay proper estimated tax are assessed when you have not paid enough taxes throughout the year via quarterly estimated tax payments as calculated on your tax return. These penalties are assessed when you file your annual tax return if you fall under 90% of your tax liability.
More and more people are entering the sharing economy at a record pace. According to a survey done by PwC, 19 percent of the total US adult population has now engaged in a sharing economy transaction in some way. Of that growing demographic, many of those engaged as sharing economy workers say that they’ve joined the sharing economy (Airbnb, Uber, Lyft, TaskRabbit, etc.) in an effort to supplement existing income.
Many workers in the sharing economy say that an upcoming vacation, a wedding, or other investments are usually the reasons they will work the extra hours for additional income that may come from Ride or Home Sharing. A study done by Earnest found that 85 percent of side-gig workers average approximately $500 per month which means that they primarily use the income they earn as extra cash and not necessarily as a full-time income.
The study also found that on all of the sharing economy platforms, there is a wide range of earners. Several Airbnb hosts, in their records earned over $10,000 per month, while other hosts earned less than $200 per month.
This trend suggests two things. The first is that the type of worker in the sharing economy is incredibly diverse: sharing economy workers live across the country, they participate in the sharing economy at various levels, and their pre-existing income levels also vary. All these factors vary immensely across the sharing economy. This trend also suggests that sharing economy workers are not doing this exclusively, but rather, typically have other jobs or work that represents the bulk of their time and income.
Our experience at Shared Economy CPA confirms this as many of our clients are full-time professionals or business owners come to us to handle their sharing economy income and expenses. Our clients are already so focused on their pre-existing careers, that going to an expert makes sense.
Most of the feedback we get is, ‘I love doing Airbnb (or insert preferred sharing economy platform here), but I don’t know what the tax implications are or what we should be worried about.’
Inspired by this question, we’ve identified 3 things that all sharing economy workers should know when it comes to taxes.
#1 - Income and Expense - Recording personal versus business records
For most sharing economy workers, expenses related to their side gig activities are usually charged to the same bank account or credit card as their personal expenses. As a result we usually see gross underestimation of the full list of business expenses. A very important step to take here is to identify a full list of things you buy and pay for that benefit the sharing economy business. Even if only a fraction of the good or service benefits the business, the portion attributable to the business can be deducted. Overstating income by not capturing your full list of deductions may subject you to underpayment penalties if you owe over $1,000 in taxes. According to the Wall Street Journal, last year the IRS saw a 40% increase in underpayment penalties, which is partially attributable to sharing economy workers.
According to IRS Publication 535, the IRS issues specific guidelines on how to split a business expense versus a personal expense.
For example, for the business use of your home, the following allocation methods are suggested:
The two methods of allocating business use of your home are based on square footage or the number of rooms.
The first method uses the number of rooms used for business divided by the total number of rooms in your home. The second method takes the square footage of the space that you use for business, divided by the total square footage of the house.
In order to calculate the deduction, some taxpayers opt to use the simplified option offered by the IRS. Under this simplified option, the standard home office deduction is $5 per square foot up to 300 square feet of the area that you have used regularly and exclusively for business. The maximum deduction is $1,500 and you just have to follow the instructions for line 30 of Schedule C in order to determine your deduction.
If you instead prefer to use the regular method, Form 8829, Expenses for Business Use of Your Home will assist you in calculating the deduction.The regular method uses the actual expenses determined and the records maintained for your business in order to calculate the deduction.
The tax laws allow you to use whichever method will result in a larger deduction. As a result, you should make sure to calculate your deduction using both the simplified option and the regular method. Keep in mind that the goal is to reduce your tax liability. Therefore, the simplified option might not be the best one since it’s capped.
Given the complexity of determining your allowed deductions, having a process to record and manage all the business’ expenses is incredibly important for accurately projecting and estimating your net profit from the business. The net profit from your business also determines taxes owed and whether you need to pay quarterly taxes. If you don’t you can get hit with an underpayment penalty when you file your tax return. A great way to segment these expenses is to have a separate bank account for your sharing economy work. Otherwise, we recommend getting software with features that allow you to assign “personal” and “business” categories to your transactions. We recommend free accounting software tools such as Wave Accounting or QuickBooks Self Employed, which can charge between $10 and $25 per month. (Be sure to ask us for a discount code if you are interested in QuickBooks Self Employed.)
In addition, being able to demonstrate a methodology for splitting business versus personal expenses is exceptional way to show auditors you’re not guessing when it comes to figuring out your tax bill. For those reading this who are a client, you’ll know that we have an audit-tested method for splitting and documenting expenses.
#2 - Paying Quarterly Taxes - Knowing when and if you need to pay taxes throughout the year
Depending on certain rules, you may be required to pay estimated taxes or face a penalty. This penalty is essentially an interest charge for not paying taxes throughout the year. To determine whether you will need to pay taxes, you will need to calculate your net profit throughout the year.
For the 2016 tax year, the interest rate for underpayments by individual taxpayers is 4 percent. The IRS sets this rate quarterly. This rate applies for the following periods — April 16 through June 30, July 1 through September 30, October 1 through December 31, and January 1, 2017 through April 15, 2017.
In general, you may owe a penalty for the prior year (2017) if the total of your withholding and estimated tax payments were less than:
Total tax in prior years is generally the amount on your prior year Form 1040, Line 63.
The exception to the rule above applies to taxpayers who owe less than $1,000 in tax or if you had no tax liability last year.
To determine your tax and taxable income, you’ll need to have a very clear picture of the profit and loss statement (See step 1).
#3 - Tax Structure - Figuring out whether an LLC, S Corporation, or another business entity works best
Lastly for the purposes of this post, we consider the entity. One of the most important decisions to make is on your entity structure. While we like the benefits of an LLC because of the personal liability protection and its relatively low cost setup, an S Corporation can provide maximal tax savings given a certain set of facts (generally when the entity reaches $30,000 in net profit). In cases where an LLC has only one member, tax treatment will remain the same and compliance is relatively simple. Legal entities are also less frequently audited than Sole Proprietorships, so from that standpoint alone we’d recommend considering incorporation.
Due to the various considerations around entity setup, we suggest considering your business goals, legal needs, and tax factors before making a decision. Often, entity selection depends on personal preferences and aversion to risk, so we advise having a conversation with your tax professional and attorney before coming to a conclusion.
Costs associated with entity setup in our experience can range from the low hundreds on a do-it-yourself platform (such as LegalZoom) to the low thousands (for example, with a regional law firm). Fees can vary depending on complexity, firm size, and region.
For more information on incorporation, check out our previous blog posts, Should I Incorporate My Rideshare Business and Should I Incorporate my Airbnb Business.
With a new presidential administration and Republicans controlling the House and Senate, 2017 is expected to bring a number of tax changes for both individuals and businesses. For 1099 contractors, it is especially important that you keep up with these changes so that you can ensure that your taxes are properly filed. To help you keep up with the latest changes, here is a list of the latest 2017 tax updates for 1099 contractors.
New Tax Brackets
For 2017, there will be some adjustment to the tax brackets for inflation. Pay attention to the differences between 2016's tax brackets and 2017's tax brackets below:
Standard Deduction Increase
The standard deduction for single taxpayers and married couples filing separately is $6,350 in 2017. This is an increase from $6,300 in 2016. For heads of households, the standard deduction is $9,350 for 2017.
For 2017, the additional standard deduction amount for the aged or the blind is $1,250. This amount is increased to $1,550 if the individual is unmarried and is not a surviving spouse. Although this change won't give you a big reduction in your tax liability, anything that can reduce it is always welcome.
Personal Exemption Remains the Same
The personal exemption amount for 2017 is $4,050, the same as 2016. However, a phase-out begins at adjusted gross incomes of $261,500 and ends at $384,000 for individuals will go into effect. These is because personal exemptions are eliminated in discrete steps based on the exact amount by which your adjusted gross income exceeds the threshold amounts that are applied according to your filing status.
For calendar year 2017, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695. The fee is calculated 2 different ways – as a percentage of your household income, and per person. You’ll pay whichever is higher up to a maximum of $2,085. You pay the fee when you file your federal tax return for the year you don’t have coverage.
If you don't pay the fee, the IRS will hold back the amount of the fee from any future tax refunds. There are no liens, levies, or criminal penalties for failing to pay the fee.
Payroll Tax Changes
Most 1099 contractors are responsible for paying self-employment taxes. As a result, there are a some payroll tax updates that you should pay attention to in 2017.
Social Security / Medicare
The wage base, which is the maximum amount of your earnings that is subject to the Social Security payroll tax, increases to $127,200 for Social Security. The Medicare tax rate for 2017 is 1.45% and the wage base remains unlimited for Medicare. For Social Security, the 2017 tax rate is unchanged at 6.20% for both employers and employees.
Federal Unemployment Tax (FUTA)
The wage base for FUTA remains at $7,000. The effective tax rate for 2017 is 0.6%.
While the information about these tax changes is being made available in 2017, keep in mind that these changes will apply to your tax preparation for 2018, not 2017. As to concerns about the changes to the tax code as proposed by President Trump during his campaign, a lot of these changes would not go into effect until 2018, since the 2017 tax changes have already been established.
In addition to the changes from the IRS, you will also need to review the 2017 tax changes for your state. Since these recommendations are general ones, you should check with a CPA to make sure that you've covered all of the changes that will affect you in 2018.
Do Turo Owners Need to Pay Sales Tax?
Turo is a sharing economy service that allows you to list your car for rent. Renters can select travel dates and the location in order to rent your locally-owned car. However, if you plan to turn Turo into a serious business or even just to earn some extra income, you need to consider which taxes you might be responsible for before you begin. Here are a few questions and answers about Turo.com to help you better understand your tax liabilities with regard to sales tax.
Do I Need to Pay Sales Tax?
If you live in a location that assess sales tax on purchases, you will be required to pay sales tax from your earnings on Turo. However, if you are wondering if you will need to pay sales tax on a new vehicle that you purchase exclusively for business, then the answer is generally no.
How Much Sales Tax?
The amount of sales tax that you will pay will depend on the city or town in which you operate your Turo business. These rates can range from 0% in states that do not charge sales tax to as much as nearly 10% in other states that charge both state and local taxes. A breakdown of the states that charge rental car taxes and the departments that are responsible for collecting these taxes can be found here.
Where Do I Pay the Sales Tax?
Sales taxes are state and sometimes county and local taxes are paid to the appropriate revenue office based on where you live and operate your Turo business. Most states offer web file services that you can use to pay the sales tax owed from your Turo earnings.
If you do not expect to pay or collect any sales or use tax because you haven't started to operate your Turo business yet or you have no earnings for a specific period, you may still be required to file a zero return.
What Happens If I Own 5 or More Cars? Can I Use Standard Mileage Deduction?
Whether you can use the standard mileage deduction depends on how the cars are used in your business. If you own 5 or more cars but you alternate using the cars at different times for business without all of them being in use at the same time by you and renters, you are not considered as using 5 or more cars and you may use the standard mileage deduction.
In this case, it doesn't really matter how many vehicles you have as long as you keep clear records of the total number of miles driven for business. For 2016, the IRS standard mileage rate is 54 cents per mile for business miles driven.
That said, if you are using all of the vehicles that you own by driving one while the rest are rented out, you are not permitted to use the standard mileage rate deduction. However, you may be allowed to deduct your actual car expenses for that year, including depreciation, lease payments, maintenance and repairs, insurance, gas and oil, or vehicle registration fees.
In the UK, you have to pay tax on your rental income if you rent out a property in the UK. Non-residents only pay tax on their UK income, meaning that they don’t pay UK tax on their foreign income. UK residents must pay tax on all of their income, including foreign income.
Whether you are a resident of the UK depends on how many days you spend in the UK per year. You are automatically considered as a UK resident if either:
You are automatically considered as a non-resident if either:
If you live abroad for 6 months or more per year, you are classified as a ‘non-resident landlord’ by HM Revenue and Customs (HMRC), even if you’re a UK resident for tax purposes. A company is a classified as a ‘non-resident landlord’ if it receives income from renting UK property and either the company is incorporated outside of the UK or its principal office is outside of the UK.
An important difference to note is that the UK tax year runs from April 6th to April 5th of each year, unlike the January to December US tax year.
When you start renting out your property on Airbnb, you must tell HMRC and you may have to pay tax. If you don’t notify HMRC, you may be charged a penalty.
If permitted by HMRC, you can receive your rental payments from your Airbnb guests in full and pay tax through Self Assessment. Otherwise, you must receive the rent with the basic rate tax (after allowing for any expenses they’ve paid) already deducted by your letting agent (property management company) or Airbnb guest.
At the end of the tax year, the letting agent or Airbnb guest must provide a certificate at the end of the tax year specifying the exact amount of tax that was deducted from your rental payments.
If you plan to use the Self Assessment method, you must first completed form NRL1i and have it approved by HRMC. Companies should use form NRL2i to ask HMRC to get rental income in full. Trusts should use form NRL3i.
Unless you have been explicitly told by HMRC not to, you must declare your Airbnb rental income via a Self Assessment tax return. The deadlines can be found here.
UK residents are required to report income from Airbnb property rental on a Self Assessment tax return if you’ve earned:
●£2,500 to £9,999 after allowable expenses
●£10,000 or more before allowable expenses
The costs you can claim in order to reduce your income tax depend on whether your property is a residential, property, furnished holiday rental, or a commercial property.
If your profits from your Airbnb rental activity are over £5,965 and all of the following apply:
●being a landlord is your main job
●you rent out more than one property
●you plan to additional new properties to rent out
You also have to pay Class 2 National Insurance. If you are not a business owner, you are not required to pay National Insurance, even if you do work in order to earn your rental income, such as arranging repairs, advertising for tenants, and arranging rental agreements.
In Mexico, there is no differentiation between residents and non-residents when it comes to the payment of taxes. As a United States citizen, you are still required to pay taxes if you own rental property in Mexico that you rent out on Airbnb.
As a rental property owner, you are required to pay Mexico Income Tax, called ISR (Impuesto Sobre la Renta) in Spanish, and Mexico Value Added Taxes, called Impuesto al Valor Agregado (IVA) in Spanish. Thanks to a tax treaty between the United States and Mexico, the IVA that you pay is deductible on your US tax return and you can use the amount of Mexico Income Tax paid to offset your US taxes so that you are not doubly taxed.
In order to pay income taxes in Mexico, you must first register with the Servicio De Administración Tributaria (SAT), which is part of the Finance Ministry (the Secretaria de Hacienda). You are required to register regardless of your residential status if you receive any income in Mexico, including rental income. Upon registering with the SAT, you will receive a tax identity, known as Registro Federal de Contribuyente (RFC).
For non-residents, only income that is earned in Mexico is subject to taxation. While Mexico does require both individuals and businesses to pay taxes, they pay taxes at different rates. The annual tax return must be submitted at the latest by April 30th following the end of the tax year in question (January to December).
There are three main methods of calculating tax on rental income:
1. A blind deduction of 35% of total income, without any additional deductions. A 35% income tax is then paid on this net income.
2. A 30% tax on income, minus the deductions that are permitted. Possible deductions include property tax, maintenance, construction loan interest, insurance, employee wages, and commissions paid to rental agents and property managers.
3. Individuals who are non-residents of Mexico and do not have an RFC or FM3 visa can pay a 25% Income Tax (ISR) with no deductions permitted, if they go through a Mexican company or individual, such as a Mexican accountant or settlement company per resolution issued on February 15, 2010 by SAT. By paying this 25% income tax, no annual filing will be due. However, IVA must still be collected from your Airbnb guests. Individuals who own properties in Mexico through LLCs are also eligible for this program.
You are required to collect IVA from your Airbnb guests at rate of 16% in the interior of the country and 11% in the border zones. The due dates for IVA are determined by your RFC and can be found here. Each state government also has its own taxes on lodgings which you are required to pay. This tax is roughly 2-3%. There may also be municipal government taxes assessed on your real estate property.
If you participate in the sharing economy by working as a 1099 contractor or by renting your home on Airbnb, you know that you will likely be required to pay taxes on your income. But just how much do you need to save in order to cover your tax payments? Here is a brief guide to help you determine how much to put aside for Airbnb and 1099 contractor taxes.
In most cases, sharing economy workers are considered as 1099 contractors for tax purposes. The only way you would not be considered as a 1099 contractor is if you have formed a corporation for your business. If you are a 1099 contractor, you will be considered as self-employed and you will need to pay self-employment tax if your net income is greater than $400.
You will need to save a significant amount of your income given that self-employment taxes total 15.3%. For income taxes, your income tax bracket will determine what percentage you should save for income tax. For example, if you earn $15,000 from working as a 1099 contractor and you file as a single, non-married individual, you should expect to put aside 30-35% of your income for taxes. It is important that you put aside money because you may also be required to pay quarterly estimated taxes.
Homesharing / Airbnb
If you rent on Airbnb, you will need to determine if your Airbnb income is taxable first. The amount of taxes that you will owe will depend on how long you rent your place. If you rent for less than 15 days per year and use your property as a personal residence for the greater of 14 days or 10% of the total time that you rent it out on Airbnb, you do not have to pay any taxes on your rental income.
However, if you rent for more than 15 days per year, you then need to make sure that you have put aside money for income tax, if you do not meet the above criteria for tax-free rental income. As a rule, Airbnb withholds 28% of your income for taxes if you do not provide them with a W-9 form. Although your effective tax rate will likely be lower than 28% this is a good rule to follow in order to make sure that you are covered.
Additionally, you may also be liable for state and local taxes related to your rental income. If your jurisdiction requires that you pay Transient Occupancy Taxes (TOT), Airbnb will automatically deduct and remit the payment of TOT on your behalf. While you do not have to put aside more of your earnings to cover these taxes, you should just be aware that this money will be taken from your earnings upfront.
How to Estimate How Much Tax You Might Owe
To estimate how much income tax you might owe, you can use safe harbor rule. The safe harbor rule is a method that is designed to help you avoid the IRS penalties that can result from underpaying your taxes. Since the IRS employs a "pay as you go" system for paying your taxes, miscalculating the amount of taxes that you owe could result in a current-year tax underpayment and subsequent penalties.
In general, the safe harbor rule can be calculated by taking 100% of the tax shown on your 2015 return and splitting it into 4 payments. You can also annualize your estimated 1099 contractor or Airbnb income and deductions for the year.
You must also determine what state, county, and city taxes you might owe. Airbnb provides a complete guide to taxes by city here. Once all of these factors have been considered, the taxes may add up to 30% to 50% of your income once you include federal and state income taxes, along with self-employment taxes.
What is a Real Estate Investment Trust?
A REIT, or Real Estate Investment Trust, is a company that owns or provides financing for income-producing real estate. Similar to mutual funds, REITs have shareholders and pay out taxable income as dividends. REITs enable ordinary investors to invest in portfolios of properties via the purchase of stocks. The majority of REITs are traded on major stock exchanges, however there are also public non-listed REITs and private REITs. REITs generally fall into two categories:
Equity REITs - These REITs generate income by the sale of and collection of rent on the properties that they own. As far as short-term rental REITs, there are an estimated 50,000 self-storage facilities in the United States. Self-storage REITs represent some of the country’s largest owners and operators of self-storage facilities and include:
Mortgage REITs - These REITs invest in mortgages or mortgage securities.
How to Form A REIT
REITs may own all different types of properties, including both residential and commercial real estate. To be considered as a REIT, as company must meet several criteria, including:
Costs of Setting Up a REIT
The costs to set up a REIT are substantial. Given that majority of REITs are multistate entities, the accounting work needed to set up a REIT is complex and the accounting fees can be around $500K just to form the REIT.
Are REITs Good or Bad for Airbnb/Short Term Rental Hosts?
According to the WSJ, some large apartment REITs are in discussions with Airbnb about pursuing a revenue-sharing model with the company. These REITs, Equity Residential, AvalonBay Communities Inc. and Camden Property Trust are some of the largest apartment companies in the United States and the partnership would allow a larger portion of America's housing stock to be rented as short-term rentals.
As a result, Airbnb hosts who have units in apartments that are managed by large REITs could benefit from such a partnership because they will no longer be disallowed from using Airbnb and can do so with the approval of the management company for the apartment. However, there are also some cons to the involvement of REITs in Airbnb’s business because it could mean additional fees for Airbnb hosts because the REITs may want a portion of the Airbnb host’s earnings to cover the cost of liability concerns that having short-term rental guests brings and because the REIT also wants to benefit financially from having Airbnb hosts rent out their units.
However, it is important to note that the impact of Airbnb is mostly felt by apartment REITs. That is because in most markets, Airbnb isn't actually competing with hotels. Airbnb offers a niche service that is generally designed to work for leisure travelers looking for specific accommodations, not business travelers. In addition, the majority of Airbnb hosts are using the service to offset mortgage and rental costs in areas where leisure travel demand is high.
When to Begin Thinking About Forming a REIT
If you own a significant number of properties that you rent out on Airbnb and finding investors for your properties comes easy to you, it may be time to consider forming a REIT if you have already established a corporation for your real estate business. However, there are a number of complex requirements for REITs, including organizational, operational, distribution and compliance requirements. You must also establish a board of managers or trustees as the management for your REIT.
Forms to File
REITs are required to file Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts in order to report their income, gains, losses, deductions, credits, certain penalties, and determine their tax liability. REITs are also subject to state corporate income taxes, as well as, local taxes.
Since REITs pay out their earnings in dividends, they are permitted to take a deduction for dividends paid (DPD) to their shareholders. Similarly, the corporate shareholders of the REIT claim a deduction for deduction for dividends received (DRD). The DPD and DRD generally eliminate federal tax liability for a REIT, which leaves the tax liability to its shareholders.
However, the differing state tax structures may not ensure that tax liability for a REIT is eliminated on the state and local levels. In addition certain states, including Maryland and Indiana have eliminated DPD in order to create state taxable income for REITs. As a result, the REIT may have tax liabilities in the states in which REIT property is located.
You should refer to the Multistate Tax Commission (MTC) website in order to determine which state and local taxes are applicable to your REIT.
Tax Filing Due Dates
Generally, a REIT is required to file Form 1120-REIT by the 15th day of the 3rd month after the end of its tax year. A new REIT filing a short period return, which is a tax return that is required when your REIT has not been in existence for an entire tax year, is typically required to file by the 15th day of the 3rd month after the short period ends. A REIT that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.
Determining whether you are considered as a resident or non-resident of Canada can be quite confusing given the fact that receiving rent from Canadian real estate or disposing of Canadian real estate can make you subject to Canadian income taxes. This article will help provide guidance for U.S. Residents who have Airbnb's in Canada and the respective reporting requirements.
If you are a non-resident of Canada and you have taxable rental income in Canada as a result of your Airbnb taxes, you will be required to pay Canadian income taxes. However, the tax rate can be offset by the income tax treaty between Canada and the United States. Since you are receiving rental income, you should follow the rules as outlined in T4144 Income Tax Guide for Electing Under Section 216.
Your Canadian agent or the renter of the property is required to remit a 25% withholding tax to the Canada Revenue Agency (CRA) on the gross rental income paid or credited to you. They must also give you two copies of an NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada, slip showing the gross amount of rental income paid or credited to you during the year and the amount of non-resident income tax that was withheld. The payer must also file an NR4 information return with the CRA.
In most cases, this will be the total of your tax obligation to Canada. However, you can make the election under section 216 of the Income Tax Act, which means that you send a separate Canadian tax return to report your rental income, in order to reduce the amount of tax that you owe.
This designation may reduce your taxes because it allows you to have tax withheld on your net rental income instead of on the gross amount. In addition, these withholding taxes are then considered as a credit against the taxes due when you file T1159, Income Tax Return for Electing Under Section 216 by June 30th. You can also use Form T1159 to claim deductions for expenses related to your rental property.
In order to use section 216, a Canadian agent acting on your behalf must file Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty, and have it approved by the CRA.
If you are considered as a resident of Canada, you will have to follow the taxation rules for residents. In Canada, Airbnb hosts, except for Quebec residents, are required to remit taxes on their Airbnb income to the CRA. If you include standard services that are common to all rentals, such as heat, electricity, in-suite laundry facilities, and parking, your earnings from rental activities will likely be considered as rental income. However, if you provide additional services, such as cleaning, security, or meals, you will like be considered as a business.
If you are a sole proprietor and your Airbnb earnings are considered as business income, you will have to use Form T2125, Statement of Business or Professional Activities, to calculate your business income and expenses. If you have rental income, you must use Form T776, Statement of Real Estate Rentals. Depending on your reporting period, you may be required to file and remit payments on a monthly, quarterly, or annual basis. For most individual taxpayers, income tax returns are due on April 30th of each year.
You are also required to keep detailed records of all of your rental income and expenses with invoices, receipts, contracts, or other supporting documents for six years from the end of the tax year to which they relate.
Self-employed individuals and employers are required to pay Canada Pension (CPP) contributions and Employment Insurance (EI). By the last day of February each year, they are required to file Form T4SUM, Summary of Remuneration Paid and to each employee a Form T4, Statement of Remuneration Paid slip to CRA. For Quebec residents, information on Quebec Pension Plan (QPP) contributions can be found here.
Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and Provincial Sales Tax (PST)
Both non-residents and residents may be required to pay goods and services tax and sales tax on their rental activities. Airbnb hosts who earn more than $30,000 in four consecutive fiscal quarters or in a single quarter are required to register for a GST/HST account and pay the applicable Goods and Services Tax (GST)/Harmonized Sales Tax (HST).
Depending on when you exceed this threshold, you will be required to register as soon as you stop being considered as a small supplier or at the end of the quarter in which you stopped being a small supplier. However, the rules regarding Provincial Sales Tax (PST) vary from province to province. Quebec does not participate in the HST system and instead administers its own Quebec Sales Tax (QST).
Make this more oriented to growing your business abroad to make more money.
For Airbnb hosts, determining whether you should be considered as a real estate professional is very important as it can have a major impact on your tax liabilities. Here is what a real estate professional is and how this status affects how much in taxes you will have to pay each year.
What is a Real Estate Professional?
According to the IRS, a real estate professional is a taxpayer who spends the majority of his or her time in real property businesses. To meet this specification, the taxpayer must provide more than one-half of his or her total personal service in real property businesses or trades in which he or she participates (Test 1) and perform more than 750 hours of services during the tax year (Test 2). In order for the IRS to determine whether or not a taxpayer should be considered as a real estate professional, the taxpayer must meet both of these tests. Real property businesses or trades consist of real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.
In determining whether you qualify as a real estate professional, the IRS will treat your activities related to each individual rental property as a separate activity, or separate business, unless you make the election to have all of those interests treated as a single activity.
Then you must meet both tests for each property separately in order to be considered as a real estate professional with respect to that particular property. In addition, qualifying for one property does not automatically mean that you will be considered as a real estate professional for other properties that you rent out.
You should also know that you don't have to have a real estate license in order to be considered as a real estate professional by the IRS. You also don’t have to work full time in real estate to be considered as a real estate professional.
The benefit of being treated as a real estate professional is that any net income and losses from your rental activities will be treated as non-passive, permitting deductions against the other income that you earn. These tests are also applied on an annual basis. As a result, you may be considered as a real estate professional some years and not in other years.
Is an Airbnb Host a Real Estate Professional?
An Airbnb Host must meet both of these tests to be considered as a real estate professional for a single property, unless the election is made to be considered as a real estate professional for all rental properties. The Airbnb host must qualify on his or her own; the test results cannot be split between spouses.
As the number of properties in your portfolio increases, it may become more difficult to meet the qualifications for each property because you then have to calculate and maintain time logs in order to have documented evidence of the time that you spend on each rental property. If Airbnb income makes up a large portion of your earnings or you have many properties, you may want to consider taking this election to be considered as a real estate professional for all of your rental activities.
How Personal Services Effect Airbnb Hosts
Personal Services that are provided by an Airbnb Host include renovations, repairs and maintenance. However, this doesn't mean that you have to perform the work. You could engage in personal services simply by supervising, meeting or planning the activities.
If you qualify as a real estate professional as a result of providing personal services, your income will no longer be considered as passive meaning that you will be considered as self-employed and will be required report your rental income on Schedule C and pay self-employment taxes.
Section 179 Deduction
Section 179 is a provision that can be used by businesses to deduct long-term personal property that is used in the business in the first year, rather than having to depreciate the costs of the property over several years. Section 179 may only be used if your rental activities qualify as a business, meaning that you are required to file Schedule C.
Some of the items that you are permitted to deduct include kitchen appliances and carpets. However, land, land improvements, and air conditioning and heating units may not be deducted. You also have the option to deduct personal property that you use in your rental business if it is not located inside of the buildings that are rented out to guests. These items include computers, telephones, office equipment and furniture, vehicles, maintenance equipment, and vehicles. The limit is $500,000 for 2015 and beyond. However, it is $25,000 for sport utility vehicles (SUVs).
Section 179 is not permitted for property that is acquired and held for the sole purpose of producing rental income, including any rental assets and capital improvements. However, an exception is made for property in hotels, motels, or vacation homes where the guests stay less than 30 days. As a result, qualifying Airbnb hosts can take Section 179.
As an Airbnb host/short term rental host, you will automatically be considered as a 1099 worker by Airbnb. A 1099 worker, also called an independent contractor, is a self-employed person who engages in a business, trade, or profession in which they have the right to control when their work is done and how it is done. As a 1099 business, you will be responsible for paying your own taxes, including social security and unemployment taxes. You’ll have the option to operate as a sole proprietor, LLC, or S corporation. Depending on the type of business entity that you select, there are different requirements. In this post, we will go over the local requirements for 1099 businesses so that you are aware of your tax obligations as an host.
What Forms Do I Need to File?
Since you are not an employee and work on your own, you will be required to pay taxes differently than employees do. You’ll need to use the amounts reported on the 1099-MISC provided by Airbnb to calculate how much you owe.
As a 1099 business, you’ll need to pay estimated taxes (Form 1040-ES) on your income throughout the year. These payments are made to the federal government. You’ll also need to make similar payments to the state tax agency in your state on four due dates throughout the year.
You are also responsible for paying self-employment taxes (Social Security and Medicare). Since an employer does not take these taxes out for you on your behalf, you will need to pay them directly. Schedule SE is used to calculate these taxes.
What Are the City and Local Requirements for 1099 Businesses?
In addition, you will also need to look to state and local agencies to determine your respective local business obligations. Many Airbnb hosts are required to pay occupancy taxes to their city as a result of their Airbnb rental activities. However, depending on your tax jurisdiction, there may also be other taxes that you are responsible for.
Here are the Airbnb requirements for several major cities:
New York City: Airbnb is currently illegal in New York City. However, they're trying to resolve this issue quickly.
Los Angeles: Some Los Angeles Airbnb businesses may be required to obtain a business license (hotels/motels). Los Angeles also applies a Transient Occupancy Tax (TOT) of 12% on any unincorporated areas within the county, which is collected by Airbnb.
San Diego: All San Diego Airbnb hosts are required to register and obtain a Business Tax Certificate. San Diego taxes the owners and operators of rentals, unless they are owner-occupied. Airbnb hosts who do not occupy their rentals are required to pay an annual Rental Unit Business Tax. San Diego also imposes a 10.50% Transient Occupancy Tax and a Tourism Marketing District Assessment (TMD), which is an additional percentage tax based on the number of units. The TOT and TMD are collected by Airbnb.
San Francisco: San Francisco Airbnb hosts must obtain a valid business registration certificate from The Office of the Treasurer & Tax Collector. Then they must also undergo short term rental registration by scheduling an appointment with the Planning Department and paying a $50 fee. As far as ongoing requirements, San Francisco imposes a 14% Transient Occupancy Tax which is collected by Airbnb.
Administrative Code, Chapter 41A.5(g) also requires Airbnb hosts to file quarterly reports which disclose the number and dates of the short-term rentals for of unit with The Office of Short Term Rentals.
Chicago: There are several requirements for Chicago Airbnb hosts. The City of Chicago requires licenses for vacation rentals, which are defined as a dwelling unit with up to 6 sleeping rooms that are available for short term rental and are not owner-occupied. A business license is also required for a bed and breakfast in Chicago. Chicago imposes a 4.5% “Hotel Accommodations Tax which is collected and remitted by Airbnb.
It is important to follow all of the rules for federal, state, and local tax filings to ensure that your Airbnb business is 100% compliant. To learn more about these requirements, go to the tax information page for your state.
At Shared Economy CPA, we're always being asked by potential clients, "what records do I need to keep for my 1099 taxes?" or "what expenses should I keep track of?"
We hope that we'll be able to provide you with more insight because most Airbnb and rideshare drivers are considered to be self-employed and are permitted to claim these deductions via Schedule C (Form 1040) or Schedule E (in certain circumstances). However, in order to be eligible for such deductions, the IRS requires that you keep careful records of your work-related expenses. Here are the most common expenses that you should keep track of.
Rideshare Business Expenses
For a rideshare business, you have the option to take a deduction for the business use of your car via the actual expenses method or the standard mileage deduction. If you opt to use the actual expenses method, make sure to save your receipts and create detailed logs with the costs of gasoline, oil, repairs and maintenance, insurance, auto loan interest, and lease payments. For the standard mileage deduction, you will need to keep track of the number of miles that you drove for business with mileage logs. If you use your vehicle for both personal and business use, keep in mind that you are only permitted to report the expenses related to driving for business.
Homeshare Business Expenses
For Airbnb hosts, there are many expenses that you should keep track of. These expenses include mortgage interest, property tax, insurance, operating expenses, cleaning fees, maintenance and repairs. You can also deduct the guest-service or host-service fees that are charged by the homeshare company. Make sure that you keep records regarding the rental days and the days that you personally used the property so that you can properly separate your personal and business expenses.
Safeguard Your Expense Records
It is important to keep your expense documents because they support the entries in your books and on your tax return. In the event of an IRS audit, the IRS will want to see the documents that show the amount paid with a description that shows the amount was for a business expense.
Documents for expenses that you should retain include the following:
● Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
● Cash register tapes
● Account statements
● Credit card receipts and statements
● Petty cash slips for small cash payments
Even if you're never audited by the IRS, you need to have a receipt to claim a deduction. If you do not have the correct documentation in place, you will need to contact the appropriate financial institutions to help you reconstruct your expense records by sending you copies of checks, statements and receipts. In the event of a natural disaster the IRS, may grant a reprieve. However, it is still your responsibility to obtain the proper records.
Generally, you must keep your records that support an item on your tax return until the period of limitations for that tax return runs out. The IRS outlines the specific guidelines for income tax returns here. In most cases, you are required to keep records for a minimum of 3-7 years.
To ensure that you have the documents that you need, saving your records electronically on your smartphone, computer or in the cloud is a good option. Scan or take high quality photos of paper documents. Update and check your records regularly for accuracy. By taking the necessary steps to secure your records, you can make sure that you take all of the deductions that you are entitled to and that you will have the information available to back up your claims if the IRS launches an inquiry into your tax filings.
While we're not lawyers and cannot give legal advice, we do often times get questions from 1099 contractors on the legality of operating as a sole proprietor (e.g. not having a legal entity such as an LLC or S-Cop or C-Corp) so we wanted to put this post together to help provide you with insight.
Legality of Operating as a Sole Proprietor (and Things to Consider)
A sole proprietorship is the most basic and common way to operate a business. A sole proprietorship is an unincorporated business where the sole owner pays personal income tax on the profits from the business. Legally, there is no distinction between you as a business owner and the business. You are entitled to all of the profits from your business and in turn you are also responsible for all of the losses and liabilities of the business.
Legal Requirements for Sole Proprietorships
However, operating a business as a sole proprietorship doesn't mean that there aren't any rules that you need to follow. In many states and municipalities, you will be required to obtain a business license and certain permits before you can operate your business. You may also decide that you want to use a fictitious business name, which is commonly referred to as a "DBA." If you choose to use a DBA for your business, your state may also require you to register the DBA for your business.
Sole Proprietorships and Taxation
As a sole proprietor, you will be considered as self-employed for tax purposes. The IRS requires that you report all income and expenses related to your rideshare or homeshare business whenever your net earnings for the year exceed $400. You must report your income and expenses on Schedule C and the self-employment tax you owe on Schedule SE, when you file Form 1040. As a self-employed individual, you are also responsible for paying self-employment tax on a quarterly basis during the year.
Although, a sole proprietorship offers many advantages with regard to the filing and reporting rules, one major drawback is the potential liability. As a sole proprietor, you are personally responsible for all of the debts of your business, which may exceed all of your personal assets. If your business is sued and a judgment is brought against your business, all of your personal assets, including bank accounts, retirement accounts, and even your car or home could be at risk.
In addition, it is not possible to raise capital by selling stock in the business to potential investors with a sole proprietorship. Sole proprietorships also do not retain value because they are not likely to survive death or the incapacity of the owner.
The Bottom Line
While there is no easier way to launch a business than as a sole proprietor and it is perfectly legal to operate your rideshare or homeshare business as such, the potential liability is a major drawback.
Individuals go to Thumbtack everyday looking for professionals to hire to help them with personal projects. As a Thumbtack professional, you can use the platform to find new customers. However, you will still need to pay taxes on the earnings that you make through Thumbtack. Here is a complete finance and tax guide to help you as a Thumbtack professional.
Understanding Your Status as an Independent Contractor
Professionals who do business via Thumbtack as considered as independent contractors for tax purposes. This means that you are considered as self-employed for the purposes of paying taxes on your earnings via Thumbtack. The platform will not pay taxes on your behalf. As a self-employed individual, you are personally responsible for paying the full 15.3% (12.4% Social Security and 2.9% Medicare) self-employment tax on your annual income.
You may also be required to make quarterly estimated income tax payments. See our blog post here for additional information and to find out if you are liable for them.
Deducting Your Business Expenses
As a self-employed Thumbtack professional, you are permitted to deduct all of the ordinary expenses of running your business. It is your responsibility to make sure that you keep track of all of the possible deductions that you can take. The tax deductible business expenses that you may be able to deduct include:
● The cost of Thumbtack Credits
● Your home office
● Supplies (fitness equipment, educational materials, and cooking supplies) that you purchase for customers
● Business use of a personal vehicle
● Tolls and parking fees
● The portion of your mobile phone use that is for your business
● Advertising (professional photography, paid ads, videography work) to promote your Thumbtack profile
● Travel expenses
Only a licensed tax professional will be able to determine the exact deductions that you are legally entitled to. If you aren't sure which deductions you are allowed, consult a qualified CPA to obtain assistance with preparing your taxes.
What About the Tax Forms?
If your earnings exceed $600 for the year, Thumbtack may send you a 1099 form. Make sure that you retain this 1099 form because you will need it to prepare your tax return.
The majority of self-employed individuals form 1040, U.S. Individual Income Tax Return. As a self-employed individual, you must attach Schedule C with your return.
Report Your Income and Expenses on Schedule C
Schedule C is used to report your income and expenses from your Thumbtack business.
Report your earnings from any 1099 forms you’ve received on gross receipts (line 1). If you have any other 1099 forms from any other sharing economy sites, you will need to sum the total from all of your 1099 forms and record the total on line 1.
Line 8 is where you should record your expenses related to advertising your Thumbtack profile.
If you use you home for business, you should calculate the deduction first by using Form 8829: Expenses for Business Use of Your Home and then enter the result on Schedule C.
After you've entered all your deductions, subtract them from gross income to get your net Schedule C profit or loss, on Line 31.
How to Earn More on Thumbtack
Once you understand how to file the tax forms as a self-employed independent contractor, it is time for you to use some methods to earn more from your Thumbtack business.
While there are many ways to spend more to find more customers on Thumbtack, including building up your Thumbtack profile and advertising, you can also earn more without directly providing services.
With the Thumbtack Referral Program, you can earn points for referring your friends and colleagues to Thumbtack. The more points you get, the higher your profile will rank and you will be more likely to get leads.
While the points won’t save you any money on the costs of using Thumbtack directly, earning more sales because of your higher ranking profile will improve your earnings. To make the most of Thumbtack, it is up to you to find ways to increase your earnings beyond simply providing services to customers.
This is just a general overview of what you can expect as a Thumbtack professional. When you know how to prepare for tax season, filing your taxes will be easier. If you have any additional questions, or you just need help with filing your Thumbtack business taxes, contact us. We are experts in the Sharing Economy and we are here to help.
While we're not lawyers and cannot give legal advice, we can speak to the tax implications of incorporating or LLC'ing your Airbnb, VRBO, Homeaway business. It is more important than ever to protect yourself from lawsuits and damages that could stunt the growth of your business. Forming your business as any of the following will protect your personal assets if your company is sued:
Why Form a Corporation?
S Corporations are preferable to business owners because they are treated as pass-through entities, meaning the income gets reported through the owners. C Corporations, on the other hand, are subject to a separate corporate tax AND a dividend tax, resulting in “double-taxation”.
Another benefit of forming an S-Corporation is that you can elect to treat yourself as an employee of the corporation. This would allow you to pay yourself a salary and treat the rest of the profit as a distribution, paying a lower tax on the amount. The salary has to be “reasonable” which is determined by several factors, such as the average salary in your field.
One of the drawbacks of forming an S Corporation is the complicated and significant number of requirements and complicated paperwork. Some of the paperwork required to maintain your S Corporation includes, but is not limited to:
There might also be state requirements for forming an S Corporation. Here’s a helpful article on how to file taxes if you’re incorporated:
Why Form an LLC?
Forming an LLC might be a great option for your Airbnb business because they are much simpler to form and maintain. The preparation of tax forms each year is also significantly less complicated than for an S Corporation. LLC’s provide the same liability protection as S and C Corporations, and like C Corporations are pass-through entities. Basically, forming an LLC has all the same benefits as an S Corporation without the complicated paperwork.
For LLC owners, filing taxes only needs to be performed once per year on April 15th. For a single-member LLC, the taxpayer is required to file a form 1040 and a Schedule C. These are the same requirements as a sole proprietorship.
Personal Liability for Business Debts
One thing to note however, there are some rare situations when the liability protection of a corporation or LLC doesn’t apply, when there was negligence on your part. A court may make the decision to “pierce the corporate veil,” which is the legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders.
This means that the owners of the business, including its officers, directors and shareholders, would become personally liable for the debt of the company. Closely held companies are generally more susceptible to losing limited liability status. If you want to protect your personal assets and maintain the limited liability status of the corporation or LLC, it is important that you comply with all of the rules for forming and maintaining your LLC or corporation.
You should also make enough investment in the LLC or corporation to ensure that it is adequately capitalized to be considered as a separate entity. Make sure to never commingle personal assets with the LLC or corporation. The best way to avoid becoming personally liable for the debts of your business is to avoid use the corporation or LLC to engage in activities that are fraudulent, illegal or negligent in the first place.
Business Deductions to Help You Save on Your Taxes
Forming an LLC or corporation for your Airbnb business can also help you to save on your taxes. You might consider depreciation methods and figuring out which business start-up costs you can deduct. Business start-up costs include costs incurred while:
Some of the costs of forming a corporation may also be deductible, such as the costs to hire lawyer, accountant or tax professional. These costs have to be amortized to be deducted.
Overall, an LLC or corporation offers a viable way to protect your personal assets when you operate an Airbnb rental business. However, make sure that you also check the start-up rules for your state as the filing and reporting requirements vary from state to state.
According to the new regulations, all Rideshare Drivers in San Francisco are required to Register their business. You can do so online on the San Francisco Treasurer and Tax Collector website. Below is a step-by-step guide on how to register your business:
The first step in the registration process is filling out and submitting the Business Registration Application.
The first part of the application is an introductory page. It contains information on the application process and structure. It also includes a list of information you need to complete the application. Here is what you need to have on hand throughout the application:
-Your Federal Tax ID Number (FEIN, SSN, or TIN)
-Estimated San Francisco Gross Receipts
-Estimated San Francisco Payroll Expense
-Legal structure of your business
-Your contact information
-Address of each location in San Francisco you do business
After you check the box that certifies you’ve read the information, you will be allowed to go to the next part of the application. There are seven sections:
2. Business Information
Fill out the name of your rideshare business at the top and choose the legal structure of your business. The legal structure will define how your business is treated under tax law and the effects should be carefully considered. Enter your business’ tax identification number. If you don’t have one, you can apply for one online as well. Finally, enter the date you plan to start your business.
3. Ownership Information
This is the section where you must provide information about yourself such as name, address, SSN, and email.
4. Officer Information
An officer is someone who can access and make changes to your business account. This section is not mandatory and may not be necessary for rideshare businesses. However, if you do decide you want to register a business officer,you only need to provide the name, title, and contact information of the officer.
5. Contact Details
This is where all business registration and tax information will be mailed to. Unless you have a separate address for your business, you can autofill your contact details from the Ownership Information section.
6. Location Information
Enter your business name in the Location Trade Name box. The Taxes and Fees section doesn’t apply to you since your rideshare business doesn’t have a fixed location. Lastly, pick 17B Driver for Transportation Network Company to define your business activities.
7. Registration Fees
This is the last section of the application and it partly determines the amount of your registration fee. Enter in your estimated gross annual income in the Estimated San Francisco Gross Receipts box. Enter a zero in the Estimated San Francisco Payroll Expense box since you do not have any employees as a rideshare driver. Your answer to the three remaining questions in the application should be negative.
Once you complete and submit the application, you will receive an email with instructions on how to electronically sign it. The last step of the application process is to pay the registration fee. You will then receive your Business Account Number.
You must renew your business registration every year by May 31st. You can calculate your estimated registration fee by using the schedules provided by the San Francisco Treasurer and Tax Collector website.
Most 1099 contractors have a few options when it comes to saving for retirement. Two of these options include self-employment (SEP) IRA and a traditional IRA. Here are the important things that you should know about these options in order to make the most of your retirement contributions.
Why Choose a SEP IRA?
If you are trying to decide between a SEP IRA and a traditional IRA, you should know that SEP IRAs are especially designed for self-employed individuals. One of the main advantages of a SEP IRA is that there is an increased contribution limit. For 2016, business owners have the option to contribute up to 25 percent of their income or $53,000, whichever is less. However, if you have employees, you are also required to contribute the same percentage to the SEP IRAs of eligible employees. The limit for self-employed individuals is calculated using the individual’s net earnings reduced by ½ of SE tax and by the SEP contribution amount. A SEP IRA may be a good option if you plan to continue working as a one-person company because the contributions are tax deductible and you have the flexibility to contribute as your budget allows.
Traditional IRA Benefits
For a traditional IRA, the contributions are set at a maximum of $5,500 if you are under the age of 50 and $6,500 if you are age 50 or older. A traditional IRA offers the option to obtain a tax deduction which will lower your adjusted gross income and ultimately your tax liability. You won't have to pay any taxes on the contributions that you make until you withdraw the funds or you are age 70½. In addition, you can also maintain a traditional IRA even if you have other retirement plans. The contributions are also protected from creditors during a bankruptcy.
Where to Deduct a SEP IRA on Your Tax Forms
Line 28 of Form 1040, Self-employed SEP, SIMPLE, and qualified plans, should be used to report the contributions that you made for yourself to this plan as a deduction on your 1040. However, if you've made contributions on behalf of an employee on the same plan they should be reported elsewhere on your return.
Where to Deduct a Traditional IRA on Your Tax Forms
For traditional IRAs, you may take a tax deduction for that contribution by reporting it on Line 32 of Form 1040, IRA deduction. This IRA deduction can be taken regardless of whether you take a standard deduction or you choose to itemize your deductions.
Filing and Tax Requirements to Be Eligible for Either Plans
For both traditional and SEP IRAs, you must meet certain filing and eligibility requirements in order to set up these retirement plans. For single individuals the modified adjusted gross income limit for a traditional IRA is $132,000. For married couples filing joint returns, the limit for a traditional IRA is $194,000.
To establish a SEP IRA, a 1099 contractor must establish an agreement to provide benefits to all eligible employees of a business, even if you are a one-person business. Each employee must have earned at least $600 for the year and have worked for the employer for at least three out of the five years prior to the year in which the contribution is made. For 1099 contractors that make in excess of $255,000, this compensation may not be considered for the purposes of making SEP contributions.
If you need advice on setting up an individual retirement account, contact Shared Economy CPA for further assistance.
If you have just purchased a new car within the past year to use for your Uber or Lyft business, you must choose whether to use the standard mileage rate or Section 179 to take a deduction. Here is why the standard mileage rate doesn’t make sense if you’ve purchased a new car.
About Section 179
Under Section 179, you may deduct the cost of your car as an expense if your car was placed in service in 2015 and it was used predominantly for business (more than 50%). For 2015, the maximum Section 179 expense deduction is $25,000 for cars over 6,000 pounds. If you purchased your new car and placed it into service within the past year, you may claim a deduction for your vehicle under Section 179.
Standard Mileage Rate
For 2016, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is 54 cents per mile for business miles driven.
You may not use the standard mileage rate if you:
●claim a Section 179 depreciation for the first year that your vehicle is in service
●choose deduct your actual car expenses for that year, including gas, routine maintenance, insurance, or vehicle registration fees
●use five or more cars at the same time (such as in fleet operations)
●claim a special depreciation allowance
Why Section 179 Is a Better Option
If you have just purchased a new car, using Section 179 to depreciate your vehicle may result in a larger deduction. Here is an example, the first-year depreciation basis for a $50,000 new car placed in service during 2015 and used 100% for business would be $50,000. This would result in a maximum depreciation deduction of $3,160. With the election of the special depreciation allowance, this amount increases to $11,160 for the year. In contrast, you’d have to drive have 21,500 miles in order to achieve a deduction of $11,160 with the standard mileage rate. For the standard mileage rate, you may also not include any non-business use of the vehicle, including driving to and from your home to pick up locations. You are also not permitted to deduct any actual expenses for your car.
Whether you will come out ahead by using the standard mileage rate or by taking a Section 179 depreciation for your vehicle will depend on the cost of the car and the number of miles that you drive. However, unless you drive an exceptionally high number of annual business miles, it is unlikely that the standard mileage rate will provide you with a greater deduction than depreciating your vehicle using Section 179.
We are constantly being asked questions about the 1099 tax form and how it applies to sharing economy workers, independent contractors, and freelancers. To clear the air, we wanted to put a fully encompassing blog post together to cover this.
A 1099 Form is a tax form that you get in the mail if you received certain types of income during the year. You generally have to report the information from a 1099 on your tax return.
A 1099 Form is used to report various types of income other than wages, salaries and tips to the IRS for taxation purposes. A 1099 must be issued for most non-incorporated vendors that are paid $600 or more for services rendered in one calendar year. All disbursements issued to attorneys, regardless of amount, must be reported on Form 1099. If employees are reimbursed for their expenses and company policy does not require receipts be submitted, a 1099 must be issued as long as the total reimbursement for the year exceeds $600.
This table lists each type of 1099 form by number and title, shows each form's reporting requirement (the minimum dollar amount which must be reported), and the due date on which the form should be received by you.
Why 1099’s are important:
A 1099 is important because an identical form is sent directly to the IRS. The form contains the tax payers employee identification and Social Security number. You can’t “ignore” the form once it’s sent out to you. It’s necessary to make sure you’ve received the correct forms, and contact the IRS immediately if you have not received a form in error. Failure to file will result in penalties starting the first day your payment is late.
The 1099 Reporting Requirements:
A 1099-MISC Form reports income that exceeds $600 generated from independent contracting services, government payments, dividends & interest, etc. Generally, the entity that pays you must fill out the appropriate 1099 form, as there are different forms for each type of earned income. The form must be sent out by January 31st. For example, Form 1099-MISC instructions are used to report payments to independent contractors when payments exceed $600 during the year.
Businesses must issue 1099-MISC forms to their subcontractors and in turn may receive 1099-MISC forms from their clients. When preparing 1099 forms for 2015, businesses are required to issue a 1099-MISC to individuals, partnerships, and LLCs.
A Form 1099-K includes the gross amount of all reportable payment transactions. You will receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions. A reportable payment transaction is defined as a payment card transaction or a third party network transaction.
What if I do not receive a 1099 - do I still need to file it in my tax return? What happens if I do not report this income, what are the ramifications?
Yes, if you do not receive a 1099 and you were paid some form of self-employment income, then you must file. As previously mentioned, if you do not report the income, it is still subject to the tax penalty. Contact the IRS as soon as possible if you have not received expected forms. Even if you did not receive a 1099, you must report all income - not doing so would be considered tax evasion.
Estimated Tax Payment Deadline for 1099 Filliers
For paper filed returns, file Copy A of all paper Forms 1099 with Form 1096, Annual Summary and Transmittal of U.S. Information Returns by February 28th; For electronically filed returns, file Copy A of all paper Forms 1099 with Form 1096, Annual Summary and Transmittal of U.S. Information Returns with the IRS by March 31.
What Is a W-9
When you begin contracting, you may be required to file a W-9 tax form. The W-9 tax form is used by the various companies (e.g. Uber, Airbnb, etc.) to issue you your 1099. You can use your personal information and you do not need a formal legal entity (e.g. LLC/S-Corp) to file a W-9 tax form.
This is also important for a business to have this documentation as it will be substantive proof that the contractor was paid and the business will be able to deduct the independent contractor's expenses as a reasonable business expense.
If you have any further questions regarding 1099 taxes, please feel free to contact us.