Airbnb and taxes are like your guests, they will always show up. With guests, you either love them or love to see them go. With taxes, you’ll be surprised by how much money you made (love), which also means how much money you have to pay in taxes (love… to see them go away).
Derek from Shared Economy, CPA and I did the February webinar all about taxes: Schedule E, Schedule C, Deductions, and much more.
But before we start our conversation, here is the disclaimer:
“The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.”
In other words, talk to your accountant or book Derek for a consultation before you go ahead and Turbo your taxes:
The video for the February Airbnb & Taxes webinar is below:
Just in case you want to read instead of watch the video, here are some key points we discussed:
Schedule C = Active / Schedule E = Passive
If you don’t know whether your Airbnb income is Active or Passive, here is a condensed version of the material participation test from the IRS Business & Small Business – Passive Activity Loss ATG – Chapter 4, Material Participation. If you say “yes” to any of the 7 questions below, it means your income is Active and you need to declare your income is with Schedule C:
- The Taxpayer (i.e., you) worked 500 or more hours during the year in the activity;
- Taxpayer does substantially all the work on the activity;
- Taxpayer works more than 100 hours during the year and no one else works more than the taxpayer;
- The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.
- Taxpayer materially participated in the activity in any 5 of the prior 10 years;
- The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.
- Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.
I told you to go ahead and talk to an expert. The above just gave me a headache. Because in the same document they state and I quote:
Significant Participation Activities (SPA)
The term significant participation activity is unique to Reg. § 1.469-5T. If the sum of the taxpayer’s time in all SPAs is more than 500 hours for the year, then income or losses from the businesses are non-passive. For each SPA, the regulations require:
- The taxpayer to participate more than 100 hours during the year.
- The activity must be a business, i.e. it cannot be a rental or investment activity. (What?)
- The business must be a passive activity. Thus, if the taxpayer works more than 500 hours in the business, it is not a SPA as 500 hours is one of the qualifying tests for material participation. Similarly, if the taxpayer does most of the work in the business, it cannot be a SPA as Reg. § 1.469-5T(a)(2) holds that performing substantially all the work qualifies for material participation.
What’s the big deal about being Schedule C/Active or Schedule E/Passive?
- Self-employment taxes
- Potential losses against other sources of income
- No self-employment taxes
- Unable to net income against other sources of income (e.g. if you have a loss from your Airbnb activity, it will be subject to loss limitations that may not allow you to net this against other sources of income)
Let’s say you’re a Schedule C (Active) filer and you made $35,000 in 1099 taxable income.
The taxable income and Single Self-Employment Tax is:
$35,000 x 92.35% x 15.3% = $4,945
(The 92.35% is determined by the IRS and the 15.3% is SE tax)
Personal Income Tax is:
$22,427 x Marginal Tax Bracket = $2,903
($22,427 = $35,000 – ½ SE Tax – Standard Deduction – Exemption)
Total Taxes Due: $7,848
The total amount of earnings going to taxes: 22%
Income $ 35,000
Business Expenses $ 0
Taxable Income = $ 35,000
Self-employment Tax $ 4,945
Personal Income Tax $ 2,903
Taxes You Owe = $ 7,848
Income $ 35,000
Business Expenses $ 25,000
Taxable Income = $ 10,000
Self-Employment Tax $ 1,413
Personal Income Tax $ 318
Taxes You Owe $ 1,731
Let’s talk deductions, per the IRS Publication 527, Residential Rental Property, listed below are the most common rental expenses.
- Auto and travel expenses
- Cleaning and maintenance
- Interest (other)
- Legal and other professional fees
- Local transportation expenses
- Management fees
- Mortgage interest paid to banks, etc.
- Points – loan origination fees, maximum loan charges, or premium charges for buying a property
- Rental payments
What about if you share the apartment with your guest? Here is what the IRS publication 527 states:
“If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price.”
This is just the tip of the Airbnb and taxes iceberg. We’re not even talking hotel, occupancy, or sales taxes. Those are bigger animals, which we will discuss at another time.
What has been your experience with taxes? Were you pleasantly surprised by how much income you made with Airbnb, or how much you had to pay?
My recommendation is to please contact a tax accountant or attorney, CPA, or Derek. You can always deduct their fee and Airbnb’s on your taxes.
Until next time,
Links & Sources:
Derek Davis – Shared Economy CPA
Tabby is a mobile app that will allow you to keep track of your business expenses to lower the amount of taxes you owe.
Below are Turbo’s Tax and H&R Block links about Airbnb and the sharing economy:
Interesting Blog Post: