Taxes and the Sharing Economy
A new smart phone app or start-up company appears every few weeks claiming to provide a novel way to capitalize on renting what you already own. These types of services collectively are often referred to as the “sharing economy” or “access economy.” Popular examples of these tools relevant to the South Florida real estate industry are Airbnb and Homeaway. Besides the larger services most of us are familiar with, there are many more less-known companies that are also active in the sharing economy. For instance, commuters can now make money by placing advertisements on their cars; and those with extra space in their garages are now able to monetize that square footage.
This growing sharing economy raises interesting challenges when it comes to taxation. The Internal Revenue Service is just catching up to these technological advancements. It launched a new web page last month designed to help taxpayers involved in the sharing economy quickly locate the resources they need to help them meet their tax obligations.
Shared Economy Providers
Participating in the sharing economy has tax implications. If you are receiving income from a sharing economy activity, it’s generally taxable. This is true regardless of whether you receive an income statement, Form 1099-MISC or other Tax Statement. This applies irrespective of whether it is a side job or you’re paid in cash. With this in mind, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules.
If you are engaged in the sharing economy as an individual, you may be treated as a self-employed worker for federal tax purposes. Self-employed individuals, also known as independent contractors, are required to pay self-employment tax. Self-employment taxes consist of Social Security and Medicare taxes (anytime self-employment tax is mentioned, it only refers to Social Security and Medicare taxes and does not include any other taxes that self-employed individuals may be required to file).
The wear and tear and deterioration of property with a life longer than a year may be depreciated. Depreciation is an income tax deduction that lets you, over time, recover the cost or other basis of certain property you own. Machinery, vehicles, furniture, equipment, and buildings may be considered depreciable property. You cannot claim depreciation on property held for personal purposes. If you are using property for business or investment and personal purposes, you can depreciate only the business or investment use of that portion, subject to an elaborate set of anti-abuse rules the government strictly enforces.
Rental Property 15 Day Rule
A special rule applies if a property is rented for less than 15 calendar days in a year. Typically, an individual’s rental income must be reported in full. However, if you rent your property for 14 days or less, none of the rental income is reportable, and none of the rental expenses are deductible. See Conitzer Properties, for more details.
When deciding on renting out your property, it is becoming increasingly important for both the government and taxpayers to have clear guidance with regards to tax compliance. Research has shown that many of those who are engaged in the sharing economy don’t know about their tax obligations and failed to put aside money to meet those obligations. The attorneys at Sternberg Legal PLLC regularly advise individuals and companies that utilize the sharing economy to earn additional revenues. While we regularly work with the subject material of this article, each situation is unique and subject to its own facts. Accordingly, please be advise that nothing in this article is intended to constitute, nor shall it constitute, legal advice.