Do you provide car rides through a mobile app, rent out your spare room using an online platform or repair computers for local businesses on demand? If so, you may be considered part of the "sharing economy" also known as the Gig or on-demand economy.
With the rise of sharing economy websites such as car sharing (e.g., Uber and Lyft), vacation property rentals (e.g., Airbnb), apartment rentals, freelance work, and crowdfunding, it may be appealing to pocket some extra cash, but before you do, make sure you understand the tax consequences.
Since the sharing economy is now a big deal, the tax issues have become a big deal too. However, indications are that sharing economy participants need help with those tax issues. According to a recent survey:
- 34% of those who reported earning income in the sharing economy did not know they needed to make quarterly estimated tax payments
- 36% did not understand what records they should keep for tax purposes
- 43% did not set aside money to meet their tax obligations or know how much they owed
- 69% did not receive any tax information from the sharing economy platform they used to earn their income
Here are some things you should know:
Income and Deductions
If you receive income from a sharing economy activity, it is generally taxable - even if the activity is a sideline and even if you are paid in cash and do not receive a Form 1099-MISC (Miscellaneous Income), 1099-K (Payment Card and Third Party Network Transaction), W-2 (Wage and Tax Statement), or other information return that reports income to you and to the IRS. Those with positive taxable income from sharing economy activities may also face state and local income taxes. On a positive note, some or all of your sharing economy-related expenses may be deductible as business expenses.
Home Sharing
Special tax rules apply if you rent a property that you also use as a residence during the year. Rental income must usually be reported in full. Most expenses must be divided between personal and rental usage, and deduction limits may apply. Also, those who rent out their properties may owe state and local occupancy taxes, room taxes, or hotel taxes. A general rule is that rental property, for tax reporting purposes, usually falls into three categories:
- Personal Residence with Very Limited Rental Use: This is a residence that is rented for fewer than 15 days during the year. In order to qualify as a residence, the property must be used for personal purposes for more than the greater of 14 days or 10 percent of the rental days during the year. If the property qualifies as a residence and is rented for fewer than 15 days during the year, you are not required to report the rental income. Similarly, the expenses, other than qualified mortgage interest, property taxes, and any qualified casualty loss, are not reportable. Otherwise known as the “15-day exception,” this rule is extremely beneficial for those looking to rent out their home, or a portion thereof, through Airbnb and similar platforms for a week or two during the year.
- Vacation Home with Both Rental and Personal Use: This is a property with (a) personal use that exceeds the greater of 14 days or 10 percent of the rental days and (b) rental use that exceeds 14 days. In accordance with IRS rules, income from these properties must be reported on the taxpayer’s income tax return and allowable expenses are prorated based on the ratio of the rental use of the property to the total days used during the year. Courts, however, may use the “number of days in the year” rather than “days used during the year.” For those participating in the sharing economy, IRS rules may yield greater tax deductions.
- Rental Property with Very Limited Personal Use: This is a property that is rented during the year in which personal use does not exceed the greater of 14 days or 10 percent of the rental days. Income from these properties is also required to be reported on the taxpayer’s income tax return, with allowable expenses prorated to remove the portion attributable to personal use.
Estimated Tax Payments
If you have profited from the sharing economy, you may need to make quarterly estimated tax payments to cover the additional taxable income and related self-employment tax.
Estimated tax payments for the 2017 tax year are due:
- April 18, 2017
- June 15, 2017
- September 15, 2017
- January 15, 2018
Tax Penalties
Those who participate in the sharing economy and fail to meet their federal tax filing and payment obligations can face a host of potentially expensive penalties, such as the penalty for failure to make adequate estimated tax payments, the late payment penalty, the failure-to-file penalty, accuracy-related penalties for faulty tax return filings, and more.
Business Entity Considerations
When a sharing economy activity becomes significant, you may want to establish a liability-limiting entity to operate the activity. Different entities have different tax implications.
For more information on the above article or any individual tax services contact Lisa Albritton, EA at (334) 887-7022 or by leaving us a message below.
