If you’ve got a client that’s renting out a home on Airbnb, a few things to think about because this client is going to have some federal, state, and local tax obligations, and if we’re just focused instead on federal and state income tax obligations, we’re going to miss a few things. So, certainly, at the federal and state level, how do they treat that particular rental? Is it subject to the passive activity loss rules? Could it be subject to the [Internal Revenue Code Sec.] 280A(c)(5) limitation rules? And you can look at the rules to figure that out.
But at the state and local level, and some states, it could possibly have sales tax — local level, likely transient occupancy tax. They probably also have to register for a business license, and some local jurisdictions have additional registration requirements, such as San Francisco and a few others, to actually come in, register, pay a fee. And they want to know that you have that property there. So making sure you’re asking those questions. And even one preliminary question to ask is, “Do you make any money off of anything connected with the internet?” Because it’s possible they could have a rental like that and receive no [Form] 1099 for it.
Let’s say we have someone who is an Uber driver, and they do it part time. Well, it’s possible that this is not an activity engaged in for profit. Most likely, they do it part time because they have a job where someone pays them a paycheck every week. I think additional considerations for that part-time worker is that when they file their Schedule C, it’s possible they could be showing a loss. Right, they’ve got a lot of expenses for the driving, and I think the IRS is going to start looking at those to say is that a hobby or is it truly a trade or business? Because the factors that indicate are you in this for profit, really don’t weigh that heavily towards being in profit. There are factors under the regs, under [Regs. Sec. 1.]183-2, there are nine factors they’re looking at, you know, “Do you have a business plan?” They probably do not. “Do you have some way that you know you are going to make a profit out of this activity? Why do you even have an asset called your car?” Because it’s for personal purposes. But they don’t set the prices.
A lot of times they’re just trying to get more cash flow as opposed to make a profit, but I think that’s where a CPA can add some value and talk to this worker: “Do you want to make this a business?” To more favorable tax considerations there, including even possibly set up a retirement plan that might benefit in those regards, but some assistance on getting there, but I think a lot of folks don’t have a thought in mind about that — they just figure they got in business and fill out a Schedule C. For those doing it full time or part time, because the barriers to entry are so low, you pretty much go onto the platform, sign up, pass the vehicle inspection, a quick background inspection. You could be driving the next day, so they haven’t given any thought to tax considerations. So they usually need help with figuring out what they might owe, and they also might owe quarterly estimated tax payments to federal and state. Recordkeeping — and there is a variety of tools out there that can really help in tracking your business miles use of car versus your personal miles, even simplified recordkeeping, QuickBooks, other tools that they just need help getting set up on that. And what is a possible deduction, what’s not deductible. Making sure they’ve got a separate bank account for their business versus a personal [account]. I think these folks could use a lot of assistance from a CPA that would help them really be doing this correctly and make it into a good money-making venture for them.