The Internal Revenue Service’s Share of the Sharing Economy
The “sharing” economy has brought me and my family some easy ways to save money and has also proven very convenient. I’ve used Uber and Lyft in neighborhoods where taxis weren’t readily available. I’ve used Zimride for longer drives, both to help defray out of town driving costs and a ride that is usually more desirable than taking a bus. AirBnB worked well for us when we wanted have a New Year’s Eve party in Manhattan near the ball drop without shelling out $500 or more for a hotel room. We didn’t need to worry about getting home among the heavily inebriated crowds after we’d toasted the new year with champagne with our friends. The Internet and smartphones have led to many other shared economy type services (I see advertisements for new ones almost every month, both online and in print) that allow individuals to make a few extra dollars by renting out things like bikes, cars or boats during hours they aren’t using them. This can be a godsend for those who can’t always pay the retail prices or in areas that are too small for any retail provider to have a convenient location.
The IRS Wants its Share Too
While the sharing economy has proven to be controversial and there have been buyers and sellers who have had some very bad experiences, it has become an integral part of our economic landscape and will probably continue to grow. The Internal Revenue Service has recognized this and has made it known that they want to be part of the sharing as well. They only want some of the money collected and won’t be giving us a ride or lending us their extra bedrooms. If you are collecting any money from the rental of anything – whether it’s extra seats in your car, spare bedrooms in your home, your bicycle or your boat – be prepared to report this extra income on your tax return, usually on a Schedule C for self-employment income.
When You Should Report Sharing Income
If the extra income you collect is minimal and you don’t receive it more than a few times a year at most, it will likely not affect your tax liability and you probably don’t need to report it. For example, if someone pays you $ 20 every few months to catch a ride in your car from New York City to Baltimore, the depreciation, wear-and-tear and fuel costs you could allocate to that one paid passenger probably exceed $ 20 anyway and there would be little or no profit to tax. But if you charge more, regularly have three passengers in your car almost every week on the same trip, the money collected and expenses associated with generating it over the course of a year need to be reported on a Schedule C. The net income you receive is subject to the 15.3% self-employment tax as well as regular income tax. Typically, self-employment income that amounts to less than $ 400 per year does not need to be reported. However, income from the sharing economy is an area that continues to emerge and the IRS is frequently issuing new guidance and regulation in this area, so check with your tax professional about how the rules may apply to your unique situation.
If you rent spare rooms in your home on a short-term basis, the Internal Revenue Service specifically provides an exemption for people who rent space for overnight guests in their home fewer than 15 nights a year – no need to report the extra income and you may not deduct any costs associated with it either. This exemption came about thanks to a Congressional representative from Georgia whose constituents collected a lot of extra money renting rooms in their homes to spectators of a major pro golf tournament every year. Residents of California, Florida and Louisiana have taken advantage of this exemption many times when the Super Bowl was held in places like Los Angeles, Tampa, Miami or New Orleans.
But if you receive money from overnight guests for 15 or more nights per year (no matter how many of your extra bedrooms are rented), you generally must report the income and related expenses on a Schedule C. Services for the tenants’ convenience, such as cleaning, changing linens and having clean cutlery and glassware for their use requires you to report the income and related expenses on a Schedule C. If you don’t provide these services and do little more than clean the common areas and/or collect trash, you may be able to consider it rental income and report it on a Schedule E instead. But verify this with your tax professional first. Income reported on a Schedule E is still subject to regular income tax but not the 15.3% self-employment tax. Expenses associated with the short-term rental to overnight guests in your home can include portions of your rent or mortgage interest, real estate taxes, maintenance costs, utilities, insurance and depreciation. You can only deduct these expenses on a pro-rated basis – for example, if the square footage of the bedrooms you rent out for 15 or more nights per year take up 15% of your home’s total space, 15% of these expenses are deductible.
The Future of the Sharing Economy
The sharing economy will probably undergo finer tuning and be subject to many more regulatory issues in the future. For example, states and cities have been demanding the payment of hotel occupancy taxes from short-term renters in some places. Also, the concept hasn’t always worked out for everything – the Federal Aviation Administration shut down a number of websites where people were trying to rent out empty seats on their private planes, claiming that you cannot offer airplane seats to the general public if you are not registered as a commercial airline. However, sharing as a concept has already been proven beneficial to both buyers and sellers and the Internal Revenue Service knows it won’t be going away. If you aren’t prepared to “share” with the IRS when you receive the extra income or when you file your return, be prepared to give a bigger share consisting of tax, under-reporting penalties and interest when you get audited.