Monthly Archives: July 2016
In my last post, I talked about the tax ramifications of the rapidly booming shared economy phenom, Uber. The IRS has taken notice and is beginning to crack down on those involved with making money from the shared economy. Today, we will move to the vacation rental sector of the shared economy. The biggest player here is Air BnB, followed by other services such as VRBO, Home Away, and FlipKey. So how does it work? Let’s say you want to take a trip to Florida for a week of vacation…If you either feel that hotels are too expensive, or you don’t like the overall feel of hotels, you would opt for the shared economy option. Hosts list their homes or apartments on the website with the price per day, location, # of rooms and pictures. If you think it looks like a place you would like to stay, you pay them via the website and receive instructions from there.
So, if you are a host receiving money for visitors to stay at your house…how are you taxed?
- The most important factor to consider is the 14 day rule. If you rent the property out for 14 days or less, the income you receive is not taxable. Money that isn’t taxed?! I’m not crazy, this is a thing. I actually had a friend/client avoid having to pay tax on the money he earned through Air BnB by having him stop renting the place out at 14 days. You will still receive a 1099 from Air BnB showing the income that they paid you for the year. You DO need to report this on your tax return. You are able to post an adjustment on your tax return stating that you qualify for the 14 day rule to cancel out this income. It is important that you keep diligent records of the number of days that your place is rented out by visitors in case it is ever put in question. Air BnB usually does a good job of doing this for you, but keep your own records as well to be safe.
- What happens if you rent out your home for more than 14 days? Now you will need to pay taxes on the income that you have brought in. This income will be reported on the Schedule C, NOT the Schedule E. The IRS considers this income to be a self employed business and not a rental property. The fact that you are providing bookings, amenities and other hospitality services makes you a business owner and not a landlord.
- So, now that you are running a business, what can you deduct? In order to reduce your tax liability, you need to track possible deductions to offset some of your income. First, keep track of any amenities that you provide visitors. If you purchase new bed sheets, towels, linens etc. for new visitors, these costs can be deducted. Also, if you are a gracious host and provide your visitors with food and beverages, these can be deducted as well. Next, you will be able to use a portion of your real estate taxes, mortgage interest, and utility bills. Take the total number of days your place was rented and divide that by 365 days. Whatever percentage you come out with, that is the percentage of your taxes, interest and utilities that you can deduct from your business income on the Schedule C. The remaining amount of the real estate taxes and mortgage interest will be part of your itemized deductions on your Schedule A. It is important to know that you can not take the full amount on Schedule A and still use your percentage on Schedule C. Also, if you only rent out a single room in your house, then you will need to use the percentage of the total square footage of that room compared to the total area of the house. Any service fees that Air BnB assesses to you can also be deducted.
- Occupancy Tax may be coming… Many hotel and lodging operators have put in complaints that they have to pay occupancy taxes when they have visitors, but Air BnB hosts do not pay these taxes. Many states are in the process of enforcing occupancy tax on the shared economy hosts. If this goes into effect in your state, you will need to charge your visitor an occupancy tax and then pay that amount to the government.
Like Uber drivers, many times Air BnB hosts do not realize that they may have become a business owner overnight. It is important to educate yourself on how you will now be treated under the tax code. I was able to save my friend a couple hundred dollars in taxes by making him aware of the 14 day rule. If you currently rent out your place through the shared economy, or are considering doing so for a big upcoming event, please consult with a tax professional to keep yourself educated and compliant. We can help with the tax preparation and tax planning of taxpayers involved in the shared economy.
The Milwaukee and Waukesha County areas are in high demand during events such as Summerfest, State Fair, and various sporting events. It is a good opportunity to put some extra cash in your pocket, but be aware of how it could affect you at tax time. Plan now before it is too late! Hammernik and Associates specializes in helping Milwaukee, Waukesha, Brookfield, New Berlin, Wauwatosa with Air BnB tax preparation and tax planning.
Next week, the final segment of the shared economy industry will focus on the online retail sector.
Nicholas Hammernik, EA
The IRS will begin to take a closer look at examining the rapidly growing “sharing economy”. The sharing economy are activities which people get paid for through an online platform. The most popular companies of the sharing economy include Uber, Lyft, Air BnB, Etsy, Fiverr and TaskRabbit. Over the next few weeks I will be focusing on these different activities to raise public awareness regarding the tax consequences involved with the sharing economy.
To begin, I will focus on the transportation sector of the shared economy. This is by far the most booming sector. In fact, it has surpassed taxis/cabs in corporate spending reports. There are two main players in the transportation shared economy game, Uber and Lyft. I personally use Uber almost every weekend and any time I am on vacation. It is easy to use, convenient and cost effective. It is focused on providing the millennial market an easy way to get from point A to point B. Uber and Lyft’s business plans are centered around having “employees” (the drivers) work for them using their personal automobiles. However, in reality, the drivers are not employees of said companies, they are sole proprietors.
What does this mean if you are a driver for Uber or Lyft?
The answer….Congratulations you now own your own business! We help Milwaukee and Waukesha Uber and Lyft drivers with tax preparation and tax planning.
The reason why the IRS is trying to raise public awareness among the shared economy community is because that these drivers don’t realize that they are their own business and not employees. This can result in major tax problems when it comes time to file your tax return. When it comes to tax preparation, there are some important things you need to know when you own your own business.
Here are five things that all Uber and Lyft drivers should be aware of:
- The income checks that you receive are not all yours to keep. When you are an employee, your medicare and social security tax are paid half by you and half by your employer. Guess what? You have to cover the employer and employee portion of this as a business owner. This is known as self employment tax. On top of this tax, you are also responsible for paying federal and state income tax on your net business income. It is important to make quarterly estimated tax payments to the IRS and State to stay compliant and avoid penalties. Hammernik & Associates works with business owners by tax planning throughout the year to stay compliant.
- All income you receive is to be reported to the IRS, this includes cash tips. The third party network will send you a tax form at the end of the year showing the total amount of income that they paid you. This will be reported on Form 1099-MISC if they paid you over $600 or on Form 1099-K if they paid you over $20,000 or there were over 200 transactions. The IRS also received this tax form, so it is important to keep track of the income that you receive throughout the year for year-end reporting. I would suggest that you create a bank account separate from your personal account to keep track of business activity only. Do not co-mingle funds between your personal account and your business account.
- Create an LLC. A LLC is a cost effective way to protect your personal assets. LLC stands for Limited Liability Company. The reason to create an LLC is to protect your personal assets in the event that something goes wrong with your Uber or Lyft business. If somebody decides they want to sue you, they can only go after any assets that are in the LLC. They can not go after your personal items, such as: your house, your savings account, your IRA or 401(k), etc. As I mentioned before, it is important to keep your business activity in a separate bank account. Any activity between your personal account and the business account can put the LLC protection into question.
- Keep track of your mileage. Not all the income you receive is going to be taxable. The way that we reduce the taxable income is by deducting business expenses. The main deduction that an Uber or Lyft driver is going to have is mileage. In 2016, the IRS mileage deduction rate is $.54/mile. It is important that you keep a log of the miles that you drive for business purposes. Make sure that you keep this log separate from the miles that you drive for personal use. There are mobile apps available which make it easy to log your miles, otherwise an Excel sheet works fine as well. You can only choose to deduct mileage OR actual expenses (gas, oil changes, repairs, etc.). More often than not, mileage is the most effective way to go.
- Other ways to reduce taxable income. What other things can you deduct as business expenses? A lot of the Uber drivers I have received rides from have water or candy available to their passengers to improve their experience. If you are one of those drivers, keep your receipts, this is deductible. It is important for Uber drivers to keep their cars clean to provide a nice environment for their passengers, therefore, any car washes, detailing, or interior cleaning expenses are all deductible. Lastly, in order to be an Uber driver you need to use a smart phone. If you are using your personal phone, you are able to deduct a portion of your phone bills. You will need to determine the percentage of use that your business takes up of the overall use of your phone, and that percentage of your bill will be deductible.
The IRS knows that the shared economy is here to stay and is growing every year. They will begin putting more focus on patrolling the tax returns of taxpayers that participate in these activities. Hammernik & Associates is here to make sure that you stay complaint, tax plan to save money, and know what you can and cannot deduct. Also, as a business owner, you now have additional tax savings opportunities available to you. If you are an Uber or Lyft driver or if you frequently use the service, let it be known that Hammernik & Associates knows how to deal with the tax implications involved with being an Uber or Lyft driver.
Hammernik & Associates helps business owners and individual taxpayers save on taxes by proactive planning.
The next blog post will discuss the home rental sector of the shared economy. Stay tuned.
Have a great weekend,
Nicholas Hammernik, EA
The last few months have been a rough time for the state of humanity. I will not get into any political views or issues regarding events that have taken place. However, it does shine a light on how valuable your life is.
A main pillar of Hammernik & Associates is helping the community. Our charity of choice over the years has been the Muscular Dystrophy. We collect donations throughout the year by selling shamrocks and we also donate $1 for every tax return that we prepare. MDA has created a campaign that makes it so easy for you to help find a cure. All you have to do is upload a picture of yourself and $5 will be donated to the MDA. Here is the picture that I uploaded.
Want to upload your own picture and donate $5? Click Here
This is an easy way to make a difference, it will only take a couple minuted of your day.
Take advantage of this simple way to make a difference in someone’s life. You have the ability to help send some kids to summer camp and put a smile on their faces. That is a great feeling!
Thanks in advance,
Nick Hammernik, EA
Today, July 1st, is unofficially named “Bobby Bonilla Day”.
Today is the day that Bobby Bonilla gets his annual check for $1,193,248.20 from the New York Mets baseball team, just as he will every single year through 2035.
To catch everyone up:
The deal was signed by the Florida Marlins in 1996, but Bonilla was traded to the LA Dodgers in the 1998 blockbuster that involved Gary Sheffield and Mike Piazza. Bonilla was later flipped to the Mets. He then only played 60 games in 1999, hitting a dismal .160 batting average, so the Mets decided to release him before the 2000 season instead of paying him $5.9 million that year.
In buying out Bonilla before 2000, the Mets triggered a deferral that paid Bonilla the above figure annually from 2010-2035.
Call it one of the more fun pensions you’ll ever see.
Pensions are a close to extinct financial animal, but if you can find an employer that offers one, you should jump on the opportunity.
What is a ‘Pension Plan’
A pension plan is a type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.
Why are Pensions dead?
Retirement has taken a back seat to corporate profitability for more than 40 years as the United States has embraced the reduction of pensions, and now the U.S. economy is paying the price with lowered productivity.
Without pensions, older workers are being forced to work longer hours and stay in the workforce longer, and that means they’re squeezing out some of the most productive workers of all, known as core workers (ages 25-54).
Employers have now opted for retirement plans such as 401K’s, 403(b)’s and Simple IRA. In these plans, employers still contribute to their employee’s retirement, it is just not as much as they would contribute to a pension.
“Bobby Bonilla Day” is a joke that is discussed every July 1st on sports talk shows and all over the Internet. It is looked at as a joke because the Mets are still paying a guy on their payroll over $1 million a year…and he hasn’t played a game in 16 years.
My question is, why don’t more athletes defer salary. There are a few other notable players such as Ken Griffey, Jr that are also being paid after their playing days. Griffey is actually even receiving 4% interest on his money…what a great retirement plan.
A Sports Illustrated story ran last year and stated this:
“Reports from a host of sources (athletes, players’ associations, agents and financial advisers) indicate that: By the time they have been retired for two years, 78 percent of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.”
In an industry that sees former athletes trying to scrape together autograph signings and speaking engagements just to make a living after retirement, I ask this: Why not make salary deferral a priority for agents during negotiating contracts?
A glorified pension in an age where pensions are dead.
Figure out a way that you can support the lifestyle you want to live after you are done receiving a paycheck. This may no longer be through a pensions, but there are other ways to secure financial independence during retirement.
If you do not have a retirement game plan in place, or you think it can be improved, contact our office at 414-545-1890. Our Wealth Management division will review your current financial game plan and come up with a strategy to make your future retirement a success.
Have a safe and happy 4th of July weekend!
Nicholas Hammernik, EA