It has been a fruitful year, but now you have to tackle a less pleasant aspect of running an Airbnb business – tax. As Airbnb host, you might have to pay tax on the income that you have generated. If you are finding this like a daunting task, rest assured, you are not alone. The majority of Airbnb hosts find it difficult to calculate the tax that is due (and this is even more difficult when they are renting out multiple properties).
Though, unfortunately there is no way to sidestep the tax collector as paying taxes is one of the things in life that everyone has to face at some stage or another. Therefore, it is important that you take the time to understand the different tax rules that will apply to your Airbnb business. With the help of the following six top tips, every Airbnb host can make sense of Airbnb tax (and even possibly pay less Airbnb tax).
Familiarize yourself with the 14-day rule
Just like your property has its own set of house rules for your Airbnb guests, Airbnb tax also has its own unique rules. When hosts understand these tax rules, they will enjoy more peace of mind and feel more in control of their finances.
One such rule is the 14-day rule. The 14-day rule states that under certain conditions hosts do not have to pay Airbnb tax on the income that their short-term vacation rental managed to generate.
In order to qualify for this tax exemption you may not rent out your home for more than 14 days per year and you must use your property for own personal use at least 14 days of the year (or 10% of the total number of days that you do rent it out). Airbnb hosts who only rent out a room in their home also qualify for this 14-day rule as long as they meet these two conditions.
Keep track of your Airbnb income
You will have to put in place a reliable process that will help you to keep track of your income. One of the first things to do if you have not done so already is to open a separate bank account for your Airbnb business. By keeping your business finances separate from your personal finances, it will be much easier to determine what your Airbnb business managed to generate and which expenses related to ensuring that your guests enjoyed a great stay.
Record all your business-related expenses
Airbnb hosts are allowed to deduct certain business-related expenses. As these deductions can save your Airbnb business a significant amount of money, you will not need a lot more motivation to go to the effort of keeping an accurate record of the costs that you had to incur.
There are many examples of business-related expenses. Any professional Airbnb host can tell you that you it takes a lot of hard work (and money) to ensure that the property looks pristine and that every single guest has a truly memorable holiday. It might be something as seemingly frivolous as toiletries or luxurious linen for your guests or a more essential expense like the monthly fee that you have to pay to the insurance company to protect your property. The service fees that Airbnb charges per booking are also another big tax-deductible expense.
The most important thing that you need to do is to keep every single receipt about every deduction and all your different utility, mortgage and insurance bills. Unlike the perks of being selected for the Airbnb select program, getting selected by the internal revenue service for an audit is a less pleasant experience to look forward to. Though, if you were smart and kept all your receipts you will be able to produce the evidence of your deductions when asked by the IRS.
Enlist the services of an accountant
When you are so fortunate to rent out multiple properties or you simply rent out your place on various vacation rental websites, it is strongly recommended that you enlist the services of an accountant or a CPA. Although it might not sound exactly like rocket science to keep track of your Airbnb income and business-related expenses, getting the help of the pros early on is a great way to stay a few steps ahead of any possible challenges.
Stay informed about the changes in the industry
Towards the end of 2017, the tax brackets for the 2018 tax year were amended when Congress passed the Tax Cuts and Jobs Act (TCJA). One of the changes that were made that will affect the sharing economy is a “pass-thru” deduction. Thanks to this deduction, Airbnb businesses will automatically qualify for a 20% reduction in taxable income. This is quite a noteworthy reduction in tax! So, it literally pays to take the time to stay up to date with any change that will have an impact on the sharing economy.
Now that you have done all the hard work, all that is left to do is to remember to pay your Airbnb tax that is due on time. Paying tax might be detestable, but having to pay an additional penalty and interest just because you had missed the deadline is even worse. So, just like you take the utmost care to write down the arrival and departure dates of your guests correctly, be sure to make a huge note of the looming deadline for tax returns to be filed.