The Sharing Economy – How It Can Impact Your Taxes
You have decided to take the whole family and a few extended family members on a trip to Hawaii. In all, there will be nine of you. So, let’s see – how many hotel rooms would you need to accommodate the travelers, taking into consideration if kids would be in a room by themselves, who could room together, etc. Add to that, many hotel rooms don’t have kitchen facilities and feeding everyone at least three times a day in a restaurant will get expensive. So, you decide to go on a website to see if you can rent a home that would accommodate everyone, enable cooking to be done and give everyone space to spread out rather than in a cramped hotel room. You find the perfect house and decide to rent it. Great! This will be some vacation!
For you, as the party who will be renting, this is an appealing alternative. But, let’s change the scenario around a little. You have a sizeable home at the shore or in the mountains and it doesn’t get used as much as it could. After your trip to Hawaii and renting a house, you decide that your second home could generate some income to help offset the maintenance. So, you decide to use one of the online sites to advertise your home for rent. Sounds like a great idea. What could be the downside?
The sharing economy has become quite popular recently – sharing homes, vehicles, tools, you name it. But, there are some things that should be kept in mind that could impact your income taxes.
First of all, the activity is taxable. Even if the activity is only part time, it is the source of a second income, payments are in cash and the owner receives a Form 1099 or a Form W-2.
Next, there are only certain expenses which are deductible, but the expenses have guidelines for deductibility.
If you rent out a home and you use it part of the time, there are special rules to be applied for determination of the allowed deduction of expenses.
The additional income may necessitate your having to make estimated income tax payments to ensure that the adequate amount of income taxes have been paid throughout the year toward your total tax liability.
From renting spare rooms and vacation homes to car rides or using a bike…name a service and it’s probably available through the sharing economy. Taxpayers who participate in the sharing economy can find helpful resources in the IRS Sharing Economy Tax Center on IRS.gov. It helps taxpayers understand how this activity affects their taxes. It also gives these taxpayers information to help them meet their tax obligations.
If you want to try the sharing economy as an owner, you may wish to check with your tax preparer for guidance on joining the sharing economy. It is great for some people, but not necessarily the best idea for everyone.
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