What AirBnB Hosts Should Know About Taxes

By Catalin Clarke, CPA
Senior Accountant

When it costs $20 per night to stay in the same neighborhood as 4 star hotels, it’s easy to see why hosting services such as AirBnb and Booking.com are soaring in popularity. Thanks to the countless attractions of Washington state, many people in our locale are entering the short-term rental business as hosts and landlords for the first time ever.

If you are among this emerging group of small business owners taking part in the multimillion-dollar industry in Western Washington, we have some tips for you to consider when planning for tax time.

You can deduct more than you might think.

When it comes to deductions, the three magic words are “ordinary and necessary.” This covers a variety of things such as tax prep fees, supplies, advertising and so on. Taxpayers also often overlook the deductibility of the home expenses themselves. If you’re renting out a full house, the upkeep expenses such as utilities, mortgage interest, security fees, etc. are deductible in general. If you are renting out a room or part of your personal home, an allocated portion of the expenses can be deducted. Also available to taxpayers are allowances for depreciation.

There are more taxing authorities than just federal.

While Washington State does not charge Business and Occupancy tax (B&O) on rental activities, there may be taxes charged on a taxpayer’s hotel type activities in certain circumstances. Some platforms, such as Airbnb, will collect and remit certain state and local taxes on behalf of their owners. Exemptions and small business credits may be available depending on the filer’s gross receipts. State and local taxes

Make sure you classify your activity correctly.

While traditional rental activities are considered passive activities, operating a “short-term” rental may be considered an operating business - similar to a hotel. There can be considerable tax impacts based on how your activity is classified which depend on the specific facts and circumstances.

In addition, rental activity lasting 14 days or less in a calendar year falls under a safe harbor and is not subject to federal tax.

Don’t be surprised by 1099s.

Depending on several factors, you may receive a 1099-Misc and/or a 1099K that shows income to you. If you are keeping track, this income should already be included in your gross receipts. It is also possible for the same income to be shown on a 1099-Misc as well as a 1099K. For example, you might receive a 1099-Misc from a business traveler. A 1099K is a summary of card transactions which you’d expect from your merchant card services provider like Square, or possibly your bank. You may also be required to file 1099-Miscs for certain services hired out, such as a landscaper or attorney.

Keep accurate records.

Good records are key to substantiating your deductions. The IRS can go back 3 years to audit returns, 6 years in some circumstances, or through all filed returns if there is suspicion of fraud.

You probably won’t need recordkeeping software if you’re renting a single house, but when you are managing 5 to 10 properties, you may want to look into something like QuickBooks. Some owners opt to keep an excel spreadsheet throughout the year to use in preparation of their return, while also maintaining a separate bank account used for any expenses related to the rental property (in case of an audit).

Having an LLC doesn’t necessarily mean you need to file more tax returns.

Many who are in business for themselves choose to place activities inside of a Limited Liability Company (LLC). This is often more for legal protection than for any tax reason. Common questions we receive center around the tax ramifications of forming an LLC. If you are a single-member LLC, which can include two spouses, the IRS considers you a disregarded entity. What this means is the activity is reported directly on the taxpayer’s individual return (Form 1040) on the appropriate schedule. If desired, an LLC can elect to be treated as a corporation or partnership, depending on members. It is a good idea to consult with an attorney when setting up a new entity.

Get Good Advice.

This list is not a definitive detailing of all items, nor is it intended to be taken as specific tax advice. Your situation may vary, so be sure to talk to your tax advisory team at The Doty Group.