Everyone is sharing everything these days! We're sharing cars, homes, bicycles, camping equipment, money (in the form of loans), dog vacations, food—you can even share your wi-fi network!
It's called the sharing economy, and it involves online sites where people can share underutilized resources, like cars and homes, with others...for a price, of course. This large global market was at 26 billion in 2013, and that was just for AirBnB.
Becoming a Sharing Business
Sharing is great, and people are making money at it, but making money means becoming a business. You must set yourself up to operate like a real business, with all that means. It includes having a separate business checking account, complying with regulations, registering your business, and, yes, paying taxes.
Even if you participate only a little in the sharing economy, it's a good idea to think like a business. It also means you need to check out several issues before you jump into this venture.
1. Income Taxes
Let's say you get money as an AirBnB host. You may not think of it this way, but you are in business, and you must pay income taxes on the money you make. That means you have to file a business tax return.
Exception: The IRS has a special rule: "If you use a dwelling unit as a personal residence and rent it for fewer than 15 days... don’t report any of the rental income and don’t deduct any expenses as rental expenses."
Figure out what business type you want to be (most small businesses are sole proprietors), collect records of income and expenses, and pay taxes.
2. Tax Deductions
If the bad news is taxes, the good news is deductions. You can deduct all real business expenses from your activity. For example, you can deduct expenses for cleaning your home for guests, advertising it, and fees to the sharing service.
For some expenses, you will need to separate out the business and personal use.
The IRS allows business owners who work from home to take a deduction for the part of their home used for business. That sounds great, but there's a trick (always with the IRS): the space you deduct must be used both regularly and exclusively for business purposes. So if you rent out your entire home one week a month and you live in the house the rest of the time, you can't claim the space as a tax deduction.
If you have a room above the garage that's only used for sharing, that might be deductible. Check with your tax preparer.
Keep very good records on your expenses, so you can claim them on your tax return.
3. Self-employment Taxes
You own the home, car, or another item that's being shared, so you are technically self-employed. Uber or AirBnB is just providing you a way to get to the people who are buying your sharing services or products.
You must pay self-employment taxes (taxes for Social Security and Medicare) based on your annual net income from this activity. These taxes are added to your income tax and paid through your personal tax return. (Hint: You'll need to save some money to pay these taxes or pay estimated taxes.)
4. Registering Your Business
If you are operating a business in a state, you must register that business, either with a formal business registration (like an LLC or corporation) or by filing a fictitious name (dba) form.
If you aren't sure whether you need to register your sharing business, check with your state's department of regulations.
5. Local Licenses and Permits
Each type of sharing has different regulations, and different localities have requirements for licenses and permits.
- AirBnB homes may have to register with the city.
- Ride-sharing services may have to comply with taxi restrictions set by cities.
- Even pet-sitting services may need to register with the locality.
- Some localities may want to collect an occupancy tax, considering your home-sharing like a hotel.
Wherever you are, and whatever kind of sharing you are doing, check with your locality to make sure you are complying with their regulations. Although most sharing services have information, don't expect the sharing service to do your research for you.
No matter what you are sharing—a car, a home, even a bicycle—you'll need to check with your insurance company about the effect on insurance. Since you got homeowner's insurance on the assumption that you are using your home only as your personal residence, your insurance may change.
Using your home for business purposes, for example, can change your homeowner's insurance rates, require you to get a rider, or make it invalid. The same goes for car insurance; you may have to pay additional insurance if you are carrying passengers.
Another business expense that people often forget about is depreciation. You can add depreciation of your home or car or other goods that you are sharing, as an additional business expense.
Items that you are sharing—home, car, equipment—can be depreciated as a business asset. To depreciate this property, you'll need to have information on the original cost to give your tax preparer. The amount of the depreciation will depend on the percentage use of this property for business purposes.
- This article in the Wall Street Journal warns that sharing your home may affect your ability to get a mortgage or refinance your home.
- The IRS has a guide to taxes and the sharing economy.