Fast Growth of Sharing Economy Impacts Tax Reporting

By Charles R Goulding, Jacob Goldman, and Raymond Kumar

The incredible, almost overnight growth of the 'sharing economy' is now confronting tax reporting. Among the largest shared economy service providers are Airbnb for apartment and other space rentals, and Uber, Lyft and Sidecar for car services.

In the U.S., the providers of these services are generally required to issue Form 1099s reporting the gross income received by the host providing the shared services. Many of the hosts, particularly individual apartment renter hosts, may not be familiar with business income and other tax reporting requirements.

Apartments and Short Term Rentals

By definition, most Airbnb and other sharing economy real estate hosts are apartment renters, since most condo and coop bylaws prohibit owners from providing short-term rentals. Not only are many renters not familiar with business tax reporting, but they typically don't have a large amount of tax deductible costs related to the rental. Although the hosts' rental expense may be partially deductible, it will be limited to the allocable space used by the guest. The typical host as a result will not have the usual real estate owner tax deductible expenses such as deprecation, mortgage interest, and repairs and maintenance. This means that a large portion of the hosts rental income will likely be considered taxable income. Hosts in rent-controlled apartments will have even smaller amounts of tax-deductible expenses. Hosts with large amounts of short term rental income (particularly if their other sources of taxable income are small) may find themselves with first-time Federal and state quarterly estimated income tax reporting obligations.

In addition to income taxes, many jurisdictions (particularly major cities) impose hotel and occupancy taxes and other short-term occupancy transit taxes. Since the federal government has tax information sharing agreements with the state and local government jurisdictions, the gross income amounts may be readily accessible by the local taxing authorities.

Automobile Sharing

With today's mobile phone applications, travelers to and from many states and even countries can simply call a car sharing service when they travel to almost any destination. Again, the revenue earned by the vehicle host will presumably be readily accessible to all taxing authorities. The vehicle host may already depreciate the vehicle if used in another business entity. This means that most of the gross revenue less ride-specific costs such as tolls and perhaps gasoline will become taxable income.

For independent contractor professional drivers, the added income may result in both meaningful amounts of increased income and self-employment taxes. Accordingly, independent drivers may need to plan for large tax increases and larger quarterly estimated tax payments. In the deregulated car sharing industry, mobile phone applications in many instances enable variable pricing for high demand events, which can further augment the independent drivers income.

Conclusion

The greatly expanding sharing economy participants need to consider and understand the taxable implications of their provided services. Tax advisers serving the shared host community need to help their clients prepare for this new economy.