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Tax Due-Diligence Checklist for Sharing-Economy Clients

UberPeople have been sharing services and property, and generating money from it, for years. For example, someone with a spare bedroom might have posted a note on a bulletin board at the local grocery store or advertised in the local paper to find a tenant. But do we understand the tax implications of the shared economy? That’s where CPAs come in.

Today’s technology allows for easier publishing and access to a wider pool of people for matching offers and acceptances. Using Airbnb or similar sharing websites, the owner with a spare bedroom will find that short-term rentals are relatively simple to arrange. Yet that same owner is unlikely to know the full tax consequences of this convenient rental, so it will be up to the tax preparer to ask the right questions.

It’s increasingly likely that one or more of your clients is participating in this new shared economy.  Many companies have sprung up to provide network platforms that allow for sharing of real and personal property, loans or donations from strangers, as well as offering various personal services such as driving. These websites include Airbnb, Getaround, Uber, Lyft, TaskRabbit, Amazon Mechanical Turks, e-Tutoring and Lending Club, as well as eBay, which has matched buyers with sellers since 1995.

 

A growth market

The 24/7, multi-jurisdictional way of doing business is expected to grow. McKinsey & Co. projects that by 2025, labor-sharing platforms could increase world gross domestic product by almost $3 trillion.  Airbnb states that about 60% of its users earn enough to be able to stay in their homes as a direct result of the added rental income they receive.

The barriers to entry for taking part in most sites are low, enabling almost anyone to set up an account and start selling, buying or renting. There are tax considerations for both parties, particularly the party receiving funds, yet users of these websites often have little understanding of the tax issues involved.

Tax considerations

Here are some of the key tax issues related to common sharing activities.

Activity

Tax Considerations

Rental of room in home

·         Separate personal and rental expenses.

·         Identify and apply the appropriate income/loss determination rule – §§162, 280A, or 469 (the answer can change from year to year).

·         Determine local tax obligations, such as transient occupancy tax and business license tax.

Ride sharing (Uber, Lyft, etc.)

·         Determine whether activity is a business or hobby (see Reg. §1.183-2). Some individuals engage in this activity part-time and only to generate cash rather than a profit.

·         Is the worker (freelancer) optimizing tax benefits, such as retirement plans?

·         Review IRS Audit Technique Guide for the cash intensive businesses, Chapter 17 on taxicabs.

Any sharing activity that generates cash (e.g, renting your personal auto)

·         Be sure client has appropriate recordkeeping in place to identify income and expenses and to separate them from personal activities.

o   Various apps exist to help with recordkeeping including ones using GPS to track personal versus business miles. See for example hurdlr and Everlance.

·         Ask client if they received any 1099-MISC or 1099-K from the activity. If yes, help them reconcile it to actual receipts for the year.

o   All clients should be asked whether they generate funds from any type of web-based activity because many will not receive a 1099. For example, network platform companies are only required to issue a 1099-K if more than $20,000 was processed and more than 200 transactions (see PLR 201604003 (1/22/16).

Below is a framework for asking clients about any web-based activities that could be incorporated into the yearly organizer:

CLIENT CHECKLIST

Do you engage in any of these online/Internet activities?

YES

NO

Selling goods or services

   

Buying goods online (use tax may be owed)

   

Online games or gambling

   

Receive advertising revenue connected with your website or blog

   

Lend or borrow money

   

Create a crowdfunding site for yourself or someone else (possible reporting or gift tax consideration)

   

Obtain funds from a third-party crowdfunding site

   

Rent out your property through a web platform

   

Find customers/work through a web platform

   

Own and use virtual currency (see Notice 2014-21 and 6/10/16 AICPA comment letter)

   

Engage in any other online/web-based activity that generated cash or revenue

   

Own digital assets (such as photos, financial records) and use cloud services (help client with data security and whether assets need to be identified in estate documents)

   

In September, the IRS created a Sharing Economy Tax Center with links to tax information to help freelancers and those renting property. This center offers general information primarily to help individuals understand related tax matters. But it’s not enough for practitioners, as it doesn’t cover all possible tax issues (such as state and local ones) or provide links to relevant law provisions.

The sharing economy is here to stay. It’s enticing to many as a way to generate quick cash or create a business venture. Your clients might may fail to mention that they are involved in some aspect of shared services and might not receive information reporting forms. It’s a good idea to be sure your client organizer asks questions, such as the suggested ones above, to ensure proper tax compliance. Talking about the tax implications of earning extra cash is also a great opportunity to assist clients with tax planning, asset protection and wealth optimization.

Annette Nellen, CPA, CGMA, Esq., Tax Professor and Director of the MST Program at San José State University. Annette is incoming chair of the AICPA’s Tax Executive Committee and an active member of the tax sections of the ABA and California State Bar. A recipient of the 2013 Arthur J. Dixon Memorial Award, the highest honor bestowed by the accounting profession in taxation, she offers analysis of current tax issues at 21st Century Taxation.

Uber courtesy of Mike Dotta/Shutterstock. 

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