7 Important Questions to Ask Before Joining the Sharing Economy
In today’s world, there is a lot of sharing going on – from car sharing to bicycles, and homes, money, camping equipment, food, vacation facilities, and even WIFI among several others.
These activities are referred to as the sharing economy, and they involve online sites where people can share less used items for a predetermined amount. The global market was put at 26 billion in 2013, and it is just for Airbnb.
According to Forbes, the sharing economy is unleashing an absolute new class of what is referred to as “micro-entrepreneurs.”
How to Venture Into the Sharing Business
It is a great idea to make money from sharing, and that means that you’ll have to treat it as a full-time business.
This includes registering your business, having a separate business checking account, paying taxes, and complying with regulations. You may also want to up the regulations with your state to find out if you need to register your business or not..
Regardless of what you are sharing, whether it is a home, car, or bicycle, it is very important that you check with your insurance company about the effect on insurance. Since you got homeowners’ insurance on the basis that your home can only be used as a place of private residence, your insurance may change. Now, if you use your home for business purposes, your homeowner’s insurance rate may change, or may become invalid, or require you to get a rider. The same applies to other examples such as car insurance. If you start carrying passengers in your private car, you may be required to pay additional insurance for it.
If you get money sharing your home spaces as an Airbnb host, you may not have considered it in a way, but as a business owner, you have to pay income tax on your revenue. Which means that you’ll need to file a business file return.
There is an exception. If you use a dwelling unit as a personal residence, the IRS’s special rule states that if it is fewer than 15 days, you should not report any of the rental income and do not deduct any expenses as rental expenses.
Find out what type of business you want to run, keep records of expenses and income, and pay taxes.
You may not feel comfortable with taxes, but you’ll find solace in tax deductions. You can deduct every expense borne by your business from your activity. For instance, you can deduct expenses involved in advertising, home cleaning for potential guests, and fees to the sharing service. Some expenses will require that you separate personal use and the business.
The IRS allows work-from-home entrepreneurs to deduct a portion of their home used in running the business. The trick is, the IRS space you deduct must be used often and exclusively for running your business. And if you only rent out your home totally for a week, and reside in it in the remaining days of the month, you’ll not be entitled to tax deduction.
If you have a room that is only being used for sharing above the garage, which might be deductible, check with your preparer. Keep a good inventory of your expenses, for claims on tax returns.
Since you are the owner of the property being used for sharing business, you can be technically referred to as being self-employed. Airbnb or Uber offers you a way to connect to your potential customers. Hence, self-employment taxes such as Medicare and Social Security must be paid based on your annual net income from this activity.
The taxes are included with your income tax and paid through your personal tax return. You may have to do some savings to settle these taxes or the estimates.
Depreciation is an aspect that is often being overlooked by business owners. Consider depreciation of your car, home, and other sharing items as extra business expenses. The items can lose value as a business asset. Hence, it is vital to keep information of the original cost to offer your tax preparer. The cost of the depreciation will depend on the percentage that goes into the property for business purposes.
Local Permits and Licenses
Localities have their different requirements for permits and licenses with each type of sharing having its different regulation. Ride-sharing services are required to comply with city tax restrictions while Airbnb homes may have to register with the city.
Pet-sharing services may need to register with the locality. There are localities that may want to request occupancy tax. You should take home-sharing like a hotel. So, it is crucial to always ensure that you are complying with every provided rule even though most sharing services have important information you may need, however, you should not expect them to do your research for you.