CHANGING BUSINESS MODELS AND METHODS
COMPLICATE 2016 TAX RETURNS
Bob Dylan said it best: “The Times They Are a-Changin”!
In the business world, things are changing, sometimes faster than rules can be written. Asked about what they do for a living, we hear from many clients that they are part of the new economy. This new economy is ever changing and includes things like driving for Uber, renting out rooms or entire homes through Airbnb, buying and selling bitcoins and funding businesses using a crowdfunding site. Add to this sales made through eBay or Amazon.
While these new-economy income generators often provide extra income, they are also complicating the tax returns of those involved. Once popular multi-level marketing plans are being replaced by a number of income-stream possibilities. They help people make up for hours lost to employer cutbacks as well as a job market that is just not what it used to be.
It’s important to consider the tax consequences of these activities. Since many are so new, not every taxpayer or even every tax professional understands them. To make matters worse, the tax consequences can vary from person to person.
For example, if you rent out your home with Airbnb for 14 days or less during the year, the rent is tax free, and the expenses are not deductible. If you rent it out for 15 days, you must report all rent collected and provide services with the rental (such as cleaning, breakfast, et al.). The rental gets reported on Schedule C, making any profit subject to self-employment tax. If the rental has losses, hobby loss rules may apply. Moving income off of Schedule C to the front of your 1040 and moving the expenses to Schedule A makes them (along with other miscellaneous deductions) subject to a reduction equal to 2% of your adjusted gross income. All this makes record keeping more important than ever and means that having a knowledgeable and qualified tax pro is imperative.
Enjoy driving and like to make a few extra dollars doing it? Uber or Lyft might be good options for some extra income, but you will want to keep records of not only the miles you are paid for but also those you put on the vehicle while driving around between pick-ups and drop offs trying to get additional fares. You should also keep track of the hours spent so that you can show that you had a profit motive even if you don’t actually earn a profit. You also need to track personal use vs. business use of your vehicle. One of the questions we are always asked is, “Which is better, the standard mileage rate or actual expenses?” The truthful answer is that we won’t know until we add up both and see which is best for you. This is why it’s so important to keep good records of all your expenses.
Many people are using a crowdfunding application to raise money for all manner of things, such as business start-ups, arts projects, presales of new products or services and even to help out someone who has suffered a medical or financial setback. What the money is raised for can have a huge impact on how it’s being taxed or even if it is taxed at all. Funds might be considered current taxable income, investment capital or even tax-free gifts. It all depends on how the money is raised and what is promised to those doing the actual funding in return for the funds received.
Bitcoins are a new digital currency based on a very complicated and involved system. Transactions are made with no middlemen – meaning, no banks! Their appeal is that there are no transaction fees and no need to give your real name. They may be virtual, but they are not tax free. They are taxable income at the time received if they are received from the sale of property or as payment for services, based on their fair market value (FMV) when received. Later, when converted to dollars or used for a purchase, there could be a taxable gain or loss depending on their FMV when exchanged.
At the very least the new economy brings new changes to both taxpayers and accountants. It requires complex choices and requires careful planning. It also requires a knowledgeable professional who understands the tax laws and as well as the activity you are participating in.