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Wednesday, December 30, 2015

Top Ten Items of Tax Policy Interest for 2015 - #9

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for number 9 - tax issues of the sharing economy. 

By sharing - I mean property sharing, such as renting out all or part of your home or other residence or letting others rent your car or other property. These activities involve some complicated areas of the law which don't readily address the wide range of arrangements people have.  Some of these issues and complexities include:
  • Is the real property rental deductions limited by Code section 280A(c)(5) or 469 or neither?
  • Is self-employment tax owed on the real estate rental?  Yes, if there are sufficient services rendered to the occupants (see Reg. 1.1402(a)-4(c)(2)).
  •  Is the activity engaged in for profit?  I think occasional renting out of your car where the company matching the owner and renter sets the price and there might even be a gizmo on the car such that the renter can just take the car, might not rise to the level of a trade or business. If true, expenses are only deductible as miscellaneous itemized deductions subject to a 2% of AGI limit.
  • Is the owner subject to business license tax in their city (and/or the city where the property is located) and did they pay it?  What other local taxes might apply?
  • For short-term real estate rentals, is transient occupancy tax (TOT) owed to the city or county?
  •  Practitioners - how much of this is covered in your engagement letter? Does your client this you will advise them if TOT or business license tax is owed? What is your client's rentals are illegal under local law (the income is still taxable, but how much do you or should you be involved)?  I've got some more background and due diligence considerations in this article: Taxation and Today's Digital Economy, CCH's Journal of Tax Practice & Procedure, May-June 201.
Some policy considerations:
  • Can these rules be simplified, particularly if the individual's income is below a certain amount?
  • Should some sharing activities, such as your car, be treated as generating investment income rather than business income?  Aren't you just generating income from unused capacity of the asset - getting back some of your investment? For example, you need a car to drive two days a week, but own a car 24/7/365.  What is the proper tax classification?  Does it matter?  Yes, for self-employment tax and other purposes.
Examples of some of the complexities and varied compliance considerations for home rentals follow:

  1. Santa Monica, CA – On 5/12/15, the City Council enacted Ordinance 2484 to allow “home sharing” while continuing to disallow “vacation rentals.” For more, see the city's 16-page guide.  The guide also includes the ordinance and TOT and business license forms. Also see the city’s website on home-sharing. 
  2. Austin, TX – this website explains types of rentals and notes a $235 license fee.
  3. Colorado – Sales 11 document,
  4. Mill Valley, CA – this website also encourages hosts to provide information to renters about activities and events in the city, as well as evacuation routes.
  5. Philadelphia, PA – “limited lodging” + July 2015 change in ordinance + flowchart 
  6. Portland, OR – Accessory Short-Term Rental Permit. 
  7. San Francisco, CA (home of Airbnb) – this website describes restrictions, registration and taxes. In-person registration is required and a home may not be rented for more than 90 days during the year when the owner is not present, among other rules.You must register your home rental in person at the city offices.
  8. Savannah, GA – this website on short-term rentals also has a link to relevant law that notes that sales tax is also owed.
What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

  1. Congress can alter our tax system via a lot of non-tax bills - here
  2. IRS funding challenges - here 
  3. Justice Kennedy called for a review of the 1992 Quill decision - here 
  4. IRS disagreeing with a court decision via a proposed regulation - here 
  5. Why not let the Internet Tax Freedom Act just expire - here
  6. A growing amount of non-binding "guidance" from the IRS - here 
  7. Due date changes starting for 2016 returns to improve tax administration - here 
  8. BEPS - base erosion and profit shifting - here

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