Launching a new business venture is an exciting opportunity. But it’s a good idea to explore your options first on the most beneficial ways to structure your new company. You probably have questions about tax liabilities, business formation, and other concerns.
Fortunately, our CPA Nerds can help. In fact, one of our very knowledgeable CPA Nerds, Adam Kalil, recently answered many of those inquiries for a client looking into a new short-term home rental venture. We believe the questions our client Michael asked and Adam’s answers may be helpful to other entrepreneurs.
Do CPA Nerds Have Experience With Short-Term Home Rentals?
Absolutely! Serving the real estate industry is one of our core business offerings. Moreover, several clients have expanded their portfolios to include Airbnb and VRBO properties. Therefore, our team has the knowledge and experience to help new clients succeed in this real estate market segment.
Short-Term Rental Property Overview
Short-term rental properties include entire residences, individual rooms within a home, and accessory dwelling units (ADUs). Laws governing STR properties vary between jurisdictions. But the general definition references furnished rentals that accommodate renters for less than 30 days. That said, many STR owners allow tenants to remain longer if the local or state laws allow it.
Rental property generates passive income. That means the owner/investor doesn’t materially participate in earning the income. That may seem odd considering the time and effort you put into renovating, preparing, and maintaining your property. But the IRS says rental income derives from passive activity unless you’re a real estate pro.
Would An S Corp Maximize The Tax Strategy For A Short-Term Rental Company?
We don’t recommend the S-Corp route for real estate, primarily due to the “reasonable wages” requirement for the company officer. Adam further explains that, as the company’s officer, “you would be subjecting a portion of your income to FICA taxes.” Adopting that requirement defeats one of the significant advantages of rental income. As passive income, it’s not subject to FICA taxes or self-employment taxes.
Should I Form A Single LLC Or Multiple LLCs For Each Short-Term Rental Property?
For legal reasons, many investors run their properties through separate LLCs. But doing so creates no unique tax benefits over managing all your properties through a single LLC.
Michael is married. So, in his situation, he can report rental activity for multiple properties on Schedule E, page 1 of a personal 1040. However, a complete Form 1065 partnership return is required if he chooses to bring in outside investors. In addition, Form 1065 partnership return is required for any LLC with more than one member. So if you had multiple owners, owning multiple properties under different LLCs, each LLC is required to file its own Form 1065 partnership return.
What Are Some Of The Tax Deductions Available To Short-Term Rental Businesses?
Renovation costs are a great eligible tax write-off. Those expenses are most prevalent at the outset. For short-term rentals, much of that focus is on cleaning, maintenance, and repairs. Depending on its condition at acquisition, you may need to invest a great deal to get the property in shape.
Adam further details that “depreciation expense will likely offset a good portion of your taxable income, as well. So, you are setting yourself up for a cash-flow-positive venture that may not have a large tax effect on you.”
Travel Expense Write-Offs
This may come as a surprise, but travel expenses in the form of mileage may represent a substantial tax deduction. You’ll frequently travel to and from your properties for multiple reasons: repairs, maintenance, renovations, payment collections, etc.
The annual mileage deduction is designed to cover gas, wear and tear on your vehicle, repairs, maintenance, and insurance. No double-dipping is allowed. So, you cannot submit expenses for those goods and services that are meant to be inclusive of the mileage – like gas or vehicle insurance – in addition to your mileage deduction.
However, parking expenses are not covered under the mileage deduction. So, you may write off any parking expenses you incur during business-related travel as a separate deduction.
Mileage Taxes Tip
Track your travel for the standard mileage rate deduction (2022 rate: $0.625 per mile) with a phone app. Choose an app that logs each trip and lets you add descriptions and details, helping you fulfill the IRS log requirement.
Can My Short-Term Rental Company Write Off Health Insurance?
No, health insurance is not an allowable rental property business deduction. “A business owner can only write off health insurance premiums against self-employment income,” Adam explains. And as we’ve mentioned earlier, rental income is passive income (or losses). But on the upside, you avoid paying self-employment tax. At 15.3%, that’s substantial savings.
What Services Offered By CPA Nerds Can Help Me With A New Business Venture?
Are Michael’s questions relatable to your business? Then, our Tax Services may be an excellent fit for you. We can help you launch, build, and grow your business through a full suite of business accounting services – from our management advisory role and asset protection services to business succession planning and everything in between.
If you have additional questions regarding a new business venture, we are happy to help and will guide you in the right direction. Give us a call or send an email for more information.