Friday, February 17, 2017

The Income Tax Filing Season Is Upon Us – How to Handle Lodging Taxes Properly

If you’re like millions of taxpayers, you’re probably either anxiously awaiting your tax refund by now, or are dreading filing and pushing it off until the deadline – Tuesday, April 18th this year, so enjoy a few extra days’ reprieve!  And if you’re like millions of other taxpayers, you were an active participant in the “sharing economy” last year and are perhaps facing some new income tax considerations associated with driving for Uber, or renting a house or room on Airbnb.

Last year, the IRS unveiled a new Sharing Economy Tax Center aimed at helping taxpayers account for these activities correctly on their 2016 income tax return.  Understandably, the IRS content focuses on Issues for Individuals Performing Services – like a car shuttle service or short-term property rental.  But remember, the IRS is exclusively concerned with collecting the proper taxes on your income at the federal level.

By contrast, lodging taxes are collected at the local level – typically city, county, and state.  They are a form of sales tax on a rental transaction and thus lodging taxes are completely separate from income tax.  As important as it is to report your income from Uber or Airbnb on your federal and state income tax returns, in the case of short-term property rentals, you should also be collecting and remitting lodging taxes – commonly on a monthly and/or quarterly basis.

But don’t despair.  Lodging tax doesn’t come out of your pocket – the government isn’t dipping into the rental revenues you’ve collected.  It’s actually your renters who pay the tax, but as the property owner, you are responsible for collecting the tax and then remitting the tax returns & payments to the local tax agencies.  But before you can start collecting and remitting taxes, you also likely need to get a license or permit (possibly multiple) that allows you rent your property legally.  This is also a check and balance with the local tax agencies to ensure that anyone actively registered to operate a rental property in their jurisdiction is filing the necessary returns.

The first step is understanding that unlike income tax, lodging taxes are filed year-round and are a tax on the rental transaction, not on your rental income.  You won’t find lodging tax advice on the new IRS website!  Although you may now recognize that lodging tax compliance is an altogether separate consideration than income taxes, actually complying with all of your local lodging tax requirements and regulations is where things get complicated and confusing.  Having to obtain multiple licenses or permits and then keeping the tax rates and filing periods straight – to say nothing of actually completing and submitting the forms and payments to each tax agency – can get really tricky, quickly.  And the challenge is only compounded if you have multiple properties!

That’s where we come in.  For just a few dollars per month, we handle it all so that you can focus on anything else other than lodging taxes.  Rest comfortably knowing you’re 100% compliant – guaranteed.  It’s what we do.

Tuesday, November 15, 2016

The Top 5 Lodging Tax Mistakes You Don't Know You're Making

There are many potential mistakes that vacation rental property owners can make when it comes to lodging tax.  With over 13 years in the industry, we’ve just about seen them all, however some tend to occur more commonly than others.  Although we’ve been around awhile, occasionally, even we get surprised by a rental property owner’s unique situation.  The cases we’ve seen could fill a library, but we’ve managed to whittle them down into the top 5 lodging tax pitfalls that catch property owners off guard.  In no particular order…

  1. Not being licensed to rent your property
    Many people believe (erroneously) that if it’s their property, they can rent it out if they want to or not.  Not true!  Properties are subject to zoning laws and your property may be in an area that doesn’t allow short-term rentals.  And even if it is permissible, you’re effectively operating a hotel business in the eyes of the tax authorities and must collect lodging tax from your renters.  This means that you need to first register with the tax authorities and obtain any required business licenses or tax collection permits in order to rent your property legally and charge tax.
  2. Collecting tax from guests but not knowing where, how, and when to pay it
    You may be aware of the need to charge & collect lodging tax from your renters and are already doing so, but knowing when to file and to what jurisdiction is another matter.  For example, if the total lodging tax rate on your property is 9%, that could be made up of 4.1% to the city, 3.2% to the county, and 1.7% to the state.  And the filing periods for each can differ, too – potentially monthly to the city, quarterly to the county, and annually to the state.  Keeping all of the tax amounts and payment timing sorted out is a challenge for even the most experienced property owners!  And the government really doesn’t like it if you’re collecting tax – which is their money – but not paying it to them.  This can be met with criminal charges.  Gulp.
  3. Assuming the tax is paid at the end of the year or paid with income taxes
    Related to the previous point, lodging taxes are not income tax.  We’ve seen some property owners simply add their rental revenue to their annual income tax return.  This is not correct!  Although you must still account for income from your property rental on your personal or business income tax return, lodging taxes are completely separate from income tax.  The key difference is that lodging tax is a form of sales tax on rental transactions between you and your renters which must be treated outside of income tax.  The tax is actually being paid by your renters – you are really acting as an intermediary between your renters and the tax authorities in collecting and remitting these taxes.
  4. Not collecting and remitting any taxes – not knowing or ignoring the requirements
    Not collecting any taxes on your short-term rentals is a big no-no too in the eyes of the tax authorities.  And here’s the really dangerous part.  If you haven’t been collecting and remitting tax payments, when the authorities find out, you are still responsible for making the tax payments even though you haven’t been charging your guests lodging tax.  In other words, your rental revenues just got reduced by the percentage you should have otherwise been charging and collecting on top of your rental rate.  Oh, and to add insult to injury, there will likely be penalties and interest on top.  Ouch!!
  5. Charging the wrong tax rate
    Ok, so you’re licensed and renting your property legally and collecting & remitting lodging tax.  Kudos to you!  But determining the right total tax rate to charge can also be a significant challenge.  As mentioned before, your property is probably governed by three different tax authorities – city, county, and state.  But there can be more.  In popular tourist areas, there may be “special tax jurisdictions” that add yet another layer.  And just for fun, each may have differing rules on applying those individual rates depending on length of stay, type of renter, etc.  And then the rates can change.  Fortunately, if you have questions about the correct lodging tax rate you should charge, we have a handy lodging tax rate lookup tool here that can save you the trouble.

The 6th mistake implied in this list is trying to figure out your lodging tax requirements and filing returns and remitting tax payments yourself!  Lodging taxes can be expensive to get wrong, but they can be easy to get right with MyLodgeTax.  If you’d rather stay out of trouble and be confident that your taxes are done right, we can help.

Wednesday, October 12, 2016

Beware of Men In Black!

This is a blog post I wish I didn't have to write.  I don't like to talk about things that are unpleasant.  However, the harsh reality is that there is a day of reckoning coming for many unwitting vacation rental property owners that could have dire consequences.

I have been reading with increasing frequency about tax jurisdictions cracking down on short-term rentals — and I'm not even talking about the ongoing contentious debate around whether short-term rentals should be allowed at all in certain areas.  While that certainly is a critical issue as well, I'm talking about tax authorities ramping up their efforts to make sure that they're getting all of the lodging tax revenue they should from the exploding sharing economy.  And they're getting very crafty.

In several jurisdictions around the country, they'll simply search the Airbnb, VRBO, or HomeAway websites for properties in their town or city.  Then, they'll go to their records to see if there's a license or permit for that property and if they've been receiving attendant lodging tax returns and payments.  If there's no permit, no tax payments, or neither, the Men In Black come calling in an unmarked sedan.  Ok, maybe not in person, but you can be sure that at least a threatening and demanding letter is on its way in the mail.

We're hearing more and more stories from tax jurisdictions — told with great gusto and pride — about how they're tracking down these property owners and recouping large amounts of back taxes as well as penalties and interest, much to the great surprise and dismay to the property owner.

In the vast majority of these cases, there was no criminal activity intended on the part of the owner — they simply didn't know their lodging tax obligations or were misinformed.

         "I rent my property less than two week a year so I'm exempt."

         "I don't operate a hotel so lodging taxes don't apply to me."

         "I report my rental earnings on my income tax so I take care of them that way."

These are just a few of the common excuses we hear that are completely wrong.

The most frustrating thing for us is that the difficult time that these property owners now face is completely and easily preventable.  Property owners aren't even the ones technically paying lodging tax — their guests are.  The property owner is just a pass-through entity collecting the tax from the renter and then remitting the tax to the appropriate tax authorities.  There is no lodging tax out of pocket for the property owner!

That is the primary difference between lodging tax and personal income tax.  Lodging tax is a tax on the transaction regardless of how many nights you rent per year.  And yes, for all intents and purposes, you actually are operating a hotel in the eyes of the tax authorities.

Here at MyLodgeTax, we are dedicated to preventing these surprises and "gotchas."  Don't be a victim of these intensifying crack-downs.  With our simple solution, you can rest as comfortably as your guests knowing that you're 100% tax compliant with your vacation rental property.

Wednesday, August 31, 2016

4 Vacation Rental Tax Mistakes Almost Everyone Makes

Vacation rental tax mistakes

Lodging taxes are full of "gotchas."  In our guest blog post for our good friends at Evolve Vacation Rental Network, we outline some of the most common pitfalls we've seen in our 13+ years of experience ensuring that our customers are compliant with their lodging taxes.  Don't let one of these mistakes catch you off guard!

Thursday, August 25, 2016

The IRS launches Sharing Economy Tax Center, but it won’t help you with lodging tax

This week, the IRS unveiled its new Sharing Economy Tax Center to help active participants in the sharing economy navigate the many income tax considerations associated with common income-earning activities such as driving for Uber or renting out a room on Airbnb.  Unsurprisingly, the IRS content focuses on Issues for Individuals Performing Services – like a car shuttle service or short-term property rental.  But consider the source.  Remember, this is the IRS whose chief concern is how you report revenue from these activities and file your individual income tax returns.  They are focused exclusively on your income and collecting the proper taxes on that amount at the federal level.

But lodging tax has nothing to do with the IRS.  If you’re looking for lodging tax help on the new IRS website, you’re likely to be frustrated.  Although the site does provide useful information for vacation rental property owners about depreciation, amortization, as well as what expenses you can deduct (such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance) – issues which will affect your annual taxable rental income – it does not provide any lodging tax compliance guidance whatsoever.

This is due to lodging tax being levied by the city, county, and at the highest level, state tax authorities – not at the federal level.  So while the IRS site may help you understand how to reflect personal earnings from your property rentals on your individual income tax return, it isn’t going to help with lodging taxes.  Which is where we come in.  Lodging tax is a particularly tricky tax because there are multiple entities involved – usually the city, county, and state.  And it’s typically up to the vacation rental property owners themselves to figure out their lodging tax obligations to each tax authority governing their property’s location.  If that doesn’t sound like much fun to you – hint, it isn’t – we can help.  We’ll take care of everything and automate your lodging taxes for you.  And we won’t ever refer you to an IRS Tax Center site – we promise!

Thursday, August 18, 2016

How Does MyLodgeTax Work?

We know how we do what we do, but do you?  Lodging taxes can be a confusing subject – sometimes explaining them and how we automate your lodging tax compliance can be difficult.  In this short & fun animated video, we cut to the chase regarding what lodging taxes are, how they affect vacation and short-term rental property owners, and what we do to automate the whole lodging tax compliance process.  All you do is report your rental revenue and we do the rest.  Watch and learn!

Monday, August 1, 2016

Lodging tax timing trauma - an example

Ok, so you know about lodging taxes and are confident you can tackle them yourself.  You’ve prepared your own income tax return in the past – how hard can this be?  Well, for starters, for most people, filing an income tax return is a once-a-year chore.  You do it once and then forget it until next April rolls around.  And you usually file both your federal and state return at once.  By contrast, the timing of lodging tax return filings & payment is typically monthly or quarterly – and possibly semi-annually or annually, too.  Plus, you’re likely dealing with at least three different tax authorities – city, county, and state – requiring three different (and separate) returns.

Let’s look at a quick example.

Guest:                                    Randy Renter
Nightly rate:                                       $200
Number of nights:                                  x 5
Total rental revenues:                      $1,000
Mandatory cleaning fee:                        $50
Total taxable revenues:                    $1,050

City tax rate:              4.2%
County tax rate:          3.5%
State tax rate:             2.1%
Total tax rate:             9.8%

Taxes charged:                                   $102.90
Total fees charged Randy:                $1,152.90

Although you are required to collect the $102.90 in taxes from Randy, it is not your money.  You are a “pass through” entity between your guest, Randy, who is paying the tax, and the taxing authorities.  However, it is you who are responsible for collecting the tax and remitting it to the city, county, and state tax authorities.

Back to our example.  The amount due to the individual tax authorities is:

Taxes due
City (4.2%):                   $44.10
County (3.5%):               $36.75
State (2.1%):                  $22.05
Total:                           $102.90

Filing frequency
City:         Monthly
County:   Quarterly
State:       Annually

In this example, you would have to file, at a minimum, a monthly return of $44.10 to the city.  If it’s not the end of a calendar quarter, you would have to hold on to the $36.75 in tax to the county until it’s time to file your quarterly return.  Similarly, you would have to retain the $22.05 owed to the state until the annual return is due.  If it’s the end of the year, you’d have to file all three separate returns to the city, county, and state.  Oh, and those months you don’t rent?  You’re still responsible for filing a return for $0 to the city.  Yep.  Can’t make this stuff up!

By now, you should be starting to get a sense for how the complexity of lodging tax compliance can quickly increase – especially if you have multiple properties.  Our guess is that you’d rather not have to deal with lodging taxes so that you can focus on other things – like renting your property and keeping guests happy.  But that’s just a hunch!  If you’d like to simplify your life, leave the taxes to us.