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.

Monday, July 25, 2016

Zen and lodging taxes

Be the tax, Danny.”

Lodging taxes get a bad rap.  The topic of “taxes” generally makes people squirm and conjures up ominous images of black-suited tax agents.  When someone purchases a vacation rental property, the concept of taxes is frequently far from their minds.  As lodging taxes face increasing scrutiny in the vacation rental industry, it’s easy to view this process with contempt.  However, if you can put aside for a moment any negative preconceptions you may have regarding lodging taxes, you may find that there are many possible reasons to view taxes in a more positive light – especially if your rental is located in a popular travel destination.

“Tax on, tax off.”

I can probably guess what you’re thinking.  Lodging taxes are a pain, pure and simple.  What good are they?  Well, here are just a few ways that may help you look at lodging taxes in a different way and how you may actually benefit from them:

·   You don’t pay sales & lodging taxes out of pocket:  Sales & lodging taxes are paid by your guests, not you.  You’re responsible for collecting the taxes and filing the returns, but you guests are the ones actually paying the tax.

·   Taxes help your town’s infrastructure:  If your property is in a popular tourist area, the majority of your community’s revenue likely comes from travel and tourism-related taxes.  A good chunk of those tax dollars are commonly reinvested in improving your town’s infrastructure to keep your community attractive and attract future visitors.

·   Taxes legitimize the vacation rental industry:  There are some hotels that would love to see less competition in the lodging space.  Certain companies have led a charge on banning the vacation rental industry on the grounds that owners aren't collecting taxes from their guests.  By embracing taxes, we can ensure that vacation rentals (and their owners) continue to thrive for many, many years to come.

So you see, taxes aren’t all bad.  The return filing process may be tedious, but by collecting and remitting lodging taxes, you actually benefit in the long run.  If you accept them – no, embrace them!  you will see the benefit.  But in the off chance you still don’t want to deal with the hassle, we can help.


Monday, July 18, 2016

Two great (free!) resources for vacation rental property owners - both new and experienced

Vacation Rental guides

Congratulations on owning a second home or vacation property!  And congratulations too for being an astute business persons and looking into the benefits of offering your home as a short-term vacation rental.  Whether you are just getting started or are already actively listing your property on popular vacation rental platforms like Airbnb, HomeAway, VRBO, or FlipKey, there are always new tips and tricks to learn.

Our friends at HomeAway and EvolveVacation Rental Network have put together two handy guides (free!) with a ton of useful information – especially if you’re just getting started.  But even if you consider yourself a vacation rental expert, there could be something you missed and it’s worth perusing these guides.  They’re relatively short reads yet chock full of great insights and advice.  Don’t take the chance that you could miss a quick suggestion or delighter to turn your guests’ experience from “meh” to “wow!”

The first from HomeAway is a step-by-step guide to renting you vacation property.  It’s a primer to make sure you’re ready to start accepting guests and every step necessary to get you to that point.  HomeAway’s Renting Your Vacation Home:  a step-by-step guide is a resource you’ll want to keep handy.

Evolve’s Ultimate Vacation Rental Success Guide is a bit meatier and will help you really optimize your vacation rental property listing and business.  This tutorial is more in-depth and detailed and can be viewed as a “how to” – how to step up from the basics of home renting and move confidently into the big leagues.  The only cost is an email address!  And be sure to study page 8 in Legal & Tax Preparation for some sound advice about lodging tax compliance (hint, hint)!

Wednesday, July 13, 2016

Tax challenges for short-term renters

There is a lot of misunderstanding regarding lodging taxes and how they’re defined – what they are and what they aren’t.  In this episode of Will’s Whiteboard, we clear up some of the common misconceptions around lodging taxes.  Check out our informative video and in less than four minutes, you'll be much savvier regarding lodging tax.

Monday, July 11, 2016

Everything you ever wanted to know about lodging tax (but were afraid to ask!)

The world of lodging taxes can be murky and intimidating.  Many owners of vacation rental properties are simply unaware that they need to charge & collect lodging taxes from their guests – and then file lodging tax returns & remit tax payments.  Some may have heard about lodging taxes but don’t really know what they are and aren’t sure they apply to them.  Others have gotten the cold wake-up call in the form of a nasty-gram from a tax jurisdiction informing them that they owe back taxes – potentially with fines and interest on uncollected lodging taxes.  Urp!

We’ve seen and handled the spectrum.  From the innocent inquiry – “Um, can you please tell me if I need to be charging lodging tax?” – to the panicky “HELP!!  I just got a letter from the county saying I owe thousands in back taxes!”  It’s easy to understand why people are so confused by lodging taxes – and it’s why we’re here to help.  Here are a few things to note about lodging tax.

It’s called different things but means the same thing

Lodging tax, occupancy tax, hotel tax, stay tax – they all refer to a type of sales tax on short-term rental revenues.  This is just the first layer of complexity but perhaps the easiest to get past.  It’s important to understand how the tax jurisdictions governing your property’s location define “short-term,” but typically, any rental of 30 consecutive days or less is taxable.  Most jurisdictions exempt rentals over 30 days from taxes.  Most – it’s not always the case, which leads to the point that…

Tax rules and regulations differ by jurisdiction

There are literally thousands of tax jurisdictions across the U.S. and there’s a good chance that your property is governed by at least three of them – the city, state, and county where your property resides.  Each has their own tax authority which means – you guessed it – three separate lodging tax rates (and three separate tax returns).  And possibly differing rules on applying those individual rates.  You must add up each of these rates to determine the total lodging tax rate to charge your guests.  Still following?  Good, because…

Tax due dates can also vary by jurisdiction

When you collect sales & lodging taxes from your guests, you’re required to file them in a timely manner as well.  The timeline in which these returns are due can vary but is often monthly or quarterly.  But your city taxes could be due monthly, your county taxes due quarterly, and state taxes due annually.  It’s a challenge to even the most disciplined bookkeeper to sort out and keep track of how much is due to which tax agency and by when.  Then comes the fun part of actually filling out a return, cutting the check and mailing hoping that you’ve got it all right and that you’re going to make the filing deadline!  The key consideration driving the need to comply with lodging taxes is…

You’re in business

In a nutshell, if you’re renting out a room or an entire home, 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.  Again, the requirements and application process for obtaining these licenses vary by jurisdiction.

All this can require a lot to effort simply to remember and keep organized – to say nothing of actually filling out and filing paperwork and paying taxes.  If you don’t want to deal with understanding all of the complexity of your lodging tax requirements, and the burden of filing tax returns and remitting tax payments, let us automate your lodging taxes so you can instead focus on booking your property and keeping guests happy.

Friday, July 8, 2016

Top tips when considering buying a vacation rental property

Owning a vacation home can be a wonderful experience with many benefits.  It can be your escape to the mountains, beach, or wherever you like to relax and unwind.  Many property owners have also discovered that renting their property out when they’re not using it can be an excellent way to offset the cost of ownership, pay down the mortgage, or simply earn additional income.  Whatever the case may be, here are a few things to keep in mind as you consider entering the world of vacation rental ownership.

  1. If you are renting your property to guests, it is considered a vacation home. This would include homes, lake houses, condos, mobile homes, house trailers, or yachts.  And, if you rent out your home to guests, you likely must collect taxes on all rental payment transactions.  Check with your local tax authorities to find out what their specific requirements and regulations are.  Most of the time, rentals of 30 consecutive days or under are taxable, but this varies by jurisdiction.

  2. To evaluate a potential vacation rental home investment, look at comparable rental rates on sites like HomeAway and VRBO.  In general, real estate will increase in value over time but certain markets will have a greater upside over time.  Evaluate how the market has performed historically and identify areas of growth that can lead to greater returns.  Additionally, ensure that the zoning laws and boundaries in the area allow you to rent out your home to guests.

  3. Manage your vacation rental like a business. Owning a vacation rental is a great way to earn extra income but it isn’t “hands off” – the most successful owners are diligent and meticulous in managing and maintaining their property.  You must remember that your guests are relying on you to have a great vacation which means their experience should be as painless as possible.  You will likely have to do general maintenance on your vacation home and provide things like extra linens and towels and amenities like basic condiments and coffee filters for guests to use.  In popular areas, the vacation rental market can be fiercely competitive so it’s important to research how others are marketing their properties and highlight features of your property in your own marketing efforts that make it stand out -- like the ability to accommodate special occasions, perhaps.  Of course, there’s the associated lodging tax rates and regulations.  Don’t forget to collect the necessary tax revenue and file the proper rental taxes for your city, county, and state!