The Airbnb Ambassador & Super Host Coach, “a.k.a. A-Coach,” sat in her office when the phone rang. It was on the Airbnb business line, and she picked it up.
“A-Coach here. How may I help you.”
“Hi, coach. I am Juli from your Facebook group. I have never run my own business before, and I am clueless about keeping the right paperwork. And, most importantly, I don’t want the IRS to audit me!”
“Great question Juli, and the right question to ask when you are starting. When you start hosting, you are focused on setting up your home, getting your listing page just right, and setting prices. That is a lot of tasks. Good for you to ask how to set up the back office.
The small business mistake you should avoid.
“When you FIRST start preparing for your hosting business is the time to set up simple bookkeeping. Why? Because when you first start, you will have many start-up expenses, which may be tax-deductible if you document these expenses correctly.
Create new business bank accounts to make bookkeeping easy
“The first thing a new hosting business owner must do is create new business bank accounts. To make record keeping easy and clean, you MUST separate your business accounts from personal funds. Create:
- Business Rental Income and
- Business Rental Expenses with a debit or credit card
“That is all there is to it!
“On your Airbnb profile, enter your bank’s routing number and your rental income account. Now, when you purchase anything for your business, use your rental business card for rental expenses, Airbnb deposits directly into your rental income account.
“Do you see Juli, how simple this is? EVERYTHING IS IN TWO BANK ACCOUNTS.
“That is easy. And what do I need for the IRS at the end of the year?
Be sure to keep these documents!
“When you run your small business, the government mandates that you keep certain documents.
PROOF OF INCOME
- At the end of the year, if you earned over $20,000 hosting, Airbnb sends you a Form 1099-K.
- If you make less than $20,000, You download your yearly transactions from the Airbnb site.
PROOF OF EXPENSES
- While the IRS does not require you to keep receipts for certain expenses under $75 but best practice is to KEEP EVERYTHING.
- Save receipts by date, vendor, amount, and category to cloud storage. And, if using a bookkeeping application (could be Excel), attached receipts to the entry.
RENTAL BUSINESS CREDIT OR DEBIT CARD STATEMENTS
- Download monthly digital statements from your bank and store them in safe cloud storage.
CANCELED BUSINESS CHECKS
- Download monthly digital bank statements to your safe cloud storage.
ISSUE 1099 TO INDEPENDENT CONTRACTORS
- IRS Form W-9 is your request for a taxpayer Identification Number.
- If you pay more than $600 in exchange for services, such as payments to an independent contractor or fees to a lawyer or law firm, the IRS requires you to issue a W-9. Ignoring this requirement may be a red flag if you try to deduct these expenses.
“If you follow the above instructions, you should feel confident you are running your back office in compliance with government regulations.
Hosts may be liable for a local hospitality tax.
‘Most cities have a hospitality tax that hotels and motels pay to support local recreation amenities. You do not want to get caught NOT paying your share and putting the hosting business at odds with local authorities. After all, cities attract tourists, and some of those tourists stay at your Airbnb.
Airbnb makes it easy to pay Local taxes.
- Go to your listings on Airbnb and select a listing
- Click Manage listing
- Click Local taxes and laws
- If Airbnb collects taxes for your area, you’ll see a default tax collection setting on the page.
- Airbnb collects local taxes directly from the Airbnb guest and deposits them into your city tax account.
Remember to pay monthly estimated taxes on hosting income
“Yes, even small business owners pay IRS taxes. Don’t wait until the end of the year. The IRS requires monthly estimated tax payments.
- Create a bank checking account for tax payments.
- Ask your accountant what tax percentage is acceptable.
- Every month transfer your estimated amount from rental income to tax payments.
- Log into the IRS site and click on the “Pay Estimated Taxes” button. The IRS will automatically transfer from your tax payments to the IRS.
Claim these tax-deductible expenses and increase your profits
There are many tax-deductible Airbnb hosting expenses. You can offset your Airbnb income with tax-deductible costs, thus reducing your tax burden. The plus side is that those are expenses you’re likely paying for already. The IRS requires you to keep a digital expense record.
Cleaning services and supplies
Hosts have always known that an essential part of guest reviews is cleanliness. With the onset of COVID19, it is even more critical. Because cleaning is a necessary expense of running the business, the IRS allows hosts to deduct all cleaning. Cleaning includes cleaning supplies AND cleaning services like laundry fees and turnover services. Plus, you can set up your Airbnb pricing to have a cleaning fee to cover your cleaning services expenses. Hosts may also deduct management cleaning software and subscription fees for apps to coordinate cleaning services.
Repairs and maintenance
“If you hire a professional to fix anything, you can claim any repairs to your property. If you like doing repairs yourself, you may deduct supplies required by the repair effort. Remember to scan your receipts and link to the entry in your bookkeeping system.
Insurance, property taxes, and mortgage
“When renting your place to guests, a good business practice is to have vacation rental insurance. Don’t risk it! Yes, Airbnb provides insurance of $1M, but it may not be enough to pay for repairs, lost revenue, and your lodging if you must move while repairs take place.
“Consider adding more insurance. For example, you could place your property in a trust. That protects you from someone trying to sue you directly because the trust owns the property. And, it is messy for someone looking for easy money to challenge living trusts in court.
“With the property in a trust, you can take out comprehensive umbrella coverage in addition to all other protection. The cost is minimal and is tax-deductible in proportion to the square footage used for Airbnb hosting.
“You pay a monthly mortgage to a financial institution. You may deduct a percentage of your mortgage. Check with your tax advisor for what is possible.
“Utilities (water, gas, electricity, and internet) may be easy deductions, proportional to the rental portion ratio of the property. If you pay for subscriptions to services like Netflix, Hulu, and Amazon Prime TV, check with your accountant for the rules on splitting expenses.
“Your listings may benefit from marketing. Your hope is more business. Therefore, marketing costs may be tax-deductible.
“When hiring accounting and tax services, they should ensure that you deduct all allowable expenses. Having the proof makes it easy and fast. Services also include the tax preparer fee. For example, if you purchase a bookkeeping application or an online service, this might be tax-deductible. The same goes for other services like photography, website building, and online marketing.
Vacation rental software
“If you use vacation rental software like a Property Management Platform (PMP), dynamic pricing, cleaning management, or home automation, you can claim any subscription fees as expenses. Don’t forget security services such as noise monitoring and outside camera coverage.”
“Juli, I know this may seem like a lot to remember, but It is not so bad, and it does not take much of your time. Get a good bookkeeping system that integrates with your bank, follow the directions for reconciling monthly statements, and scan invoices into the system. That is it! Download the file and hand it to your tax accountant at the end of the year.”
“Thank you, coach. I think I have got it. Collect and record income and expenses in business accounts along with proof of transactions. And, pay estimated taxes.”
“Believe me; it does not take long to create a bookkeeping routine, just as guest greetings and making sure your place is perfect. It is all part of running your Airbnb like a business.”