You’ve decided to rent out your property on Airbnb as a side hustle or full-time. and are thrilled about the benefits it brings. However, let’s be honest, the chances are that you’re significantly less excited about paying tax on that hard-earned Airbnb revenue. Airbnb and other sites like them usually report to the IRS, so you’ll be paying income taxes if you rent out your property for more than 14 days. However, tax deductions alleviate some of that burden because they reduce your tax liability. Your taxable Airbnb income will include your earnings, minus your deductions. So to retain as much of your money as possible, you’ll want to ensure that you keep a meticulous record of all your Airbnb income and expenses. This is easy when you have an efficient process in place. Let’s examine a few options.
Why is it important to track your Airbnb expenses and income?
It is essential to track your income and expenses from your Airbnb rental because, quite simply, it helps ensure that your business will run smoothly. After all, between all of the small expenditures like batteries, soap, cleaning supplies, condiments, and other essentials, every penny adds up to help you have more savings at the end of tax season. In addition, you and your accountant can use this information to file your taxes accurately. In the end, this puts more money back in your pocket.
Six tips for recording your income and expenses
1. Open a separate bank account
One of the first steps is to open a separate bank account that you’ll use just for your Airbnb venture. It might sound like more work to have two accounts, but you’ll find that the opposite is true. When you have a separate account for your Airbnb business, you will know which expenses pertain to your business. Using your personal bank account, you might save a few bucks every month, but it’ll make tracking that much more difficult come tax season. As for the extra bank account’s expense, you’ll likely be able to offset a portion of the monthly fee as a tax deduction.
2. Save your receipts
Your receipts are your first pieces of evidence for your expenditures. These help validate your deductions to the IRS, and, therefore, help lower your taxable Airbnb income. With these receipts, you can show that your expenses were for your business rather than your personal use. Be sure you also save utility, insurance, and mortgage bills if you plan to deduct those costs.
3. Enlist the services of an accountant
If you list your place on rental sites and earn personal income through other means (i.e.: employment or from running another company) or have several rental properties across several platforms, make life easy for yourself and enlist the professional services of a CPA or accountant. It’s a must. An accountant is well informed of local tax laws and will be able to tell you precisely what income and expenses Airbnb hosts should keep a record of. They may even make you aware of costs you have forgotten, like office equipment, property taxes, HVAC improvements, etc. Your accountant will also advise on whether it’s worth it to incorporate or LLC your vacation rental business or keep it under your personal income declaration. You don’t necessarily need to keep the accountant on retainer year-on-year if you don’t grow your vacation rental portfolio. Get set up once, learn how to track income and expenses, and then DIY if possible.
Try not to delay this process too long. It can be tempting to put it off as long as possible, but the sooner you can wrap your head around your tax situation, you’ll be able to avoid challenges that may pop up down the road. In addition, you’ll find that hiring a CPA ensures that everything is done legally and they can also provide you with peace of mind.
4. Use accounting or automation software
You can solve the challenge of tracking vacation rental income and expenses with modern technology. For expenses, a simple and cheap option is QuickBooks. On top of sorting your expenses by property, another key feature perfect for vacation rental owners and managers is the ability to scan receipts with your smartphone. No more lost receipts! As for tracking income, the ideal solution is a Property Management Platform (PMP). PMPs like Hostfully make it a breeze to see which property generated how much income. And on top of that, you get all the features that will help you scale your vacation rental business like multi-channel distribution, a central calendar, integrations with other niche vacation rental software, centralized guest communications, and much more.
5. Only use one payment processing vendor
Many vacation rental companies are now becoming independent from listing sites like Airbnb and Vrbo. Instead, they get reservations by operating their own direct booking websites. Just how popular are direct booking websites for vacation rental companies? According to our client base, more than 61% of vacation rental companies with 1-9 properties have one. That number jumps to 87% when more than 10 properties are managed. Then consider upselling products and services when the guests stay in the vacation rental. It’s a quick and easy way to make extra Airbnb income.
The problem is, with a direct booking site and upsell services, you need to collect payments with a credit card processing service. Choose a reputable credit card processor like Stripe that integrates well with a vacation rental business process to monitor your income streams better. It’ll centralize all your income transactions that don’t run through Airbnb or Vrbo/HomeAway. In addition, it’ll make collecting income data that much easier.
Using something like Stripe helps ensure that your guests can simply and quickly send you their payment. It will also help you manage that Airbnb revenue and keep track of necessary receipts. Payment processing companies also help prevent the loss of records or even payment errors. You’ll find that data collection on your income will be much easier too.
6. Automate filing income and expenses
Keeping track of income and expenses by hand is a time-consuming process. It can be difficult to track the different revenue sources when it comes to income. Assuming you list your properties on more than just Airbnb (i.e.: Vrbo, Booking.com or your own direct booking site) you’ll have to log in to each platform and figure out which reservations brought in what payout. As for expenses, you’ll find it time-consuming to organize receipts and invoices. Will you remember which receipt relates to a specific property at the next quarterly tax filing? Remember that tracking income isn’t just crucial for tax purposes. You need to be organized and keep insightful vacation rental analytics to guide future business decisions.
To make it easy to file income and expenses, check out Zapier. With this software, you can connect almost any two apps together and tell them what to do when something fits certain parameters. For the example of short-term rental income tracking, you can tell Zapier to sort all Airbnb income statement emails into one folder. Or better yet, get Zapier to take the information and input it into a Google Sheet or Excel file the minute it comes in. In addition, major property management platforms (PMPs) like Hostfully are integrated into Zapier, which opens up the possibility for other accounting automation in your vacation rental business.
Which Airbnb expenses are tax-deductible?
There are a lot of tax-deductible Airbnb expenses. Why does it matter? Well, you can offset your Airbnb income with those tax deductions. The plus side is that you’re likely paying for those expenses already. So claiming expenses is an easy way to recoup taxes owed. All you need is to keep track of what you’re allowed to claim and keep records for future reference.
1. Cleaning services and supplies
Nowadays, it’s crucial to run a clean vacation rental to get a 5-star review. Luckily, all cleaning products are expenses that can be deducted come tax time. But did you know that you can deduct cleaning services like laundry fees and turnover services? So it’s all the more reason to pay a cleaning company to do the dirty work. You can set up your Airbnb pricing or implement a cleaning fee to cover your cleaning services expenses. In addition, owners and hosts who use cleaning management software and apps to coordinate services can claim the subscription fees as expenses.
However, it gets a bit more tricky if you charge a security deposit. In this situation, if you choose to deduct the cost of the repairs, the retained security deposit is considered taxable income.
2. Repairs and maintenance
A stitch in time saves nine! If you get a professional to fix that pipe or window, you can claim any repairs that you had to make to your property. The same goes for fixing an expensive HVAC system! If you’re a DIYer, any supplies you pick up at the hardware store can be claimed as deductions.
3. Insurance, property taxes, and mortgage
When you’re renting your place to strangers, you must have vacation rental insurance. You worked hard to get that investment property up and running. So why risk it? Unfortunately, Airbnb insurance isn’t necessarily sufficient to keep your business completely protected. First off, the payout time is incredibly long. Second, the insurance won’t cover lost income if your vacation rental is unusable during repairs (i.e. if a renter causes a fire). Though insurance can be costly, claiming it as a tax deduction offsets parts of the cost come year-end. Just make sure that you save your bills to include them in your deductions.
Utilities like water, electricity, and the internet are easy deductions, especially when you consider that these days most guests are looking for free Wi-fi. Don’t forget that you can also claim subscriptions to services like Netflix, Hulu, and Amazon Prime TV if you offer them in your vacation rental. If you’re using your personal account both at home and in the vacation rental, don’t be greedy and claim the entire subscription fee as a deduction—claim 50%. However, check with an accountant if you can do a split claim as tax laws in your area may vary.
5. Appliances, furniture, and household supplies
You will need cleaning supplies, snacks, furniture, fittings, bedding, and additional accessories to run your Airbnb business successfully. The good news is that you can deduct these costs as well. So, welcome your guests with a bottle of bubbly and some snacks. Yes, you can deduct those expenses from your income. The added benefit is that a good vacation rental welcome pack is also an excellent way to score a 5-star review.
6. Marketing and advertisements
Any business requires marketing. You will also boost your income by attracting more visitors when you pay for marketing. Plus, you can pay less tax since any marketing cost is tax-deductible. This is clearly a win-win situation.
7. Professional services
Here is another win-win situation. When you enlist the services of an accountant, they will ensure that you deduct all the expenses that you can. That also includes the accountant’s fee. The same goes for other services like lawyers, photography, website building, and online marketing. You can even claim expenses like paid ads to your direct booking website as tax deductions. So, get help from the best and enjoy those deductions!
8. Vacation rental software
If you use vacation rental software like a Property Management Platform (PMP), dynamic pricing tools, cleaning management apps, or home automation apps, you can claim any of the subscription fees as expenses. That makes getting such software a much more appealing proposition when you consider the income-boosting or time-saving benefits they bring to the table.
Hostfully Subscription Fees
Hostfully charges a subscription fee, which is billed monthly or annually, for the use of the Hostfully platform. This fee is an expense that you can deduct as a business expense when it is time to file your annual taxes. Refer to IRS Publication 527, Residential Rental Property to learn more about reporting rental expenses.
Top 3 Airbnb expense tracking apps
Feeling a little overwhelmed? We know that taxes can trigger a whole slew of emotions. If you’re feeling overwhelmed by the need for tracking all of this information, we highly recommend using one of these excellent expense tracking apps to get you started.
Hurdlr is a wonderful app because it can help you maximize the amount of money you can save with deductions. It also links with your bank and credit cards to securely and seamlessly manage all of your Airbnb income and expenses.
You’ve probably heard of Quickbooks before, even if you are brand new to the vacation rental game because it is widely viewed as the perfect accounting software for small businesses. You’ll also enjoy the mileage tracking, creating batch invoices, and even the business analytics side.
Users love that Stressa is very easy to use and can track everything from income to your spending. This app does everything you’ll need to prepare for tax season.
Tax season can elicit eye rolls, nerves, and frantic preparation. However, if you take the time to track your expenses, hire a great CPA, and claim all qualifying expenses, tax season doesn’t need to be a stressful time of year.