The Airbnb platform has created a real sensation in the tourism industry. Thanks to a simple interface, tourists may book accommodation in different price categories in more than 220 countries; active advertisements exceeded 7 million. The system also allows realty owners to monetize their property by renting it out on the platform. As its popularity increased, the need for Airbnb accounting increased as well. Let’s discuss how to control income, figure out expenditures, and avoid common challenges.
Navigating Airbnb Bookkeeping
Generally, bookkeeping for Airbnb involves recording revenue and expenditures on your real estate. At first glance, everything seems simple, but making accurate calculations is sometimes problematic, especially if you own several properties in the system.
Some realty owners are worried about tax returns because their accounting system is built on payments received. Rental income is a source of revenue. You are required to track overall gains (completed payouts) and maintenance and repair expenditures on the property.
You have to organize such operations to create a full set of all the company transactions recorded on the accounts. This structure consists of your rental earnings and spending. You must correctly classify all the cash transactions, reconcile the accounts, and submit your financial documents to the tax authorities.
Many landlords find it challenging to monitor everything at once. Your financial documents include total Airbnb income, deductions, and adjustments for platform services. If you plan to minimize your income tax pay on the real rental profit, you must carefully monitor all tax deduction opportunities.
The significance of managing finances for your Airbnb business
Property owners need to monitor the inflow/outflow of cash carefully. Considering such information is vital to guaranteeing the smooth functioning of your venture. Any minor cost associated with your Airbnb property should be reflected on your accounts to maximize savings on mandatory fees. You or your bookkeeper can use this data to calculate your taxes correctly and get more funds in the refund.
New property owners often embrace the potential of Airbnb while neglecting the primary components of launching a successful business. Vacation rental accounting, working with taxes, paying contractors, and storing invoices are a few types of economic activities that property owners often forget about. These are the key factors that help you analyze how profitable your home rental business is.
If your calculations highlight that your spending exceeds your gains, you will face difficulties. Carefully manage the inflow/outflow of cash to achieve success in the Airbnb system.
Optimizing Accounting Practices for Airbnb
Renting out real estate as a short-term vacation spot can be an excellent income-earning option, allowing you to own multiple apartments and run a business year-round. While Airbnb has made promoting rentals and paying for services more accessible, don’t forget you’re still running a business. It means you will have to keep detailed records, the rules of which we will discuss below.
Calculate all income
The money you receive in the Airbnb system falls under the payout category. This amount includes per-night charges, cleaning fees, additional occupant surcharges, and other commissions you collect, and the platform automatically deducts mandatory fees from your payments.
Rental gains, which are indicated in tax documents, are your total income. It is the sum of payments before subtracting commissions and refunds. Your declared revenue will exceed the system’s payments, and the difference is created by deducting spending from your tax documents.
Control the use of real estate
Due to the peculiarities of tracking expenditures and the strict requirements for financial reports, it is necessary to record when the real estate was utilized for private needs and when you rented it out.
As per IRS guidelines, a dwelling is classified as a personal residence if it is occupied for over two weeks during the year or for a minimum of 10% of the days it is rented out. Moreover, if you use your house for both renting and personal living, you have to split your expenditures between the rental and your private needs.
Calculate expenditures
Don’t forget to record even small expenditures. Buying a table, renovating the sink, cleaning – it all adds up.
Property owners often don’t take advantage of many deductions because they don’t note all the minor expenses during the year. Remember that as long as tenants live in your home, these costs must be considered. It’s essential to know how to record rental expenses in 2023.
Note the common categories of expenses:
- All purchases made to decorate apartments (towels, bedding sets, devices, decor, dishes, etc.)
- Renovation and maintenance
- Essential utilities
- Insurance
- Management charges
- Real estate taxes
- Home loan interest
- Furniture/equipment purchase
- Marketing/advertising
- Travel expenses (if applicable)
- Miscellaneous expenses
Assign each transaction to the appropriate expense category. This helps you analyze spending patterns and identify areas for potential cost savings.
Handle deductions correctly
Property owners can fully or partially write off indirect spending. The deduction rate depends on what part of the building you are renting out and rental period. Direct expenditures, in contrast, are fully deductible.
Wholly rented out: If you do not utilize the house for private needs, you can subtract all expenses during the rental period. Consider this example: you rent out a house for 140 days, which means you may deduct 38% of your spending from rental earnings (140/365 = 38%).
Shared space: If you rent out part of the premises while living in the home, you may deduct a portion of the expenses for the days you rented. Consider this example: you rent out 170 sq. m. of 1400 sq. m. for 80 days. Let’s assume that your total costs are $12,000. You can deduct 22% (rented period) and 12% (space leased): (22%*$12000*12% = $316.8).
It is crucial to perform all calculations correctly to avoid problems with the tax authorities.
Assets and upgrades
Be sure to keep a record of your total assets and critical updates. Each asset and improvement must be recorded separately to establish the correct depreciation schedule. One of the methods of reducing mandatory payments is to select a depreciation schedule with the minimum terms to deal with different categories of assets; it is not necessary to stretch the process over many years.
List of required assets:
- Initial purchase of real estate (you must separately indicate the land plot and the house).
- Any upgrades.
- Purchase of furniture and equipment.
- Landscape design.
Working with an accounting expert will determine the optimal depreciation schedule to decrease spending and raise the return on capital.
Common Airbnb accounting challenges
Airbnb is dedicated to developing a dynamic short-term rental business around the world. A cheaper alternative to hotel stays is why the app is so popular. In 2022, 394 million nights were booked in the system worldwide. However, many landlords have made some rental property accounting mistakes when tracking spending and tracking tax standards and hidden commissions:
- Mistakes in documenting expenses: One thing you should always do is to write down and to document your spending. It is something that many people forget and end up paying more without taking full advantage of the deduction. If you have repaired or renovated the rental unit, such expenses may reduce your tax, but you must provide evidence of such spending.
- Misinterpretation of Airbnb’s 1099-K: If you earn more than a current threshold amount in the US, Airbnb files a 1099-K report with the IRS showing how much they paid you last year. Many property owners pay more in taxes because they think the 1099-K numbers are net income after Airbnb commissions and refunds, when they are gross amounts before all charges. Establishing an accounting system that controls these items for each booking is necessary.
Depending on where you live, there may be additional state or city tax requirements. In some locations, you will have to register to obtain a license. It is vital to carefully study all the details to avoid problems due to the violation of laws.
Some recommendations to manage Airbnb bookkeeping
As rental owners, you often have to deal with Airbnb accounting, but you can reduce the stress. Whether you are just starting a business on the platform or you are a seasoned user, several recommendations will help you effectively control your profit and expenditures in the system:
- Divide personal and business finances: Before becoming a landlord, you should open a separate bank account for business transactions. Why? Because otherwise it will be difficult to separate real estate transactions from personal transactions in one bank account. Using this approach, you can accurately assess the profitability of your business.
- Keep each receipt: You should save your invoices to reduce taxable income. This serves as evidence that your expenses were business-oriented rather than for personal needs. Presenting bills acts as a confirmation of deductions to the IRS, ultimately leading to a reduction in your tax burden and potentially impacting your Airbnb profits significantly.
- Use software: Airbnb property owners no longer have to manage bills and bank statements manually. Let’s assume you rent out real estate on different systems, including Airbnb and Booking.com. You must log into each site separately to examine your income and expenses. In addition, difficulties may arise with the systematization of financial results. Consider automating bookkeeping to record every cash movement, stay organized, and save time.
If you are not experienced in handling Airbnb bookkeeping, we recommend seeking help from a professional accountant. Because bookkeepers know the ins and outs of Airbnb accounting, they can help you find expenses that can be used to provide tax deductions. When hiring an accountant, choose an experienced and reliable specialist you can trust; check his qualifications and recommendations.
Final words
Airbnb is an excellent way to make extra money by renting out a spare part of your home. This platform can also be used to lease out real estate as a full-fledged business that generates revenue and provides tax benefits.
Given the increase in demand for Airbnb, it is essential to understand all the costs associated with renting out real estate and the taxes arising in the course of this activity.
BooksTime is an Airbnb expert, and we guarantee you will get clear and helpful financial reports for you to meet all your financial goals and obligations. We are also available to provide advice regarding potential errors and benefits that may arise.
Want to avoid your Airbnb accounting becoming a 24/7 headache? Contact us today!
