If you participate in the Sharing Economy, be it opening up your home on Airbnb or sharing your car on Turo, you know that it can be very rewarding. While you may enjoy running your business, the bottom line is you are generating an income. This income, regardless of if it is part time or full time, needs to be reported to the IRS. If you are just getting started, or even if you have been running your business for a while, you may have some questions regarding your tax situation. When it comes to your taxes for your Sharing Economy business, it is important to get it right the first time! This way, you can keep more of your hard earned income, and rest assured you avoided any tax mistakes.
Tax Mistakes Happen All The Time
Believe it or not, tax mistakes happen all the time. Sometimes they happen because the business is new, or the taxpayer isn’t used to having more than one source of income. Sometimes things slip through the cracks, numbers get miscalculated or exaggerated, or things get left off. Even under the best of circumstances, mistakes can happen, hey you are only human and things can be really hectic when you are running a Sharing Economy empire!
If by chance you catch your mistakes, you can amend your tax return. Trust us, it’s better that you catch your mistake than for the IRS to catch them. A tax return can be amended by filing a 1040X, if that is the case and it’s best to do it before the IRS simply states that you’re wrong.
You have 3 years from the filing date, or 2 years from the date you paid to amend your tax return. Reasons you may need to amend your taxes include:
- You need to correct an error or omission to your income
- Your filing status changed
- Missed tax deductions
- Missed tax credits
While we hope there are missed tax deductions and credits that would result in a refund, sometimes the right answer is to pay now before paying later. Assessments on underpayment penalties include a 20% penalty on tax adjustments and do happen.
The Most Common Tax Mistakes
Like we said, tax mistakes happen all the time. The best way to avoid tax mistakes is to be aware of them. When it comes to taxes, knowledge is definitely power. We understand how complicated taxes can be, after all they are constantly changing and updating. However, failure to understand and stay up to date on the laws, does not negate your responsibility as a taxpayer. Here are some of the most common tax mistakes to be aware of.
Income Miscalculation or Omissions
Hey we get it, not everyone is a math genius. However, when it comes to your taxes your lack of math skills is no excuse. Double check, even triple check your numbers! And make sure you have accurately reported all income. The IRS does not take kindly to income omissions. If you have multiple sources of income this where things can get a little tricky. It is important to keep track of all sources of income, especially any self employed or secondary income, for which you may receive a 1099.
Issues With 1099’s
It is important to understand that you may or may not always receive a 1099. In the event you do not receive one, the income still needs to be reported. For example, platforms like Airbnb issue a 1099K when you reach 20K in revenue and 200 transactions.If you didn’t reach the threshold and did not receive a 1099K, you will need to run the figures from your transaction reports. This is where keeping track of your revenues with your accounting process comes in handy.
On the other hand, if you had an excellent year and received a 1099K from Airbnb, you will need to not only make sure you report the income to the IRS, but report it accurately. The IRS also gets a copy of your 1099K from Airbnb, so they are more than aware of your income. Any discrepancies can raise a big red flag.
Sign On The Dotted Line
Missing signatures is one of the most common tax mistakes according to the IRS. The IRS considers a tax return that isn’t signed invalid. So, it is important to take the time and make sure you sign it. And if you are filing jointly, make sure your spouse also signs. In addition, if you are having your taxes prepared for you, make sure you sign the e-file authorization form.
File On Time
Waiting until the last minute and not filing on time can be a costly tax mistake. The IRS will issue a penalty if your taxes are not filed on time. In addition, if you do not pay on time, you may not only be faced with a penalty, but also interest! Which is why it is important to not only file on time, but also pay on time. Some important things to know:
- If you cannot file by tax day, file an extension.
- Even if you file an extension, your tax bill is still due on tax day.
- If you cannot pay by tax day, make sure you contact the IRS and set up an installment plan.
Leaving Money On The Table
Are you taking advantage of all of the tax deductions and credits that are available to you? If not, you could be leaving money on the table. Paying more than you should on your taxes is a painful mistake. By participating in the Sharing Economy, you may incur certain ongoing business expenses that can qualify as deductible expenses. Some examples of deductible expenses include: insurance costs, maintenance costs, marketing expenses, depreciation, and service fees. Talk to your tax advisor to learn more about which deductions and credits are applicable to your business.
For the best results with your taxes, it is best to have a plan. Tax planning should take place all year long. It involves planning for deductions, creating a tax savings, timing income and expenses, saving for retirement, and making estimated tax payments. To learn more about tax planning contact one of the tax experts at Shared Economy today. For more tips on how to avoid tax mistakes subscribe to our newsletter.