When the tax bill passed last year, there was a lot or press given to the new 20 percent break for “pass-through” businesses. For a lot of hourly and salaried employees, it was just another example of how business owners get deductions while Joe Plumber gets taxed. A few enterprising homeowners, though, have figured out a way to take advantage of this unique tax break.
Starting a business, however, even as an Uber driver, can seem like a time-consuming and complicated endeavor that doesn’t really create as much income as you might like.
But there’s a relatively painless way: Rent out a spare room of your house. Landlords of all stripes could be eligible for this deduction. AirBnB has noted that many of there hosts have now become LLCs to take advantage of the tax breaks for businesses and now, the “pass through.”
“If you have the housing, you’re taking advantage of assets you already have to get into a business,” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.
Pass-through entities are businesses that don’t pay the corporate income tax, such as LLCs and S-corporations. Instead, the profits are passed through to the business owner, who reports that income on their individual returns.
(An LLC, or limited liability company, is a business structure in which the owner is taxed at his or her individual income rate yet is also covered by a corporation’s limited liability).
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However, you don’t need to incorporate to qualify for the pass-through deduction, but the safety and protections afforded by incorporation far outweigh the small amount of time and money that registering an LLC actually costs.
The best news is this – to qualify all you need to do is report all of your rental business income and expenses on either Schedule C or Schedule E of your tax forms. Now, I’d be lying if I said that all this was written in stone. We’re still waiting on clarification from the IRS on things like what Schedules they’ll want to use and, honestly, if there are limits on the businesses using this pass through. The good news, though, is that if you have the space or the assets to be able to do this, it offers a unique way to take advantage of tax breaks that you might not be able to use, otherwise.
After all, taking advantage of the pass-through deduction by becoming a landlord might be especially enticing to those expecting a higher tax bill, thanks to the new curtailments on state, local and property taxes ($10,000) as well as mortgage interest ($750,000 for homes purchased after Dec. 15, 2017). Guess what? Those are real problems out here and this is a great way to help solve them.
As with any tax questions – especially regarding the new laws – I’d love to sit down to discuss how it affects your own situation and to see if a strategy like this makes sense for you. In fact, we might just find some exciting new places to put more money in your pocket.