Travel andFinancial Considerations: Uber and Airbnb
Two new companies have becoming household names, Uber and Airbnb, and though they provide services that have been mainstays in the economy for many years, they both leverage the Internet to provide these services. In many ways these companies are like Apple, Facebook and Amazon, in that they have practiced a variation of what Harvard Business School professor Clayton Christianson, refers to as “disruptive technology.” The Virginia Society of Certified Public Accountants (VSCPA) offers the following travel and financial considerations when using these services from the sharing economy.
With disruptive technology, a paradigm is so different in either the product itself or the way it is provided, that while it takes some time to be implemented and popularized, at some point a critical mass of customers and potential employees/suppliers takes notice, and a business/cultural explosion takes place. Generally, before this explosion takes place, there is a degree of reluctance and lots of questions on behalf of consumers. But many have heard about the new technology and want to explore it, and if it works, it can become part of normal behaviors and habits. This cycle occurred with Facebook about eight years ago, with the initial reluctance stemming from the question, “ill anything bad happen to me if I put personal information or pictures of myself out on the Internet?”
Put simply, Uber is a non-traditional taxi company in which a consumer can arrange a ride through a computer/smartphone app, from almost any location. Payment is handled online. Drivers are not employees, but contractors. They use their own cars and drive when they prefer. Passengers can see the progress of the incoming ride through their app and get a ride quickly.
Airbnb is an Internet-based lodging service in which lodging providers (homeowners/hosts) list their lodging and potential guests can book, all online. Airbnb collects service fees for bookings. Prices and pictures of the accommodations can be reviewed by the consumer online for many different destinations though the search function. As an example, this provides homeowners a chance to generate income by using Airbnb as platform to rent out their home.
On both sides of the exchange, parties who have not dealt with these two businesses can see the potential red flags. Regarding Uber, if I am a driver, will the passenger I am picking up be safe and not vandalize me? There was a major story in October 2015 in which a former Taco Bell executive beat up the driver while the executive was intoxicated. It was recorded, with the video going viral. The passenger then countersued the driver saying he was being illegally recorded, but lost his job.
On the other side of the transaction, will the Uber driver in any way harm me as a passenger? In February 2016, an Uber driver was charged with six counts of murder of non-passengers in and around the time he was driving for Uber. This brought into question the security procedures that Uber uses to screen drivers. Uber responded by saying it did a full background check on the driver, and that no security procedures would have potentially detected the concern as the driver had no adverse record prior to this instance. Nevertheless, Uber indicated it would review its procedures. In addition, the commissioner of the Boston Police said that “Uber was one of the safest platforms I have dealt with.”
Regarding Airbnb, the most logical question for the host, is will my home be vandalized or misused? There have been some well publicized examples related to Airbnb in which accommodations used by guests have been used as a temporary brothel and a drug den.
While all of the above are most certainly not the norm, all parties to any business relationship that may be new tend to be influenced by just be just a few examples of bad behavior. In an earlier time, many Internet users were reluctant to put in credit card numbers to make online purchases until they felt it was secure.
So what are some best practices when dealing with disruptive technology/experiences? The first is acquire as much information as possible related to the experience/transaction before becoming invested. Ask a lot of questions. The second piece of advice is put your foot in the water before going in completely — in essence, testing the experience/transaction. That would mean renting your house just for the weekend before renting it out while you are on vacation, or taking an Uber ride from your house to a short destination and back. This will allow both parties to the transaction to test the payment platform and all other operational aspects of the experience. Advice from friends, family, and neighbors about any experiences they may have had with these two companies can be useful.
Financial/Tax Considerations for Service Providers for both Uber and Airbnb
For existing or potential service providers, it is always good to discuss in more detail financial and tax considerations with a CPA. This section will provide some basics.
With Uber, a service provider is not an employee but an independent contractor, which means he/she is running his or her own business. That means when he/she gets paid by Uber, no income taxes, Social Security taxes, or Medicare taxes will be withheld. For federal income taxes, that means the service provider will report both income and expense deductions on his/her personal tax return (generally Schedule C). Also, the tax return will determine the Social Security and Medicare taxes that also need to be paid, The good news in that expenses can be deducted against income which will lower taxes. Some example of expenses that would be deductible would be depreciation on the car, tolls, gas, oil, etc. Also because no taxes will be withheld from payments from Uber, quarterly tax payments will need to made to the IRS.
With Airbnb, the financial considerations are a bit more complicated. Airbnb provides a document online, prepared by CPA firm Ernst & Young (EY), that covers in detail the tax implications of rental property. A major tax consideration includes whether the property being rented is used as a home, used partially as a home and rental property, or used exclusively as rental property. One great federal tax break is if a dwelling is considered a home, it can be rented out for 14 days or less and there is no tax on the rental income (it does not need to be reported). With rental property, where income is reportable, expenses can be deducted such as house cleaning, utilities, etc. The profit that is earned on rental property is reported on a Schedule E. If property is a used by both the owner and guests, expenses related to business will need to be prorated.
In time, both of these companies may become as culturally entrenched in their market as Facebook, Amazon, and Apple have become. Turn to your local CPA for more guidance.