“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. Instead, the profits are passed through to the business owner, who reports that income on their individual returns.
People are already realizing this opportunity, said Miguel Centeno of Shared Economy CPA, a firm that specializes in taxpayers who are independent contractors.
“Our doors are getting knocked down here,” Centeno said. “We’ve had a huge surge in the number of Airbnb hosts who’ve become LLCs.”
(An LLC, or limited liability corporation, 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).
However, you don’t need to incorporate to qualify for the pass-through deduction — although Centeno said it provides some additional benefits.
“If someone slips and falls, the worst scenario is they’re going after your home,” he said. “The LLC is a veil between the business and your asset.”
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 (watch out for guidance from the IRS on which one). The IRS is also expected to issue a new pass-through form sometime this year.