A Shared Economy? Imagine the Possibilities.

Across America, yard work is a sport.  Even though lawn services call constantly, there are many of us that attack our own lawns and hedges every week, trying to keep them under control. To assist me in my efforts, I own a lawnmower, a string trimmer, an edger, and a blower.

Because my yard is small, I use each of them for less than 20 minutes. My next-door neighbor does the same thing — he cares for his own yard, and owns the same pieces of equipment that I have.  He also has a similar sized lot.

Which brings up a question.  Why don’t we share? 

I know my lawn equipment cost around $800, and I’d imagine his did as well. This equipment sits idle the entire week, except for the brief 20 minutes that it’s used, and yet the notion of sharing such things is almost foreign. I also have a pressure washer, which gets used three to four times a year and a small air compressor that gets turned on maybe once a year.

Still, I thought nothing of buying them.

It’s part of American culture to own things outright, as if we somehow get more pleasure or utility from items that are possessions instead of shared with or borrowed from others. At least, that’s how it was.

Whether it’s a generational idea, a product of the financial crisis, or something else entirely, the shared economy is picking up steam.

The most visible sign of this is Airbnb, the website that serves as a clearing house for those that have an extra home, bed, or sofa to share, and those that want such accommodations. Just to be clear, this sharing is actually renting… no matter what Airbnb or anyone else says.

When one party with an asset allows a second party to use their property for a limited period of time in exchange for payment, it’s rent. There are no two ways about it.

Airbnb allows people who own underutilized assets to share them with others for a price, thereby increasing the efficiency of the asset in general.  This would be the same as if I paid my neighbor $5 per week to use his lawn equipment, or $20 each time I used his pressure washer.

There’s nothing new under the sun about the transactions; they’re rental agreements.

What is new about these arrangements by Airbnb, Uber, and others is that they give consumers who own underutilized assets the ability to engage them in commerce.  Renting out a room is as simple as signing up with Airbnb.  Renting out your car (with you as the driver) is as easy as signing up with Uber.

For years there have been websites that allow the sharing of small appliances and tools, such as vacuums and electric drills for a fee.  It’s as if we’re cataloging a vast library of items that can be “checked out” and then returned.  The items aren’t being created, because they already exist.  They’re just sitting idle at the moment.

Which brings me to H&R Block.

If I share my lawn tools with my neighbor, no one cares… as long as there is no exchange of value, particularly cash.  If there’s any remittance or similar sharing done in exchange for the lawn equipment, then we’ve just crossed the line from friends to parties in a transaction.

The difference is the first one makes for good neighbors, while the second makes for IRS headaches.

In the world of taxes, individuals have to report any income received through barter or exchange by estimating the fair value of what was received.  In the case of Airbnb and Uber, those providing the services must report the funds they receive as income.

The IRS wants its slice of the pie, no matter how the transactions were framed or discussed, which makes sense.

Imagine if we all offered our spare bedrooms through Airbnb and drove the hotel industry to zero.  Taxing authorities including cities, states, and the federal government would lose significant revenue.

The service is still offered and paid for, but the channel through which business is conducted has switched.  Instead of businesses organized to provide lodging with all of the necessary staff and licenses, it’s now a bunch of moms and pops letting strangers stay in Junior’s old room for a fee.

It’s still commerce and the government still wants its slice, which makes H&R Block, as well as Jackson Hewitt, Liberty Tax, and so many other tax preparation firms very happy.

Joining the sharing economy as a provider brings with it the responsibility of reporting income to the appropriate taxing authorities. Airbnb has this message concerning local taxes on its website:

Your state or locality may impose a tax on the rental of rooms. In many places this is known as an occupancy tax, but may also be known as a lodging tax, a room tax, a use tax, a tourist tax, or hotel tax. We expect all hosts to familiarize themselves with and follow their local laws and regulations.

Keep in mind this is outside of reporting personal income to the IRS.

Tax compliance is difficult at best.  As individuals join the sharing revolution, they’ll not only make a few extra bucks but also greatly complicate their tax returns.

Every time a new service emerges, allowing individuals to make a buck off of stuff they already own by listing it online, I’d imagine the management teams of the national tax prep services smile a bit bigger, and have a dance in their step.

Image RJ sig
Rodney

P.S. There’s an interesting subject featured in today’s Ahead of the Curve by Charles Sizemore — it’s about butter. Yes… butter. Read on…

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.