Airbnb corporation tax versus personal tax

kdowling

I was reading this article https://www.paylesstax.ie/airbnb-tax-returns-how-to-calculate-tax-on-airbnb-earnings/

which suggests that you can set an airbnb listing up as a company and only pay 12.5% corporation tax as apposed to around 50% tax otherwise.

That seems a bit dodgy to me and I'd be surprised if revenue would accept this but would love to hear others opinions on it.

I was also curious about the cleaning fees being allowable.

Why do so many host clean their properties themselves if cleaning fees is an allowable expense, surely it would be a no brainer to get a cleaner in and

dceduct the cost against tax if its alowable?

Peregrinus

Two points:

First, there's nothing magical about running an Air Bnb. You can conduct any business through a limited company and the profits are taxable at 12.5% .

The catch is that to limit your tax hit to 12.5% you have to leave the money in the company. When you extract it from the company and pay it to yourself (as wages for your work as a director of the company, or as dividends paid on your shares in the company) it's income in your hands, and liable to income tax at your marginal rate.

As for cleaning as a deductible expense, yes. But deducting cleaning expenses for tax purposes doesn't mean that your tax bill is reduced by the cost of the cleaning; it means that your taxable income is reduced by the cost of the cleaning. So if you are paying tax at the marginal rate of 40%, and you spend €100 on cleaning, your taxable income is reduced by €100 and your tax bill is reduced by €(100 x 40%), which is €40. The net cost to you of the cleaning is not nil; it's €60. So you still have to decide whether its worth your while to pay €60 not to have to clean the gaff yourself.

Grumpypants

https://www.boards.ie/discussion/2058233046/airbnb-corporation-tax-versus-personal-tax

Deducting for tax doesn't make it free. You just don't pay tax on that amount. But you have to spend it.

So let's say, to keep it simple, you earn €200. Normally you pay your tax on both €100s. With PAYE, PRSI and USC it's about 50%.

So 50 from the first 100, 50 from the second 100. Total tax bill is €100. Profit to you is €100.

So if you clean it yourself you keep the €100.

But if you pay someone to clean it. You get €200. You give €100 to the cleaner and write it off. The other €100 is profit and You then pay tax on that €100.

So from the €200 you started with. You get €50, tax man gets €50, cleaner gets €100 (who then has to pay tax on the €100).

kdowling

Thanks for the replies guys.

I wonder why they mentioned in that article about the 12.5% corporation tax as if it was a big advantage.

if you are going to be taxed at the higher marginal rate eventually is there any scenario where the corporation tax route makes

sense?

They are tax advisors presumably trying to sell you a product - in this case incorporating a company and all the various returns that go with that.

It isn't as simple as you think - do a search on close company surcharges.

The other thing they seem to be suggesting is that an air Bnb listing is more like a trade (like say a hotel) than passive income (renting out on a lease)

Can it make sense? Sure.

Should you do it? Take professional advice.

Peregrinus

A limited company is a form of business structure, and their may be good business reasons for conducting your operation through a limited company. The tax consequences will form part of the business case but, ideally, only a small part. A well-designed tax system will not distort business choices and lead people to do things they wouldn't have done, but for the tax consquences. (Or, rather, it will only lead them to do things differently where there is a public interest in having them done differently.)

It might make sense, for example, to operating your Air Bnb through a limited company if it is your plan to use the profits to fund deposits on more lettable properties, and so build up a portfolio over time. If that's your plan, you won't be paying the profits out to yourself in the form of dividends and wages and you can accumulate them as reserves within the company paying only the 12.5% corporation tax. So using a limited company might make sense in that context. Or, if you are going into this business jointly with several other people - friends, family members, just people with some money, whoever - then it might make sense to use a limited company to establish your respective shares in the business, and to regulate the relationships between you.

So, there could be lots of good reasons for using a limited company. But it's not some magical Harry Potter-type incantation that will miraculously enable you to do exactly what you have been doing all along, but just pay 12.5% tax on it.

kdowling

https://www.boards.ie/discussion/comment/118638607#Comment_118638607

Thanks all for the info, very helpful,

I like the idea of setting up a company and using the profits to fund more properties to let as we have a number of buildings on our grounds that could be converted.

I was going to get a consultation with the Paylesstax guys who wrote the blog quoted in the op but would I be better to get advise from a tax advisor instead?

Mrs OBumble

Another scenario is if you know your PAYE income will be very low next year: keep the cash in the company and pay yourself a higher rate then.

Peregrinus

https://www.boards.ie/discussion/comment/118697694#Comment_118697694

A small business adviser whose expertise will include, but will not be limited to, tax.

Like I say, running a business is not mainly about minimising your tax. If your thinking is too tax-driven, you risk taking your eye off the ball, which is about earnings, growth and profit, not about tax minimisation.

Marcusm

https://www.boards.ie/discussion/comment/118632825#Comment_118632825

https://www.boards.ie/discussion/comment/118632825#Comment_118632825

https://www.boards.ie/discussion/comment/118706589#Comment_118706589

Sorry to contradict you here Peregrinus but you need to be careful in your statements on CT. Although Ireland is often quoted as having a 12.5% CT rate this ignore the existence of the higher rate of CT which applies to non-trading income plus the income of certain trades such as dealing in and developing land. Income generated from Irish source property whether letting on a long-term basis or on a short-term basis through Airbnb is assessed to tax at 25% under case V of schedule D. Practically all income profits derived from land/property are taxed at this rate. The only true exception is from the operation of a guest house/hotel where significant services are provided in addition to the accommodation.