how does bonus depreciation offset w2 income?

Question

we started an airbnb business in 2018, and invested $90k on property and land improvements, and purchasing personal property for the airbnb.

Some of these cost qualify for bonus depreciation. Since we started renting in Q4, it will result a net loss for 2018. we are wondering how does the loss offset w2 income ($400k+)?

Does bonus depreciation only offset w2 income if reporting through NOL on sch c? or passive loss on sch e also offset w2 income?

Appreciate the help!

Steven N. · Answer

thank you!

Ashish Acharya · Answer

Looks like you are providing substantial service in your activity.

If you provide substantial services (regular cleaning, changing linen, or maid services), you report your rental income and expenses on Schedule C.  AirBNB income without substantial service would not be subject to self-employment taxes. Yours will be.

The way to avoid having your rental activity being classified as a bed and breakfast is not to provide substantial services to your guests—don’t provide them breakfasts, clean their rooms each day, or do their laundry. Charge renters a cleaning fee at the end of their visit that is separate from their daily rental charge.

Material participation rules apply to determine if income is passive or nonpassive. Since you are confident it is non-passive, your loss created via bonus depreciation will offset your W-2 income.

Talk to a professional.

Steven N. · Answer

we are actively participate in the airbnb activity.  we provide coffee/tea to every guest, and refresh linens per request, provide misc items like car brush/umbrella/battery, etc.

Eamonn McElroy · Answer

Do you materially participate in the rental activity?

Because this is AirBNB (and likely has an "average period of use" of 7 days or less), you would not be able to qualify losses under the active participation standard and instead would have to use material participation.

Good convo to have with your CPA.