Are You Taking Advantage of the Short-Term Rental Tax Loophole?

Are You Taking Advantage of the Short-Term Rental Tax Loophole?

Summer is upon us, which means that we are entering peak season for short-term rental (STR) investors. Millions of traveling families and friends will be flocking throughout the country for summer getaways, many booked at STR properties on digital platforms like Airbnb and Vrbo. STRs are popular year-round; however, depending on a property’s location and proximity to nearby attractions. According to Consumer Affairs, guest demand for STRs in the US has increased in recent years, surpassing pre-COVID levels, and is estimated to have an annual compound growth of 11% through 2033.

You may be considering jumping in on the short-term rental game or capitalizing on missed opportunities. If so, you should know the basics of the short-term rental tax loophole, a strategy that can significantly reduce your taxes. Let’s talk about it.

What is the short-term rental tax loophole?

The short-term rental tax loophole is a tax strategy allowing short-term rental property investors to classify short-term rental activities as non-passive, therefore enabling them to deduct these losses against their active income, such as W-2 and business income. Note that you do not need Real Estate Professional Status (REPS) to take advantage of this loophole. This means that an investor can have a day job and still legitimately qualify and benefit from this strategy, if done correctly.

What is considered a short-term rental?

A rental property is considered a “short-term rental” for tax purposes when:

  1. The average period of customer use of the property is 7 days or less.
  2. The average period of customer use of the property is 30 days or less, and you provide significant personal services for rentals.

How do you calculate the average customer stay?

Divide the total number of days in all rental periods by the number of rentals during the tax year.

How does this loophole reduce your taxes?

A well-executed STR tax strategy has two components:

Losses Treated as Non-Passive

STRs are exempt from the passive activity loss rules typically applied to rental properties. This is because, according to the IRS, STRs do not actually fall under the category of “rental activity” (see section entitled “Rental Activities”).  Rental activities are normally subject to passive activity loss rules which dictate that passive losses can only be used to offset passive income, and cannot be used to reduce an individual’s active income for tax purposes. However, since STRs are not considered “rental activities” for tax purposes, they are not classified as passive.

This means that owners of STRs, if they meet certain material participation criteria below and other rules, can use STR losses to reduce their overall taxable income without the same limitations as typical rentals.

Accelerated Depreciation & Cost Segregation

Having RBT CPAs conduct a cost segregation study on your property can yield significant benefits by reclassifying certain building components that can either be deducted immediately via accelerated depreciation, such as bonus or Section 179, or over a shorter time frame of 5 or 15 years as compared to ratably over a much longer 39-year period. strategy.  If you bought your property in a previous year, it’s not too late to take advantage of this method.

What is material participation?

Material participation requires active involvement in the operation of the STR. To qualify for the STR tax loophole, you must satisfy at least one of the material participation criteria outlined by the IRS. You will need to prove your participation using documentation such as time reports, logs, appointment books, calendars, or narrative summaries. Some examples of material participation include performing maintenance work on the rental property, managing bookings, and communicating with guests.

Have questions?

Need help navigating the short-term rental tax loophole? RBT CPAs has you covered. Our real estate industry accounting experts can help you determine how you qualify for this loophole, key considerations to get and stay qualified, and work with you to formulate a highly effective tax strategy that works for you. Give us a call today to learn more and to find out how we can be Remarkably Better Together.

Making the Most of Cost Segregation and Bonus Depreciation in 2025

Making the Most of Cost Segregation and Bonus Depreciation in 2025

If you are a real estate professional purchasing, constructing, renovating, or expanding a property, you may be able to maximize your tax deductions through a cost segregation study. With bonus depreciation set to phase out fully by 2027, you might want to consider conducting a cost segregation study sooner rather than later in order to make the most of current tax-saving opportunities.

What is a cost segregation study?

Cost segregation is a tax strategy that can be combined with bonus depreciation to maximize tax deductions for property owners. The standard depreciation period for real estate is 39 years for commercial properties and 27.5 years for residential rental properties. However, many building components depreciate at a faster rate than the building structure itself, and can therefore be written off sooner. A cost segregation study assesses various components of a building or property and categorizes them based on their depreciation periods. Building components (i.e., carpets, cabinetry, countertops, electrical components, etc.) are separated into groups of 5-year assets, 7-year assets, and 15-year assets. Segregating depreciable building components into 5, 7, and 15-year assets allows property owners to deduct more in the short-term, rather than over the course of 27.5 or 39 years.

What is bonus depreciation?

Bonus depreciation is a tax incentive that allows property owners to take an immediate deduction for investments in depreciable assets, rather than spreading deductions out over the course of several years. The Tax Cuts and Jobs Act (TCJA) of 2017 established a bonus depreciation rate of 100%, meaning 100% of the costs of qualifying property could be written off in the first year of purchase. Since 2023, the bonus depreciation rate has decreased by 20% per year until it is due to completely phase out in 2027. The bonus depreciation rate for 2025 is 40%, and the rate for 2026 will be 20%. Real estate professionals planning to invest in new property may benefit from doing so before bonus depreciation phases out in 2027. Efforts to restore 100% bonus depreciation are currently underway in Congress.

What is the benefit of a cost segregation study?

Accelerating depreciation deductions through a cost segregation study reduces the property owner’s taxable income, thus reducing tax liability and increasing cash flow. Cost segregation studies can be conducted for newly purchased or constructed properties, but can also be applied retroactively for properties previously acquired or constructed. Cost segregation studies are a valuable tax-saving tool on their own, but can lead to even more tax savings when combined with bonus depreciation.

Interested in a cost segregation study?

RBT CPAs’ experts are available to conduct a cost segregation study of your property, identifying accelerated depreciation opportunities and helping you to improve your cash flow. In addition to cost segregation studies, we also assist clients in real estate tax planning, financial reporting, budgeting and forecasting, property management accounting, Low-Income Housing Tax Credits, and other accounting services. Our team of skilled accountants possesses the expertise and industry insights needed to optimize your financial performance. Give us a call today to learn more.

The Low-Income Housing Tax Credit Program: Why You Need a LIHTC-Certified CPA on Your Team

The Low-Income Housing Tax Credit Program: Why You Need a LIHTC-Certified CPA on Your Team

The Low-Income Housing Tax Credit (LIHTC) offers tax credits to real estate developers for constructing, purchasing, or renovating rental housing for low-income individuals and families. A LIHTC-certified professional determines whether applicants are eligible for the Low-Income Housing Tax Credit and ensures that tax credit properties remain in compliance with IRS, State Housing Finance Agencies, and HUD (Housing and Urban Development) regulations. RBT CPAs, a leading accounting firm in the Hudson Valley, can provide this service to real estate developers with LIHTC properties or those looking to apply for the program.

What is the Low-Income Housing Tax Credit?

The Low-Income Housing Tax Credit (LIHTC) program is used to create affordable housing for low-income families via residential rental real estate development. The project can be solely low-income, or combined with market rate units as part of a mixed-income development. The LIHTC can be used for new construction, rehabilitation, or acquisition of rental properties. The program benefits families seeking quality affordable housing while also creating opportunities for developers and investors to achieve a profit. For every dollar of credit received, investors can deduct a dollar from their tax liability over a 10-year period.

Due to the ongoing nationwide housing crisis, the LIHTC program is arguably more important now than ever. According to recent U.S. Census data, nearly 50% of all renters are considered “cost-burdened,” meaning they spend more than 30% of their income on housing; over 25% are deemed “severely cost-burdened,” spending more than 50% of their income on housing. The Low-Income Housing Tax Credit program is the primary source of affordable housing creation in the United States.

What is the CPA’s Role?

The LIHTC program is very complex, presenting many administrative hurdles and compliance requirements. If LIHTC properties do not remain in compliance, previously received tax credits may be recaptured, meaning the recipient must pay at least a portion of the credits back, plus interest. To avoid the recapture of tax credits, it is imperative to work with a Certified Public Accountant (CPA) versed in all stages of a LIHTC project who can ensure proper planning and review.

LIHTC-certified professionals complete a comprehensive certification course followed by a five-hour examination. CPAs with this certification possess a thorough knowledge of the LIHTC program including eligibility requirements, IRS and HUD regulations and guidance, occupancy requirements, calculations, annual recertification processes, and more. Using their specialized knowledge and training, a LIHTC-certified CPA will ensure that LIHTC properties remain in compliance with the program’s many complex and ongoing regulations.

That’s where we can help.

RBT CPAs is prepared to guide our real estate clients through the complexities and requirements of the LIHTC program. We offer specialized accounting, audit, tax, and consulting services for the affordable housing industry, including: annual financial statement audits, reviews and compilations and annual tax filings; due diligence; project final cost and eligible basis certifications; 95/5 test; 10% and 50% tests; capital account analysis; tenant file agreed-upon-procedures; financial forecasts; tax planning; and HUD audits and compliance.

Learn More

To learn more about how we can help you with your LIHTC project, get in touch with one of our experts. RBT CPAs Client Advisory Partner Ross Trapani, CPA is a certified Tax Credit Specialist. Ross earned his certification through the National Center for Housing Management, an industry leader in providing high-quality specialized certifications to professionals serving the housing industry. To learn more about the Tax Credit Specialist certification, you can visit the NCHM website. For information regarding the LIHTC and how RBT can help, email Ross Trapani at rtrapani@rbtcpas.com.

RBT CPAs, a leading accounting firm in the Hudson Valley, has been proudly serving businesses in the Hudson Valley for over 50 years. To learn more about our expert accounting, tax, audit, and advisory services, contact us today.

Is Your Business Continuity Plan Keeping Pace?

Is Your Business Continuity Plan Keeping Pace?

The world is changing faster than ever. Is your business continuity plan keeping pace?

Between the COVID pandemic and ensuing shutdowns, supply chain debacles, labor shortage, gas price hikes, increased cyber threats, the war in Ukraine, catastrophic weather events, and now, uncertainties surrounding the economic environment, the last three years have proven time and time again that continuity planning should be a regular, ongoing part of running a business.

A business continuity plan proactively anticipates internal (i.e., you suddenly become incapacitated) and external (i.e., a global pandemic) events that can disrupt your business and defines how you’ll prevent, mitigate, respond, and recover. At the end of the day, a plan can help you maintain operations, minimize the impact on your business; protect staff, finances, and brand; and return to normal as quickly as possible.

Take a ransomware attack as an example, since it can shut down operations for an average of 20 days. Your plan would detail what you’re doing to prevent an attack; how to minimize the impact should an attack occur; how to keep operations going despite an attack; and what you would need to do to get business operations back to normal ASAP.

Developing the plan should be a team effort among key people in your organization. That way, everyone knows the protocols to follow and can react with speed and clarity should the need arise.

According to InvenioIT – an industry leader in business continuity, data protection, and IT security, your plan should identify objectives and include important contact information; risk assessments; business impact; prevention; response plan; systems planning; backup locations, and assets; communication plan; testing protocols; and gaps and recommended fixes. (Refer to InvenioIT for details.)

The U.S. Department of Homeland Security along with FEMA developed a free, downloadable business continuity planning suite. It includes training resources, a plan template, and test scenarios.

Perhaps one of the most challenging parts of continuity planning is figuring out how to prioritize what your plan should focus on first.

ContinuityCentral.com’s article, “Myth Busters: A Business Continuity Statistical Mystery Solved?” (Geary Sikich, Feb. 19, 2020) includes a list of questions that can help you prioritize – here are my favorites:

  • “What are the three to five scenarios that could put our company out of business?
  • Do we have a set of early warning indicators for emerging threats to the business?
  • Are we developing accurate assessments of the issues facing our organization (direct, indirect)?
  • What opportunities have we missed over the past three years due to inaction rather than lack of knowledge?”

You may also want to check out Accenture’s research report on operating through volatility, which includes a five-pillar framework for understanding immediate and potential future risks:

  • “The people that power the organization
  • The overarching strategy of the organization and how it differentiates the company
  • The systems that underpin operations, both internally and with customers
  • The supply chain and operational network that allows the company to fulfill customer needs.
  • The partner and customer ecosystem and its alignment to business goals.”

Since so many factors impacting business can change on a dime, be sure to review and update your continuity plan at least every six months.

While you’re focused on protecting your business, let RBT CPAs focus on protecting you by providing professional, ethical and top-notch accounting, auditing and tax services. We’ve been serving businesses in the Hudson Valley and beyond for over 50 years and believe we succeed when we help you succeed. To learn more about what RBT CPAs can do for you, give us a call today.

Getting Clarity on New York Marijuana Laws

On March 31, 2021, New York State approved the Marijuana Regulation and Taxation Act (MRTA), making adult use of cannabis legal in the state. In October, the New York Department of Labor issued new guidance on adult cannabis use and the workplace, which covers all New York state employers. Here are some highlights…

As reported by the National Law Review, under NY Labor Law 201-D, “Employers cannot discriminate against employees over the age of 21 based on their use of marijuana provided it takes place outside the workplace, outside working hours, and when not using the employer’s equipment or property.”

Does this mean employers can’t have policies against using marijuana? No. An employer can prohibit its use at work, during meal and rest breaks, and when an employee is on call. What’s more, employers can prohibit marijuana possession on company property, including company vehicles. Finally, employers can take action against an employee if his/her use of marijuana outside of work impairs the employee’s ability to perform job duties or interferes with an employer providing a safe work environment.

What’s still a little fuzzy is how an employer can prove impairment, since it will be based on objectively articulable indications (not the very limited instances when a drug test can be used or the smell of marijuana on a person) and could actually uncover a disability. For example, let’s say an employee operates a heavy machine in an unsafe and reckless manner. It may be an articulable symptom of impairment under the law; it could also be due to a protected disability, triggering the process to determine if an accommodation is needed and can be provided.

In New York, an employer:

  • Cannot test for it unless required by federal law; an employee is impaired while working and articulable symptoms interfere with the employer’s ability to provide a safe and healthy workplace per state and federal safety laws; or it would result in loss of a federal contract or funding.
  • Can test for it when federal or state law makes drug testing a mandatory condition of an employee’s position (i.e., drivers of commercial motor vehicles or for-hire vehicle motor carriers).
  • Can take employment action (but doesn’t have to) if an employee is found to have used marijuana at work.

There are still some hazy areas, like New York’s Scaffold Law which puts liability for gravity-related worksite injuries on the construction company or project owner. The jury’s still out on how this will  play out. Unfortunately, it may take some court cases to bring that level of clarity.

In the meantime, employers should:

  • Review/update related policies to ensure they’re in
  • Identify objectively articulable impairment signals and train managers and supervisors what they are and how to spot them.
  • Educate employees on marijuana use policy.

For assistance or answers to questions, contact New York’s Office of Cannabis Management or consult with a legal advisor.

While RBT CPAs can’t provide legal advice related to the NYS marijuana laws, we can help with your tax and accounting needs. Click here to get started.

Artificial Intelligence: The Next Frontier in Manufacturing

Artificial Intelligence: The Next Frontier in Manufacturing

Artificial Intelligence (AI) represents the next frontier in manufacturing. Is your company ready to get on board?

While the majority of  manufacturers globally already embrace some form of AI, almost 40% don’t.  This means there is still a lot of opportunity for organizations to drive efficiency, reduce downtime, and deliver high quality products with AI. Jumping on the AI bandwagon becomes even more important as reshoring picks up speed. As companies bring manufacturing back to the U.S., AI may very well be the key to winning employees, customers, market share, and more.

So, what exactly is AI?

According to Capgemini, “Artificial intelligence (AI) is a collective term for the capabilities shown by learning systems that are perceived by humans as representing intelligence.” Capabilities can include speech, language processing, smart automation, enhanced creativity, image and video recognition, conversational agents, prescriptive modeling, advanced simulation, analytics, predictions, and more. When it comes to manufacturing, AI appears largely in the form of machine learning (where algorithms and code use data to learn); deep learning (an advanced form of machine learning); and autonomous objects (like a robot or vehicle that can complete a task on their own).

More than just a one-off solution, companies are transforming their entire manufacturing operations with AI. This is logical following digital transformation, according to AIMultiple, which notes “After a company adopts digital processes, the next step is to improve the intelligence of those processes.”

Manufacturing operations are using AI to help maintain systems by identifying product or equipment failures in advance to prevent breakdowns; promote the quality of products by identifying issues early; forecast demands for products and pricing; and manage inventory based on demand and supply. As a result, downtime is decreased, costs are lowered, time to market is maintained, productivity and quality are improved; there’s greater speed and visibility across the supply chain; and inventory management is optimized – but the advantages AI affords don’t end there.

According to Manufacturing Tomorrow, AI makes customization affordable and within reach of more manufacturers. It also takes smart manufacturing to a whole new level, by monitoring parameters and making adjustments in real-time to promote quality and save time from costly breakdowns. AI can help optimize the flow of goods via the supply chain to minimize waste and delays. It also offers cyber security protections by protecting systems and operations from unwanted infiltration, while enhancing productivity and sustainability.

Is there anything AI can’t do?

While it cannot fill the talent shortage or decrease the tremendous competition for employees in today’s job market, it does replace the need for employees to complete repetitive tasks with more attractive prospects for job seekers looking to use higher end skills operating and maintaining cutting edge AI technology.

AI is touching every part of the manufacturing process, from product design to delivery, with the projected market reaching $16.7 billion in 2026.  While AI in manufacturing is growing in the U.S. (28% of manufacturing operations have at least one use), it still has a way to go to catch up with Germany (with 69% of manufacturing operations implementing AI) and Japan (30%). This opens a lot of opportunities to U.S. manufacturers looking to get on board the next frontier with AI.

While you’re exploring what’s next for your manufacturing operations, you can trust RBT CPAs to know what’s next in everything related to accounting and taxes. Let us do what we do best so you can focus on what you do best. Contact us today.