Tax Benefits of Forming an Airbnb LLC: The Pros and Cons

As an Airbnb host, you invest time and effort into your rental property. You work hard to make your guests feel comfortable on vacation. After creating a profitable Airbnb business, you can use tax planning strategies to lower your tax burden and keep more of your rental income.

Whether you’re an experienced rental host or just starting an Airbnb business, forming an LLC could benefit your operations.

This article will explain the tax benefits of forming an Airbnb LLC. You’ll learn the pros and cons of the business structure, the process of registering an LLC, and how to decide whether an LLC is right for your Airbnb business.

Is Owning an Airbnb Considered Having a Business?

Many Airbnb hosts start short-term rentals hoping to make extra cash but not necessarily expecting to open a real estate business. 

However, the IRS views most rental property hosts as self-employed business owners. Airbnb hosts must generally report rental income and expenses on their personal income tax returns.

Exceptions apply to property owners with less than 15 days of rentals during the year.

Additionally, short-term rental property owners must pay self-employment taxes on Airbnb income. We recommend consulting real estate accounting professionals for help with income tax rules. 

Do Airbnb Hosts Need a License?

The IRS doesn’t require Airbnb hosts to have a rental license, but state and city rules vary. Many cities require hosts to register and obtain business licenses to host short-term vacation rentals. 

Depending on your location, you might need to obtain the following:

• Local business license

• City and/or county tax licenses

• Rental permit

• Zoning review

Check your local laws to determine the Airbnb rental requirements.

What Are the Tax Benefits of Airbnb LLCs?

Limited liability companies (LLCs) can offer several tax benefits for Airbnb hosts. LLC tax benefits include the following:

• Professionalism and reputability

• Income tax structure flexibility

• Personal asset protection

• Business tax deduction support

We’ll discuss the above examples in further detail below.

Improve Your Airbnb Host Reputation

Help your rental listing stand out by improving your host profile. When you form an Airbnb LLC, you can use your LLC’s business name to list your rental availability.

Having a business profile signals to renters that you’re an experienced host. It also shows potential guests that you’ll offer professional service, cleanliness, and hospitality.

Open a Business Bank Account

Establishing a business bank account helps you separate rental income and expenses from your personal finances. 

Many financial institutions require business owners to provide an EIN before opening a bank account. You can get an EIN after forming your LLC.

Additionally, many accounting professionals offer budget-friendly EIN application services so you can skip the tedious paperwork. 

Establish a Flexible Tax Structure

An LLC is a business structure treated as a passthrough entity for federal income tax purposes. LLCs pass income and expenses to the owners, who pay income taxes on LLC profits.

Single-member LLCs (businesses with one owner) default to sole proprietorships for federal income tax purposes. Multi-member LLCs default to partnership tax treatment. 

However, LLC owners can elect alternate income tax treatment.

• Business owners can file an entity classification election to convert their company to a C corporation.

• C corp owners can file an S corporation election to maintain passthrough entity taxation.

C corps and S corps have distinct tax benefits. Depending on your rental income and involvement in property management, corporate tax treatment could lower your tax liability. 

We recommend consulting professional CPAs to determine the most favorable business entity type for your Airbnb rental.

Protect Your Personal Assets from Liability

A primary advantage of LLC formation is limited liability protection, which extends beyond tax benefits. An Airbnb LLC protects the host’s personal assets from legal claims. 

If a renter sues an Airbnb LLC, the legal action generally extends only to the LLC’s assets. The legal claim typically excludes the host’s assets, such as their personal bank account and primary residence.

Maximize Your Tax Deductions

Airbnb hosts can deduct certain business expenses, such as the mortgage interest and property taxes paid on the rental property. Forming an Airbnb LLC helps hosts improve their small business recordkeeping and maximize business tax deductions. 

Airbnb LLC owners must maintain accurate and timely bookkeeping to track rental income and expenses. Your recordkeeping helps you maximize your Airbnb tax deductions and avoid missing expenses. 

Cons of Forming an LLC for a Short-Term Rental Business

Establishing an Airbnb LLC presents minimal drawbacks. Consider the following cons of forming an LLC for your real estate rental.

• Complicated paperwork: Entity formation filings can require tedious applications.

• Filing fees: Most formation documents include initial and annual fees.

• Slow processing: Government agencies often require correspondence via paper mail or long lines at the registration office.

• Varying tax rules: LLC registration rules and forms differ by state.

• Annual report filing requirements: Many states require LLCs to file annual reports.

Business owners could feel overwhelmed with paperwork and LLC filing requirements. Fortunately, accounting professionals can support your business with budget-friendly entity formation services. You can avoid time-consuming, confusing forms with 1-800Accountant’s help.

Should You Form an LLC for Your Airbnb Business?

Consider the following factors to determine whether an LLC is right for your property rental business. 

• Annual Airbnb income: Hosts with substantial rental income could benefit from establishing a business profile on Airbnb. Conversely, owners with minimal bookings may not want to invest time and money into the LLC registration process.

• Number of properties: You can form an LLC to legally hold your real estate if you own multiple rental properties. Additionally, the LLC could protect your personal assets from potential legal claims.

• Location: Several states offer taxpayer-friendly treatment of LLCs. For example, certain states do not impose a personal income tax, so LLC owners do not pay state income tax on LLC profits. Examples include Florida, Nevada, Texas, and Wyoming. Conversely, certain states impose taxes on LLCs and personal income taxes on LLC owners. Examples include California and Tennessee.

• Filing requirements: Review local laws to understand the required fees and paperwork. Depending on whether your state has a time-consuming and costly process, you can decide whether the investment makes sense for your business. 

The above considerations can help you decide whether an LLC formation suits your situation. However, your ultimate decision depends on numerous factors, including the above. Your tax advisor can help you examine the pros and cons of LLC formation for your Airbnb business. 

We recommend consulting entity formation professionals before starting the LLC registration process. 

How to Form an LLC for Airbnb Property Management

As an Airbnb host, you can establish an LLC by registering with your Secretary of State. The LLC registration process generally includes the following steps: 

1. Choose an LLC name. Use your state's business name search tool to confirm the availability of your desired business name.
2. Draft your LLC's operating agreement and articles of organization. Many states require business owners to submit these documents during registration.
3. File the LLC registration application with the Secretary of State. You'll likely need to include ownership details, such as the owner's name and social security number, registered agent details, and business address.
4. Obtain licenses and permit. Your state and/or local jurisdictions could require a vacation rental license or zoning permit for your Airbnb business.
5. Register for taxes, if applicable. In addition to income taxes, relevant state taxes could include sales, employment, and occupancy taxes.

Each state’s rules and forms vary, so we recommend checking your local administrative guidance. 1-800Accountant’s entity formation services can help you navigate confusing instructions. 

Partner with 1-800Accountant for Your Airbnb LLC Formation

Don’t let the LLC formation process feel overwhelming. 1-800Accountant can support your Airbnb business through entity formation, strategic planning, and tax return preparation. 

Accounting professionals can help you determine the most favorable business structure for your Airbnb rental. We’ll find ways for you to maximize your Airbnb tax deductions and lower your tax bill. 

1-800Accountant’s real estate experts offer industry-specific tax advice so you can feel confident in your business planning and tax compliance.