Parking space sharing app and potential tax implications
Individuals who are auctioning or leasing parking spaces should look into the tax implications
Parking in dense cities, college campuses, and other crowded areas has become much more competitive in recent years as parking-space finder apps have come on the scene. These parking space apps, such as MonkeyParking, Haystack, and ParkModo, have allowed drivers to bid on public parking spaces or rent private parking spaces. But just because these parking space apps create a nontraditional income stream for their users (like many sharing economy apps do), the income isn’t always so novel in terms of the tax code.
In fact, the IRS is unwavering in its position on this particular type of economic disruption: What a parking space app calls a sharing fee, the IRS calls income. And income shall be taxed.
Parking space apps upset many civic leaders
First, let’s take a look at the original purpose of parking space apps. When MonkeyParking and similar apps started out, they allowed people who were parked in a public parking space to auction off the space to another driver who needed it.
In law schools across the U.S., property law professors were likely lecturing about how parking space occupiers can’t get away with selling something they don’t own. Perhaps unsurprisingly, several cities, including San Francisco and Boston, promptly banned the auction feature. The leasing feature of these apps still allows drivers to rent a private parking space from the owner.
Although some jurisdictions have banned the auction feature from parking space apps, this controversial feature hasn’t completely disappeared from all advertisements. Parking space app features will likely continue to be in flux as developers negotiate and potentially litigate the issues with state and local jurisdictions.
A look at the parking space apps tax consequences
Like other sharing economy apps, parking space finder apps created a digital marketplace that connected two groups who have something to gain from each other.
This marketplace led to a flurry of taxable economic transactions. It also led to tax consequences for people using the app.
Auctioning public parking spaces
Let’s examine the tax aspects of auctioning off public parking spaces.
For tax purposes, the parking space occupier doesn’t have a property right to lease or sell the parking space. Instead, the occupier receives payment for physically occupying the space until the auction winner arrives.
News reports have also explained an alternative theory favored by app promoters. Promoters say that the auction winner pays the occupier for merely providing information about his or her expected time of departure from the space.
Either way, the occupier receives payment for personal services, not the lease or sale of property. Under U.S. tax law, payment for personal services is subject to ordinary income tax rates and possibly self-employment tax.
Parking as a side business?
Whether the occupier has to pay self-employment tax on the income depends on how extensive his or her business activity is.
Under tax law, individuals owe self-employment tax only if they earn the income in a trade or business. The activity is a trade or business if the individual engages in the activity to make a profit from selling goods or performing services.
In the example of the parking space occupier, if the occupier uses the parking space finder app occasionally, the individual is probably not in the trade or business of reserving public parking spaces for profit. The individual would report the income on line 21 of Form 1040 (line 21 of Schedule 1 tax year 2018 and line 8 for tax year 2019) and wouldn’t owe self-employment tax.
But, if the occupier regularly and continuously reserves and auctions off public parking spaces, the individual is in the business of reserving public parking spaces for profit. The individual would report the income on Schedule C and would owe self-employment tax.
For example, imagine that a budding entrepreneur recognizes the economic value of occupying all of the public parking spaces near a popular theater, restaurant, or downtown stadium. The entrepreneur can’t occupy all of the spaces by himself, so he pays a small fee to local pedestrians to occupy the parking spaces. The entrepreneur then auctions off the spaces using a parking space finder app. The auctions go so well that the entrepreneur starts getting up early each morning to expand his domain of occupied public parking spaces.
First, the entrepreneur will have to report the income on Schedule C and pay self-employment taxes. On the local level, it is possible that proceeds from parking services will be subject to state and local sales tax or other taxes or fees. In addition to that, tax issues will inevitably arise from the potential employer-employee relationship the entrepreneur may have established between himself and his assistant occupiers.
The IRS taxes income from illegal activities just as it taxes income from legal activities. So, regardless of whether certain cities have banned the auction feature of parking apps, the tax consequences still apply.
Renting private parking spaces
For tax purposes, the income that a private parking space owner makes from leasing the space is rental income that is not subject to self-employment taxes. This is because the driver renting the space is paying to use the property, not for services the owner provided.
Since the owner is potentially renting out nondepreciable property, the owner should apply passive activity rules with great care.
Here’s why. In the case of a parking space, it’s likely that less than 30 percent of the space’s unadjusted basis is depreciable. In that situation, IRC §469 and IRS regulations will treat the owner’s net income as nonpassive, but a net loss as passive. The result: The taxpayer can’t use the income to offset any passive activity losses.
Whether and how much the owner can deduct expenses depends on the owner’s personal use of the parking space. If the owner uses the space part of the time and leases the space when he or she isn’t using it, the owner must allocate the upkeep and maintenance expenses between personal use and rental use.
On the other hand, if the owner never uses the space and holds it only for the rental income, the owner can deduct all of the upkeep and maintenance expenses, subject to passive activity rules.
Remember the parking space apps tax consequences
Taxpayers and their advisors should be aware that the IRS will treat income generated from parking space sharing apps as an additional source of revenue. The app company may issue a Form 1099-K to the IRS and the taxpayer showing the amount of income the taxpayer received. Taxpayers need to report that income in different ways, depending on how they use the app. It’s also possible that other unexpected issues can come up, including self-employment tax, local tax, and even payroll tax issues in special cases.
So, whether drivers are auctioning off property they don’t own or leasing spaces that they do own, app users should be aware of the potential tax consequences and plan accordingly for tax season.
For more information for rental real estate owners, see the Insights article, “Rental property and the qualified business income deduction”
Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA.
This article was originally published on November 30, 2015.