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Did the Trump Tax Plan Help or Hurt Turo Hosts?

Did the Trump Tax Plan Help or Hurt Turo Hosts?

Trump passed one of the largest tax reform bills in the past 20 years and it will have a large impact to any business, including Turo Hosts and their car sharing business. The Trump Tax Plan affects 2018 income so this is the first year it will be applicable.

The main impact of Trumps Tax plan on Turo Hosts is that there is a 20% deduction on pass through income. All Turo Hosts are running their own business. The default business structure for Turo Hosts is a sole proprietorship and it is typically registered under your social security number. Sole proprietorships are considered a pass-through entity since income follows through the sole proprietorship to the recipient and taxes are levied on the recipient’s rather than at the business level. The Trump Tax Plan has essentially gave Turo Owners a 20% deduction on their taxes.

The second biggest impact is vehicle deprecation on Turo Hosts’ taxes. Trump’s new tax plan allows for much higher vehicle depreciation deductions on our taxes. Some hosts can fully write off their vehicle in the first year that it is put into service. It does cause minor issues when the Turo Host goes to sell the car since now they have to recapture this deprecation, so essentially you will be taxed on when you sell it. At the end of the day, you are still getting taxed on your Turo income, but it is now pushed back until you sell the vehicle via deprecation recapture.

If you are single or married with no kids, no house, and pay little state income tax, you essentially received a 20% reduction of your taxes from Turo income purely based on the 20% deduction on pass through income. The other main changes in the Trump Tax Plan is the doubling of the standard deduction, reduction of tax rates in the middle brackets, removal of the personal exemption, and limit of deduction for State and Local Taxes (SALT).

Here are some factors that will positively affect Turo Hosts:

Increased Deduction for Pass-Through Income

The Trump Tax Plan allows for a 20% deduction of pass-through income. There are other provisions that affect other professions but it should not for any Turo Hosts, so essentially you are getting a 20% deduction on the net profit. However, your total net income from 1099s will still be subject to medicare and social security taxes as part of the self employment tax.

Increase of Vehicle Depreciation

Buried in the Trump Tax plan was a provision that increased vehicle depreciation. In the past, you were only allowed to deduct a maximum of $11,160 through Section 179 on new cars and $3160 on used cars or cars you owned previously but not put into service for your business. Below is the chart:

Limits for passenger cars placed in service in 2017 (no Section 179 or bonus deprecation):

With Trumps tax plan, these limits had been raised significantly. below are the new vehicle depreciation limits if vehicles had been placed in used after November 2017:

For 2018, here is the limit of depreciation deduction for a passenger car

With these limits, most Turo Hosts can write off their entire value of their car in the first year that it has been put in service. Note that the deduction works off of what you paid for the vehicle, not what it is worth. When Turo Hosts sell the vehicle, they are taxed on the selling price of the vehicle from depreciation recapture.

Increase of Standard Deduction

The biggest part of the Trump Tax Plan is the doubling of the Standard Deduction from 6500 to 12000 for single filers and from 13000 to 24000 for married couples filing jointly. While this is great for some people since it lowers their taxes, it may not be so good for others since it essentially makes it more difficult to itemize deductions since your itemized deductions will not exceed the standard deduction.

Lower Tax Brackets

The Trump Tax plan lowered the rates of some of the tax brackets. The tax cuts seem to affect low income earners a bit more than high income earners purely based on just the tax brackets alone. Take a look at the below calculations:

Single Filers

IncomeOldNewCut %
400005738.754739.517.4%
450006988.755839.516.4%
500008238.756939.515.8%
550009488.758039.515.3%
6000010738.759139.514.9%
6500011988.7510239.514.6%
7000013238.7511339.514.3%
7500014488.7512439.514.1%
8000015738.7513539.514.0%

You can see that if you make 40k a year as a single filer, you will get about a 17.4% cut in your federal taxes, assuming that everything else on your tax return remains the same. You can see a similar trend in people who file as married filing jointly:

Married Filing Jointly

IncomeOldNewCut %
8000011477.35947917.4%
9000013977.351167916.4%
10000016477.351387915.8%
11000018977.351607915.3%
12000021477.351827914.9%
13000023977.352047914.6%
14000026477.352267914.3%
15000028977.352487914.1%
16000031477.352707914.0%

I essentially doubled the income from single filers and did a similar calculation.

Here are some factors that will negatively affect Turo Hosts:

Elimination of Personal Exemption

The personal exemption is something you can claim for someone on your tax return, such as a child or dependent (other than your spouse, regardless of your feelings towards how dependent they are on you.) Starting 2018, you will no longer be able to claim a personal exemption. The increase of the standard deduction does offset this somewhat if you have only one or fewer personal exemptions, but you will  pay more taxes if you have two or more personal exemptions. For those who file as married filing jointly, the increase of the standard deduction is 6500. The personal exemption was set at 4150 for 2018. If you have one exemption, you will still gain about 2250 in additional deductions. If you have two exemptions, you will lose 1800 in deductions.

Limit on State and Local Taxes (SALT) Deductions

The cap on deductions for state and local taxes is now $10,000. This will mostly affect drivers in California and New York due to their high state income taxes but may affect you in other states if you have high property taxes like in New Jersey, New York, Texas and Florida. If you live in a condo that is assessed at $500,000, you’ll hit the cap on SALT with a 2% local property so it is very possible that you’ll take a small hit when you hit the cap on SALT deductions.

Limit on Deduction of Mortgage Interest

For those who are married filing jointly, you can take the mortgage interest deduction if your property is worth under $750k, which is lower than the current limit of $1 million. This should affect only a small percentage of the population in the US but possibly a decent percentage in places like California, Seattle and the North East (NY, NJ, CT, MA).

How Much Do You Save on Taxes?

This is a very difficult question to answer since everyone’s tax situation is different. I can do the best case scenario below:

Single Filer, full time Turo Host making $40k a year with no State Income Tax with no kids or house

They will get a 20% pass-through income deduction, about a 15% deduction on federal income taxes, and the increase from the personal deduction. This person may get about a 30% reduction of their taxes.

This Tax Plan is Temporary

I would argue that many Turo Hosts will get a slight reduction of their taxes due to the deduction on pass through income. The biggest deductions will come from Turo Hosts who are buying a lot of cars and building their fleet in 2018-2026. If Turo Hosts plan on building their business, the next eight years is the time to do it because Trump’s tax plan is so generous with vehicle deprecation.

If your taxes end up increasing, remember that it expires in 8 years so you won’t have to deal with it for that long.

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