July 27, 2021

A couple of tax tips for RV owners

There are several ways you can use your RV in business. 

A. You can rent your RV out and treat it as a business lodging facility.

B. You can drive it from one business client to another and treat it as a means of transportation.

C. You can sleep in it when on business trips, and treat is as a transient lodging facility.

In each of these situations, the tax treatment of your RV will be different. 

When the IRS looks at your tax return, their first step will be to determine if your motorhome qualifies as primarily for lodging or transportation.

Most of the time, the IRS considers RV a lodging facility.  Here is their reasoning: “As a general rule, if for business purposes, the motorhome is used for lodging at least as many days as it is used for transportation, we believe that the predominant use is for lodging.  This is particularly true ..when the taxpayer spends an extended time away from home at a temporary worksite and the transportation mileage is very low”.

However, there are always exceptions. You can prove them otherwise as long as you know what you are doing and can provide solid tax records.

 Here are my two cents on the tax treatment of your RV:

No Section 179 and no Bonus Depreciation

Section 179 and Bonus Depreciation of a motor home can put you in the crosshairs of the IRS, and that’s not where you want to be. As mentioned above, the IRS tends to consider RV a lodging facility and according to the tax law, lodging facilities cannot take the 179 deduction or bonus depreciation unless they meet a transient basis exclusion. Transient basis means that most of your RV rentals are less than 30 days. The classic example of a transient lodging facility is a hotel.

In Shirley, taxpayers had to fight to get their 179 deduction. The taxpayers owned a fleet of rental RVs, which they sold or rented to the public on a transient basis. Aware of the transient basis rules, Shirley took the 179 deduction.

However, the IRS disallowed the deduction. Their argument was that there was no “transient basis” and RVs were used solely for lodging.The IRS argued that taxpayers’ customers could have gotten themselves a standard hotel room while on business trips. But instead, they opted out for comfortable lodgings in the form of a recreational vehicle.

The Tax Court decided in the favor of the taxpayer and ruled that Shirley’s motor homes are section 179 property and allowed the deduction. However, we can see the logic of the IRS. In addition, according to some recent court cases, even one day of personal use can kick you out of transient basis exclusion.

In Evans, the court granted the Section 179 deduction for a motor home the taxpayers used to transport the taxpayers’ motorcycles to motocross competitions where the taxpayers advertised their residential home and commercial construction business. In this case, the court ruled that the motor home was “primarily’’ a transportation vehicle and not a lodging facility. Thus, it was eligible for the Section 179 deduction.

Since there is a chance the IRS may decide that your RV is a lodging facility not eligible for Section 179 expensing, what should you do? Take the easy road: forget Section 179 and bonus depreciation and go for depreciation only.

Beat the Assertion

In Jackson, the court ruled (incorrectly, as we’ll explain) that the taxpayers’ $248,457 Winnebago motor home was a personal residence under the vacation home rules and thus qualified for zero Section 179 and zero business deductions.

The Jacksons attended RV rallies to identify prospects and sell RV-specific insurance policies to them. The court ruled that the Jacksons used their motor home 2/3 for business and 1/3 for personal purposes. But then (and this is the part that’s wrong) because the Jacksons had more than 14 days of personal use, the court denied the business use as nondeductible use of a personal residence under the vacation home rules.

That’s wrong. IRC Section 280(f)(4) is the reason the court’s decision is wrong. It reads as follows:

***2BOA(f)(4) *Coordination With Section 162(a)(2). Nothing in this section shall be construed to disallow any deduction allowable under section 162(a)(2) (or any deduction which meets the tests of section 162(a)(2) but is allowable under another provision of this title) by reason of the taxpayer’s being away from home in the pursuit of a trade or business (other than the trade or business of renting dwelling units).

Under this section, the taxpayers’ motor home should have been treated as 2/3 business and 1/3 personal residence. Technically, the 14-day rental expenses disallowance rule does not apply to the motor home because there was no rental of the motor home.

What this means for you: keep IRC Section 280(f)(4) top of mind. Why? Because this section says that your use of the motor home for overnight business lodging produces business deductions for business travel and that such travel is not subject to the vacation home rules. I should note that the Jacksons never brought this code section to the court’s attention, so that’s likely why the court did not consider it.

In Hoye’s, the court allowed business deductions, even though there was some personal use involved. Dr. Hoye’s medical practice required his postsurgical availability at the hospital for some of his cases. He was the expert. Other physicians, respiratory staff, and nurses were not familiar with or trained in a certain thoracic and oncological surgery. Thus, in these cases, Dr. Hoye had to be immediately available 24 hours a day for up to five days after the surgery. Where was Dr. Hoye going to stay for these five days? He considered renting an apartment in a nearby town, but the town was too far away. He considered the local motel, but sometimes it had no vacancy. His solution: a $192,215 motor home.

To make sure he was available when he was needed, Dr. Hoye rented a pad (a place to park the motor home) three blocks from the hospital and had a telephone and other utilities installed.

When it was necessary for Dr. Hoye to be nearby after surgery, he drove the motor home to the hospital. In the first year, Dr. Hoye performed 16 major surgeries, three of which required his postsurgery on-call presence. The next year, he performed nine major surgeries and had to stay near the hospital five times. Dr. Hoye also used the motor home to attend medical meetings and seminars, investment meetings, and or personal and recreational purposes. In one year, his use of the motor home fell into these categories:

• 12,000 miles to medical conventions

• 2,000 miles to an investment seminar

• 800 miles to and from the hospital for surgery

• 4,000 miles for personal pleasure 

On the basis of this mileage, Dr. Hoye claimed 78% business use. The court disallowed the investment seminar {which today would not qualify in any circumstance, as investment seminars are no longer tax-deductible). The court cited International Artists and Schwartz where the use of an asset for both business and personal use qualified for depreciation deductions to the extent of its business use. And the court granted Dr. Hoye the deductions for the business use of his motor home. Please note, personal use of the RV didn’t disqualify the doctor from all deductions based on vacation home rules, such as it did in Jackson.

Again, keep this top of mind: even if you rent out your RV on RV rental websites, IRC Section 280A(f)(4) gives you the travel deduction and makes business travel exempt from the vacation home personal residence disallowance rules.

Build a Mileage Log

Don’t take a chance on how the IRS is going to classify your motor home. Keep a mileage log for each trip. In that log, record your mileage according to the law’s required components:

• investment use

• business use

• personal use

• commuting use

Of these four categories, “business use” is the only desirable one. Make sure to note clearly the business reason of each business day. Also, keep this general rule in mind: no log of business use, no deductions.

Build a Nights-Sleeping Log

You should also keep a log that classifies each lodging night as investment, business, or personal use. Again, as you would expect, the desirable night is a business night.

Never Use the Motor Home as an Entertainment Facility

If you are looking for a way to complicate your motor home deductions, use the motor home for entertainment, either directly or indirectly. Direct use would involve having people over to the motor home for a party. Indirect use would involve driving the motor home to your hunting area.

Tax law gives no deduction for any facility used in connection with entertainment.10

Lawmakers carved a transportation facility exception into this no-deduction rule. If you use your motor home primarily (more than 50 percent) for business transportation, you may

• deduct the business part and

• treat the entertainment part as personal.

 But if you use your motor home for entertainment, you are treading on shaky ground.

Keep Business Use over 50 Percent

When you use Section 179 expensing on a motor home classified as a means of transportation, keep your business use for each of the years before year 6 at more than 50 percent. If you fail the “more than 50 percent” test during this period, you have to report and pay taxes at ordinary income rates on the recapture of some of your prior depreciation deductions.

You won’t like that! (So keep the business use over 50 percent.)

Takeaways:

Keep good records to protect your motor home deductions:

• Keep a mileage log for every personal and business use of your motor home. Make sure you have more than 50 percent business miles.

• Keep a record of every night you use the motor home for personal or business lodging. Make sure you have more than 50 percent business nights.

• Don’t claim Section 179 expensing on the motor home. Instead, stay with depreciation to avoid extra IRS audit attention and the possible loss of the Section 179 deduction under the lodging rules.

• Keep IRC Section 280(f)(4) top of mind. Why? Because this section says that your use of the motor home for overnight business lodging produces business deductions for business travel and that business travel is not subject to the vacation home rules.

And finally, avoid using your motor home as an entertainment facility.