June 22, 2021

Can I write off my RV as business expense?

Thinking to write off your RV as a business expense? Before getting creative, let’s look into the IRS Code and previous tax court cases. RV taxation is nothing but simple, and before taking that deduction on your return, you need to get a clear idea of what you are getting into. 

There are a couple of tax rules that cover RV taxation. Checking your tax situation against each rule will help you determine if your RV tax deductions are legit. 

There are several ways you can use your RV in business. You can rent it out. You can use it for business transport. You can use it as a hotel during your business trips. But before starting on your tax return, you need to understand the main tax rules.

Rule number one. You are allowed to take a business deduction on your tax return ONLY if your RV or trailer is used for business purposes. This rule is outlined inthe** I.R.C. § 262(a).** Personal, living, or family expenses are not deductible except as otherwise expressly provided by the Internal Revenue Code.  The IRS code 26 U.S.C 163(h) does expressly allow to deduct mortgage interest and RE taxes of your RV as a second home. However, you still cannot write off other expenses such as miles, depreciation, gas, repairs unless you use your RV for business purposes.

And how the IRS determines whether your activity is business or not? Well, they will look at your intent. If your intent is to make a profit and " the acquisition and/or maintenance of the property was primarily associated with profit-motivated purposes." then you are engaged in business. If your main intent is to drive around the country and enjoy your freedom, then miles, depreciation, gas, repairs are personal expenses, which cannot be deducted. If your personal and business motives coexist, then the IRS allows you to allocate the expenses between personal and business use. However, this allocation is not always allowed because of the painful Section 280A rules, about which talk here.  

Rule number two. Once you decided if your RV is involved in a business or not, look into U.S. Code § 162, which states that you can deduct expenses ONLY if they were ordinary and necessary for your business. Your RV expense will be disallowed if the IRS finds that your business use of the RV is unnecessary or unusual for your trade.  For example, in Henry v. Commissioner the taxpayer, a tax attorney, and accountant bought a yacht and adopted a house flag colored in red, white, and blue and bearing the numerals "1040." This flag attracted attention and resulted in inquiries. The accountant wrote off the yacht as a business advertising expense. The Tax Court disallowed his deduction since it was not ordinary or usual for a lawyer or accountant to promote his business in such a manner, and the taxpayer could not demonstrate a business benefit derived from this type of advertisement.

Rule number three. Determine if your activity is a hobby. This rule is covered in IRC code 183. If the IRS decides that your activity is simply a “hobby”, RV expenses will be limited to the income from the activity. Hobby expenses traditionally would go on Schedule A in the 2% AGI limitation category. This category of deductions has been suspended till 2025. Therefore, if the IRS decides that your RV activity is simply a hobby, you would have to claim your income, but won't be able to claim your losses.

How does the IRS determine if your activity is a hobby or a business? Surprise surprise! The IRS came up with its own set of factors to make this determination. And here they are:

Factor 1: Manner in Which the Taxpayer Carries on the Activity

The IRS looks if the taxpayer carries on the activity in a businesslike manner and if the taxpayer maintains complete and accurate books and records. The IRS also looks to see if there has been an abandonment of unprofitable techniques or the adoption of new methods with a goal to increase profits. Those that exceed to the level of a business will typically have sophisticated records, and separate personal and business financial accounts as well as a detailed business plan with long and short-term goals.

Factor 2: The Expertise of the Taxpayer or his Advisors

Taxpayers who are looking to generate a profit and operate a business, have prepared for the activity in question by extensive study of the business or through the hiring of an expert. They will then act in accordance with the practices learned or by relying on expert knowledge.

Factor 3: The Time and Effort Expended by the Taxpayer in Carrying on the Activity

There should be a devotion of personal time and effort into carrying out the for-profit activity. Additionally, the taxpayer should withdraw from additional occupations to focus on the business activity.

Factor 4: Expectation that Assets Used in Activity May Appreciate in Value

The profit encompasses the expectation that the assets of the activity will appreciate or there is a potential for appreciation. An asset cannot be held that is unlikely or known to not appreciate in value.

Factor 5: The Success of the Taxpayer in Carrying on Other Similar or Dissimilar Activities

Even if the taxpayer's activity is currently unprofitable, the IRS will look if the taxpayer has a history of converting other activity into a for-profit business.

Factor 6: The Taxpayers History of Income or Losses with Respect to the Activity

The IRS will look to see if the taxpayer claimed continued tax losses from the activity in previous years. Several years of losses are OK, but there should also be a time when the activity actually made a profit.

Factor 7: The Amount of Occasional Profits, if any, which are Earned

The IRS will look if there is a positive relationship between profits and losses. The presumption here is that if an activity has income for three out of the last five years, the activity generally is presumed to be for-profit.

Factor 8: The Financial Status of the Taxpayer

The IRS will see if the taxpayer has other substantial sources of income. People that operate the activity as a business will be more likely to have no other substantial sources of income.

Factor 9: Elements of Personal Pleasure or Recreation

The for-profit motive of the taxpayer should be the main motive. If the taxpayer continues personal use of the business asset and has access to the asset at any time, this means that the asset is held more for hobby purposes.

Congratulations on getting through such a difficult and boring reading. You must be very motivated!

If you went through all rules and still think that your RV tax deductions are substantiated, please get ready for the new challenge: IRC Section 280 A. Inherently, the IRS considers RVs as lodging units. And lodging units are subject to Section 280 A rules. This section states that if you use your RV as a residence, you can not deduct business use of your RV, unless you can prove that you used it exclusively for business. So, you have to keep your RV busy and make sure it does not qualify as a personal residence. You use your RV as a residence if you use it personally for more than 14 days a year or more than 10% of all rental days.

You can read up on Section 280A here.