January 19, 2022

Section 280A and RVs

When you were buying your RV, your dealer told you it was a home, and you could write off your taxes and interest. But what if you primarily use it in business? Can you write it off? And if yes, in what capacity? A house or a vehicle?

In Shirley, the Tax Court came up with a "primary function test." If a taxpayer has to get a hotel in the absence of an RV, then their RV qualifies as a lodging unit. If they have to get a car in the absence of an RV, then the RV should be classified as a vehicle. From the IRS standpoint, if the taxpayer spends more time lodging in the RV than driving, then the RV should be classified as a lodging facility.

Inherently, the IRS tends to classify RVs as dwelling units. This is not good news for people who legitimately use their RVs for business purposes due to Section 280A. In plain terms, that section states that there should be no business deduction for a dwelling unit used as a personal residence. You can only get some write-off when you use a part of your residency exclusively for businesses. Your RV becomes a personal residence when during the year you use it for personal needs for the greater of 14 days or 10% of the total days rented.

There was a court case where a couple was disallowed RV tax deductions because of the Section 280A rule. A California couple had an insurance brokerage business, where they were selling recreational vehicle policies. They would drive their RV to various rallies and set up a tent to advertise their insurance services to potential clients. During their rally years, they generated significant business revenue and felt entitled to write off their RVs as a business expense.

The IRS disallowed tax deductions, and the couple took the case to the Tax Court, where they lost again. The Tax Court studied Code Sec. 280A and claimed that even such an innocent activity as watching TV constitutes personal use. The couple used the RV personally for more than 14 days, which made their RV a personal residence. The court stated that the couple did not use any portion of their residence exclusively for business as it is required in Section 280A(c). Therefore, no deduction for the expenses allocated to its business use was allowed.

I believe that the couple could have avoided such a harsh outcome if they proved that they used the RV personally for less than 14 days during the year. In this case, the RV would not be considered a personal residence, and business expenses could be allowed. Or if they referred the Tax Court to 280A(f)(4), which states that "Nothing in this section shall be construed to disallow any deduction allowable under section 162(a)(2).” Section 162(a)2 allows deduction of traveling expenses while away from home on business. Or if the RV didn't have a toilet. A property can be considered a dwelling unit ONLY when it has kitchen, sleeping, and bathroom facilities. Without the bathroom, the RV would be regarded as a vehicle. And with vehicles, there is no exclusivity rule when it comes to tax business deductions.

Wait, what? Did you say Section 280A(f)(4) allows travel expenses?

You are correct. Even if the IRS deems your RV as a residence, you can still deduct 100 percent of the costs of getting to and from your business destination when the primary purpose of your trip is business. This means that you should be able to deduct gas, take the depreciation, and expense some repairs and maintenance. There are two ways to take travel deductions on your RV. The first way is a standard deduction, and the second one is the actual deduction. There is a lot of information on standard and actual deductions on the internet, and we won't go in-depth about this topic here. However, it is worth mentioning that you can't switch to the actual deduction if you took the standard deduction in the first year. This rule prevents you from taking a huge depreciation expense in the first year and then switching to the standard deduction. No double-dipping is allowed.

Another famous RV case: Dr. Hoye vs Commissioner.

In this court case, the IRS allowed almost all RV tax deductions. Dr. Hoye's medical practice required his availability at the hospital for some of his patients. Instead of renting an apartment, he bought a motorhome. When necessary, the doctor drove his RV to the hospital and stayed in the RV after a performed surgery. He also used his RV to attend medical conferences, investment meetings, and personal purposes. He tracked his usage by miles, and on this basis, claimed 78 percent business use. The Tax Court granted the doctor all of his deductions besides the investor meetings use.

Suggestions

Keep a Mileage Log. Don't risk how the IRS may classify your motor home. Take matters into your own hands and have a mileage log for each of your trips. Record your mileage in regards to: 

  1. Investment use.
  2. Business use.
  3. Personal use.
  4. Commuting use. 

Of course, the business use is what you want to have the most out of these categories.

Keep a Nights Sleeping Log. In addition, you should keep records that classify each night in your RV as investment, business, or personal use. Again, as you should expect, the desirable night is a business night. It is also essential that you read up on tax home and transient status. You can read about it here. If your RV is your only place of residence, then most likely, your travel deductions will be disallowed.

As you can see, Section 280A has loopholes, and it is possible to write off your RV. Remember about the 14 days rule, travel exception, and keep solid track of your trips.