January 19, 2022

Transient rules, business mileage and Section 179 deduction

There is a possibility to write off your new RV by applying Section 179 rules. You can take advantage of this deduction when you use your RV as a lodging unit or a vehicle. This deduction is possible ONLY when you use your motorhome heavily in your business. An RV with occasional business use won't qualify for the Section 179 deduction.

What is Section 179?

In plain terms, Section 179 allows you to write off a big chunk of your RV in the year you purchase it. This way you don't write it off gradually year to year but get an immediate tax benefit on your most recent tax return. This deduction is available for a used or new property. You can’t use Section 179 on a gifted, inherited, or leased motor home. Nor you may use it if you purchase your property from a relative or any organization that you control. Under ordinary circumstances, a business can reduce Section 179 deduction by the percentage of personal use. This deduction is allowed only if the business use of your business asset is more than 50%. However, when it comes to RVs, it is wise to take Section 179 ONLY when your business use is 100%. This is because inherently the IRS classifies RVs as lodging units and suspects lots of personal use.

First, you need to determine whether your RV is a residence or a vehicle. In Shirley, the tax court battled with this question and finally narrowed it down to the "primary function test." If one has to pay for the hotel in the absence of an RV, then his/her RV qualifies as a lodging unit. If one has to get a car in the absence of an RV, then the RV should be classified as a vehicle. But what if you have to get both a hotel and a car? The court left this question unanswered. The IRS argues, that if the taxpayer spends more time lodging in the RV rather than driving, then the RV should be classified as a lodging facility.

It is much easier to apply Section 179 to the RV classified as a vehicle because vehicles are allowed to take Section 179 expense. In Evans, the court allowed Section 179 deduction because it decided that the RV was predominantly used for transport.

It gets complicated if your RV is considered a lodging unit. A lodging unit classified as a personal residence is not allowed to use Section 179 with one exception.

This exception is called the transient rule. A lodging unit is used on a transient basis when one uses the unit as a hotel at a single location for less than 30 days. For example, you post your RV on a rental website and its average rental term is less than 30 days. If this happens, in the eyes of the IRS your RV becomes a hotel. In Shirley, the court granted the Section 179 deduction based on this rule. However, be careful. If you attempt to apply this rule to your situation, please remember that even one day of personal use may kick you out of the hotel status and your deduction will be disallowed.

Hypothetically, you can also use your RV as a "take it with you business lodging facility". As long as you don't stay at the same location for 30 days, you may claim that you used your RV as a hotel. For example, you use your RV for business lodging in Florida for twenty days and then you move to Colorado and stay in the RV while on business for another 15 days. However, this strategy only works if a) your RV is not your tax home (you may need to read up on home rules here ) b) you don't use your RV for personal purposes at all. And this approach is risky. Previously, the IRS claimed that "a taxpayer, who uses a motor home as lodging while away from home retains the ownership of the motor home and is in no way a transient to respect with that motor home".

Important Rules:

1. Avoid ANY personal use when renting to transients. The court has held that one day of personal use will turn your RV rental activity into a residential rental activity under vacation home rules. Residential rental triggers the recapture of your Section 179 deduction.

Follow these steps to avoid personal use:

  1. Do not use the motorhome for things like watching TV and hosting parties.
  2. Do not let your relatives use it.
  3. Do not allow any person to rent it for less than a fair rental rate.
  4. Do not swap your RV for other arrangements.

2. Remember about the previous court cases.

Unless you prove to the IRS that the main purpose of your RV is transportation, they will treat it as a dwelling unit. All they have to do is to apply the personal use test from Section 280A to label your RV as a residence. And according to Section 280A(a), you are not allowed to take tax business deductions on personal residence (unless you prove that you used a part of your RV exclusively for business).

Here is the personal use test: Your RV becomes a personal residence when you use it personally the greater of 14 days or 10% of days rented. This means that if you used your RV personally for more than 15 days, not only the IRS will disallow Section 179 deduction, but they can take away other valid business tax deductions.

There was a court case, where taxpayers' business deductions were disallowed because they did not separate between business and personal days. They obviously used their RV for generating income, but they also used it personally and there was no division between personal and business usage. In the eyes of the Tax Court, even such an innocent activity as watching TV in an RV while being on business makes the whole day personal. In the absence of records, the Court decided that the couple used their RV personally for more than 14 days. This made their RV a personal residence. And a personal residence is not allowed any business tax deductions unless the taxpayer can prove that a part of the residence was EXCLUSIVELY used for business. The couple could not prove that either and all business deductions were disallowed.

Suggestions:

If you treat your RV as a vehicle, your mileage log substantiates your business use. Make sure to document your business and personal miles since the business / personal mileage ratio is how you will allocate your expenses. No mileage records mean no business deductions.

If you treat your RV as a hotel, you should track business and personal days. Days of non-use do not count. For example, the motor home sits in your driveway unused for 75 days in a row. You do not consider the 75 days of nonuse in your tax calculations.

IF you treat your RV as "a take it with me business lodging", make sure to establish that the motor home is used on a transient basis for the year. Your most audit-proof assertion of transient use is on the basis of days of use. This means that you need a record of each night's stay that shows where you were and why you were there. To make sure you have your motor home business use wired for deductions, make this one additional note not required by the travel rules: For each night of business use, make a note about whether it is a transient or a non-transient night.

Already tired of all tax rules? Here is a simple (but radical) solution for you. Get rid of the bathroom in your RV! Who needs it anyway in the age of remote work and Zoom meetings? The IRS defines a dwelling unit as a property that "contains basic living accommodations including sleeping space, toilet, and cooking facilities." Without a toilet, your RV becomes a transportation vehicle. And as I mentioned before, you are allowed to take the Section 179 deduction on vehicles.

Transient rules and business mileage may allow you to benefit from the Section 179 deduction. However, Section 179 has many issues: You may face a recapture and pay taxes in the next year. Or the IRS may get nitpicky and disallow the section 179 deduction because they feel that you didn't comply with the transient rules and your RV is a mere personal residence. It is our opinion that if you want to be IRS audit safe, you should avoid taking the Section 179 deduction at all and stick with traditional MACRs.