[Article by Honey Shellman. She is the person I have used for a few years to do my taxes. Why is this article here? Because she is also an RVer. So when I mention things like “campground” or “rally,” she knows what I am talking about. If you have an RV and need business or personal tax help, I recommend her]
Are You Asking The Right Tax Questions?
This article is designed to help you develop the right questions to ask but may not answer all of your tax questions. It will explain what part of owning an RV may be an income tax deduction, the additional deductions you may take advantage of if you are self- employed, using your RV as a second home, working out of your RV as a work camper or while self-employed. You need to know the difference between having a hobby versus a business, how an income tax professional can best help you, and most importantly, the record-keeping aspects needed to take advantage of possible deductions.
Some of us use our rigs only a few days a year, while others have sold their residence and now are fulltimers. Then, there are people like us who still own a primary residence but live in our rigs six or more months a year. We call ourselves mostly fulltimers. Fulltimers and mostly fulltimers have more opportunity to take advantage of possible tax advantages.
As an income tax professional with over 30 years experience, and as an RVer with over 18 years experience, as soon as my fellow RVers find out what I do for a living, they want to know if there is an income tax advantage to owning an RV. The biggest challenge in helping people is asking the right questions.
When faced with a situation where we have little or no experience, most of us lack the knowledge to even know where to begin. This information will point out the income-tax areas which may possibly benefit you.
When applicable, links to IRS forms and publications, along with other sites which may be valuable will be provided. Be aware that the IRS does not update all publications on an annual basis. The link provided may need to be updated. The IRS website is surprisingly useful and contains more information than can possibly be digested.
Clearly, income tax laws apply to us depending on the way we use our rigs, and to the extent, if any, RVers may use them for business purposes. There is no one answer which applies to us all, and a rudimentary understanding of how our income tax system works will clear the path for you to ask the right questions.
The IRS and What if My Return is Selected For Review?
How many of our legislators who enact our tax laws prepare their own income taxes? If they had to prepare their own taxes, perhaps our tax code would shrink from reportedly over half-million pages to, at most, a few hundred pages. When a new tax law is enacted, someone has the daunting tasking of looking at perhaps 2,000 or more pages and making it fit into a one- or two-page form. Not an easy task! Next, picture yourself newly out of college freshly hired by the IRS as a revenue agent. The computer flags a return for review, and your job is to pull it out of the file, review it, and see if it warrants further scrutiny. Would you know what to look for?
IRS personnel are grossly understaffed and underpaid for what is expected of them. For every newly minted revenue agent with no experience, there are the career professionals who are counting the days until retirement. They may or may not be experienced in the issues surrounding the tax returns they are reviewing. It is a daunting job with a short retention period.
If your tax should be selected for audit or examination, remember that revenue agents are messengers. Always treat them with respect. They are not out to get you. They are just doing the job they are hired to do. It is probable you and your tax professional will know more than the revenue agent reviewing your return. With proper substantiation together with contemporaneous records, you should feel more confident you have covered the basic guidelines.
Do You Have The Right Income Tax Professional?
If your tax return consists of retirement income, social security, and/or a little interest income and you take the standard deduction, chances are one of the many income tax preparation software packages will more than suffice. If you have complex business, rental, or investment income issues, you need a professional preparing your return. Keeping up with the myriad of tax law changes is a daunting challenge. If you think the software packages will keep you up-to-date, you have way too much confidence in tax-software programmers. We pay thousands of dollars for professional software, and still find errors and omissions each year.
Finding the right tax professional isn’t rocket science. Many Certified Public Accountants (CPAs) specialize in income taxes. Enrolled Agents (EAs) specialize only in income taxes and can practice in all 50 states and territories of the USA. Professional designations aside, the most important criteria are the years of experience the individual has. You want someone with at least 10 years of experience. The second criterion is finding an individual with whom you feel comfortable. In today’s digital world, a personal meeting is not as necessary as being able to freely communicate over the phone. If you find the right person, even someone you’ve known for years, if verbal communication is unsatisfactory, keep looking! Ask your fellow RVers who they use and why. Be wary of anyone claiming to be an expert on RV tax issues.
Are You Using Your RV as a Second Home?
Does this description fit you? You bought a shiny new RV and it is sitting proudly in your driveway or community storage area. You use it every weekend you have a chance and plan on a week or two in our beautiful national parks during summer. So do you have an extra tax deduction? The answer, of course, is maybe.
First, if you take the standard deduction in lieu of filing a Schedule A to itemize your deductions, the answer is no, you have nothing to deduct. You shouldn’t feel cheated, however. On the contrary, congratulations! Think of it this way: you have spent less money on medical, charity, taxes, and mortgage interest than the government allows. You are ahead of the game. Another bonus: you don’t have to worry about the IRS scrutinizing your Schedule A deductions.
Do you file a Schedule A? Then the answer is possibly. First, let’s examine sales taxes. There are two components pertaining to sales tax to consider:
- New for 2010 and depending on your state of residence (or, if you are a fulltimer and you lived in multiple states during the calendar year,) your total income, and the degree to which you keep records, you may benefit from the sales tax paid on a new vehicle, figured on a purchase price up to $49,500. For 2010, there is a new worksheet on page 2, Schedule A for just this purpose: http://www.irs.gov/pub/irs-pdf/f1040sa.pdf.
- The second option available is for general sales taxes. Remember, the option to deduct sales taxes only is available if you do not deduct state income taxes. This will pertain to most fulltime RVers living in states without income taxes.
The second type of deductible tax is personal property taxes. If you purchased a new or used RV this year, they will be separately stated on your sales contract. If you renewed your motor vehicle license fee, you will need to refer to the bill. The deductible portion pertains only to the amount based on value. Registration fees, weight fees, and any other type of fees charged by your state are not a deduction.
The last item you may be able to deduct on Schedule A is the interest you pay if you took out a loan to purchase your RV. Here, the rules pertaining to deductible mortgage interest become quite complex, especially if you took out the loan after October 13, 1987. If you took out a new loan to purchase your RV and it is your second home, and your combined mortgage amounts are $100,000 or less, the interest is fully deductible. Total mortgage amounts over $100,000 require special worksheets:
If you used a home equity loan, or have refinanced your loans throughout the years, the rules are even more onerous. The tracing requirements for the use of refinanced proceeds and go way beyond the scope of this article. Please consult your tax professional.
Do You Have A Hobby Or Business?
Many RVers dream about turning their hobby into a business. The question to ask here is Do you have what it takes? It takes a lot of time, energy, fortitude, patience, and recordkeeping to be able to substantiate running a business out of your RV. Plus, if this activity has an element of personal pleasure or recreation, the IRS can classify your activity as a hobby.
All income received from the pursuit of either a hobby or business is taxable income. The difference lies in the ability to deduct the expenses of operating your hobby or business. If you have a hobby, your expenses are limited to the amount of hobby income, and can only be reported as a miscellaneous itemized deduction subject to 2% of your adjusted gross income (as reported on line 37 of your individual income tax return: http://www.irs.gov/pub/irs-pdf/f1040.pdf). Generally, your hobby income is reported on Line 21, on page 1, of Form 1040. Therefore, if you do not itemize your deductions on Schedule A, the ability to claim any expenses in connection with your hobby is lost.
If you have a business and operating as a sole proprietor, then both your income and expenses are reported on Schedule C: http://www.irs.gov/pub/irs-pdf/f1040sc.pdf . Some expenses such as meals and entertainment are still limited, but if your total expenses exceed your income, you may be able to take the loss to offset other income. This will depend on the type of activity you have. Note the check boxes at the bottom of Schedule C, lines 32a and 32b. Now you have material participation and at-risk rules to
contend with. Consult with your tax professional to deal with these issues.
Although you won’t find the word hobby in the IRS code, the determining factor in deciding if the activity constitutes a hobby or a business is the profit motive. Obviously the IRS can’t force you to be profitable, (wouldn’t that be interesting?) but you do have to prove your profit motive. In determining profit motive the courts have relied on several key factors:
- The amount of time and effort expended on the activity
- Reliance on the income produced from the activity for a livelihood
- Having a written business plan
- Following the advice from experts in the same field of expertise
- Having a marketing plan together with its implementation
- Keeping proper business-like books and records including separate business bank accounts
Showing continuous losses from your business on your tax return is what triggers the IRS to examine your return. If you show profits in at least 3 of the last 5 years, including the current year in question, you are presumed to have a profit motive.
Of course it is possible to work for others and still have a sideline business. If you decide to turn your hobby into a viable business, it’s best to be prepared before commencing your activity. Most localities require business licenses and there may be other requirements, depending on the type of business and your location. A little planning will make your transition much easier and may even lead to some great tax write-offs for your RV.
Are You Working Out Of Your RV?
Retired or not, if you are traveling in your RV and plan to supplement your income, there may be more tax-planning opportunities but this depends on what you do. If you are a volunteer at one of our nation’s beautiful state or national parks, or another type of site, there is little or no income tax consequence. Usually you volunteer your time in exchange for free camping. Since you are staying for the convenience of your employer, the fair market value (FMV) of your campsite is a tax-free benefit.
What if you are a work camper? The same holds true. Your camping space is a tax-free benefit if you are staying for the convenience of your employer. You should be receiving a W-2 form to report your earnings and withholding just as you did when you had a full-time job.
What about travel expenses? Here, you need to know the definition of a tax home. Please refer to IRS Pub. 463, page 3: http://www.irs.gov/pub/irs-pdf/p463.pdf. When you have multiple areas of business activity, the principal place of business is treated as your tax home. The IRS considers the following factors: (1) the time spent on business activities in each area, (2) the amount of business activities in each area, and (3) the amount of the resulting financial return in each area. Only business travel expenses incurred while away from your principal place of business are deductible.
In my opinion, if you are a fulltimer, then your tax home is wherever you are working. This means you cannot deduct the travel expenses to go from one location to another. However there is an exception to this. For example, if you are working for Employer “X,” and he wants you to go to another location on a temporary basis, and then return. Your travel expenses will be deductible unless the stay is for an indefinite period of time. Again, the rules are complex, so check with your tax professional.
Remember, as an employee, if you don’t itemize your deductions, no tax benefit is received. As travel expenses can only be reported on Form 2106: http://www.irs.gov/pub/irs-pdf/f2106.pdf. Note the result of Form 2106 then flows to Line 21 on Schedule A: http://www.irs.gov/pub/irs-pdf/f1040sa.pdf. If you take the standard deduction, consider yourself covered. If you are self-employed, travel expenses are
reported on Schedule C.
Often times, you will receive a Form 1099 in lieu of a W-2 form. Many employers don’t want to pay their share of payroll taxes so they take this route, which technically may or may not be legal, depending on the state. If your employer is directing your work, you are using their equipment, staying on their premises, and working certain hours that they specify, you are clearly an employee and technically you should be issued a W-2 form.
If you receive a 1099-MISC: http://www.irs.gov/pub/irs-pdf/f1099msc.pdf with an amount in Box 12, you may be considered to be self-employed. Be certain to discuss this with your potential employer prior to accepting employment as this can lead to a more complex tax return.
Are You Self-Employed?
Technology allows many of us to work on the road today where just 10 years ago it would have been totally impractical. The first question I ask is: What deductions am I entitled to? http://www.irs.gov/businesses/small/article/0,,id=109807,00.html. Assuming that
you are a sole proprietor, a good starting point is Schedule C: http://www.irs.gov/pub/irspdf/f1040sc.pdf.
Can I Write Off My RV?
With a legitimate business, you can write off the business part of your RV. Due to the large element of personal use (you sleep, eat & bathe in your RV) you won’t be able to write off 100% of your RV. You accomplish this in one of two ways: either through depreciation or by taking the business-mileage method. Depreciation is the method used to recover the cost of the business portion of your vehicle. If you choose to take the mileage method, the rate allowed includes all vehicle expenses, including depreciation, except for interest and taxes, so the actual cost of your RV will be a major determining factor. For an overview of depreciation, see: http://www.irs.gov/businesses/small/article/0,,id=137026,00.html
There is nothing in the IRS Code that directly addresses the needs of the RVer. And to my knowledge, there are no revenue rulings, letter rulings, or court cases to hang your hat on. As RVer’s, we are in the unique position of combining the Office-inHome deduction together with Auto and Travel expenses. In the event of an examination, it is imperative to show your intent to comply with IRS rules & regulations. By pointing out your compliance per IRS publications and form instructions, in my opinion, you stand a reasonable chance of defending the position taken on your tax return.
There is only one case I am aware of, where the business owner of an RV may have been entitled to a 100% depreciation deduction. This RV was custom built without a kitchen, without a bedroom and without a bathroom. He had all the walls lined with bookcases for his library and the only furniture consisted of a desk and chair. He truly had a rolling office!
What Are Self-Employment Taxes?
As a sole proprietor, you are your own employer, therefore, you are required to pay both the share of Social Security and Medicare taxes that would normally be withheld from your paycheck, plus the amount contributed by your employer. The computation is on Form 1040 SE: http://www.irs.gov/pub/irs-pdf/f1040sse.pdf. Basically you will owe 12.4% of your self-employment profits up to a maximum of $13,243.20 on the first $106,800 for the Social Security component, and an additional 2.9% without limitation for the Medicare component.
What Records Am I Required To Keep?
Lots! Recordkeeping, bookkeeping, accounting or whatever you call it is the bane of existence for every business person. Unlike our criminal justice system where innocence is presumed until proven otherwise, the IRS requires you prove all the deductions claimed without exception! And it gets worse: All records must be kept contemporaneously. This means no going back to reconstruct business usage or mileage after-the-fact.
It is also imperative to keep separate business checking accounts and credit cards. Failure to do so indicates a lack of proper bookkeeping procedures. An excellent starting point is IRS Pub. 583: http://www.irs.gov/publications/p583/ar02.html.
If your business return is selected for examination, the first thing the auditor will ask for is your bank account statements for the year under review. He will add up the deposits for the year and cross check the total with the revenue you report. Any discrepancy will require further examination. This is one reason why separate accounts for your business are imperative.
All items of non-revenue deposited into your business account need to be separately stated and should either go into your bookkeeping system as a capital contribution or loan if you are sole proprietor. Other business entities are a little more complex.
The next item an auditor will request is the log for the business usage of your RV. This pertains to auto, travel, office-in-home, entertainment and depreciation. Without a contemporaneous log, the auditor will throw out all deductions for these pertinent items. There is NO going back to reconstruct anything. You don’t even have the option of suggesting that 30% business usage sounds reasonable. No records, no deduction, no exceptions! Don’t put yourself into this costly position.
What Type Of Books and Records Are Best?
If you are operating as a sole proprietor, any method you consistently use is OK as long as you meet the requirements outlined in Publication 583. Personally I don’t require my clients keep a specific accounting system, but do request a signed statement as to their existence. Many people use spread sheets, which work fine for the sole proprietor. For business entities such as corporations, partnerships, limited liability companies or family partnerships, I want to see the profit and loss statements, balance sheet, and the general ledger.
Can I Establish a Retirement Plan For My Business?
For the sole proprietor, the simplest types of plans are SIMPLE IRAs and SEP plans. Although you can establish a profit-sharing plan, a 401(k) plan or a defined benefit pension plan, they involve considerable administrative costs and annual information returns with the IRS. Under a SIMPLE or SEP plan, no annual reporting is required. Most, if not all, of the national brokerage houses have pension plan departments which can help you establish the plan best for you at little or no charge.
How Do I Document Business Usage?
If you are not self-employed and incur travel expenses for your employer, the easiest method is to keep a pocket calendar and record any business mileage on a daily basis. Remember, in addition to the odometer readings, to record the “4 W’s:” Who, What, When and Where.
- who you went to see
- what the business purpose was
- when you went to see them (dates)
- where the meeting took place.
This information is necessary for all business records pertaining to travel and entertainment expenses.
If you are self-employed and work out of your coach, then you must establish the hours you use your coach for business on a daily business. For instance, if you are working on any given project, you need to keep track of the time you start and stop your activity. Many people use a spreadsheet for this purpose. I can think of no other way to rationalize the business use of your RV to the IRS if you don’t keep this type of record. You should also record the project you are working on. Typically, part of each day will have several activities, i.e. writing, researching, recording expenses, taking sales orders, shipping product, making sales calls to potential customers, etc. Only at the year’s end will you really know the percentage of business use of your RV. If for example, you log in 1,800 hours, and you use your RV 8,760 (24 x 365) your true business use of your RV comes to 20.55%. This would be the percentage of business use for depreciation, fuel, utilities, campground fees and maintenance.
You may have travel expenses in addition to this. If you are working in Tampa, Florida, need to attend a trade show in Perry, Georgia, and then return to Florida, as long as you are considered to be working full-time at the trade show, that is clearly the business purpose. Therefore, you could deduct the mileage from Florida to Georgia (clearly this is not commuting) and 100% of your expenses such as camping fees while attending the trade show. Note that travel & entertainment meals are almost always limited to 50%.
I should caution there are approximately 350 miles between Tampa Florida and Perry Georgia. Don’t expect the IRS to allow 100% of your camping fees as travel expenses if you take 2 weeks to get there. A one-night stop is reasonable and most likely justifiable. It’s tempting for the RVer to stop and see sights, friends, and relatives while enroute from Point A to Point B but doing this no longer constitutes business use.
Is It Worth It?
Clearly the amount of net profit from your business activity will determine the need to reduce your profits, thus lowering taxes. However, using the example above, if your rig costs $300,000 and your business usage is 20.55%, then the cost of your RV allocated to business is $61,650. Over 6 years this equates to an annual deduction of about $10,275 for depreciation. But if your annual costs for fuel, maintenance, utilities, insurance, taxes and campground fees come to $24,000, the business percentage at
20.55% is an additional $4,932 for a total of approximately $15,200. If you have a loan on your RV, the total will be higher. If your effective federal tax rate is around 20% you will save $3,040 in income taxes and $2,325 in self-employment taxes for a total of $5,365. That’s an immediate return of 35% on your money!
The purpose of the previous information is to point you in the right direction and alert you to the possibilities of extra income tax deductions by virtue of owning an RV. They are neither conclusive nor all encompassing.
If you use your RV only occasionally for business, the effort required may not be worth the end result. That is certainly true in our own case. Although we are away from our brick & mortar home 7–8 months each year, the few returns prepared while on the road, along with tax planning and occasional financial statements, don’t justify the recordkeeping required.
Since there is no reason, other than pleasure, to go from Point A to Point B, we don’t even claim travel expenses. However, you may have very legitimate reasons from going from Point A to Point B. Keeping a mileage log to claim the standard mileage allowed would suffice.
If you need to shelter every taxable dollar, then proper recordkeeping will help reduce your tax bill. If you don’t keep good records, you won’t be able to claim any tax deductions.
Another important consideration is your overall economic situation. Possibly, if you are nearing retirement age, it may be worthwhile to show more income and pay more social security taxes to boost your potential social security income when you have attained full retirement age. That is the case for some of my RV clients. Making financial decisions based solely on income taxes is never a wise decision. It should only be on part of the puzzle. Here is where competent professional advice can be invaluable.
I would be happy to help you with general questions throughout the year. No one should claim to be an expert on RV income tax issues. With my experience talking to many RVers on the road together with 30+ years of preparing taxes, I do have a good understanding of how our tax laws work in general. And remember, there are no established guidelines for RVers. The suggestions made are simply conjecture until
court cases come along which can be relied upon.
Most important: Get out there and enjoy this amazing country of ours. If you haven’t been out in awhile, my question to you is: What are you waiting for?
About the Author
Honey C. Shellman, EA, is a federally authorized income tax practitioner. She and her husband Bob, also an enrolled agent and former CFP, own Shellman Financial Services in San Diego County, CA.
She established her first tax practice, Professional Tax Service, Inc., in 1978. After moving to Arizona, she dissolved the California Corporation and has operated as Shellman Financial Services ever since.
Honey prepares both individual and business returns for clients living in several states during the filing period and does income tax planning year around.
They travel with their three kitties, Pangor, Daphne, and Tiazzi, roughly 7–8 months each year in their motor home, The Popeye Express, and have logged over 150,000 miles in 18 years. To see the pictures of the fun part of their lives, visit the blog of their travels:
To review tax questions asked by other RVers, visit her business-related blog:
E-mail questions to: email@example.com
The accompanying tax articles are designed to provide income tax guidance to the recreational vehicle user. It is printed with the understanding that the author and publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.