Writing off an RV in a Business

From Bob Jennings at TaxSpeaker. Check out more taxspeaker.com

Writing off an RV in a business In the seminar business our speakers must be able to get from one city to another because so many people are depending on us. Taxspeaker’s speakers do miss the very rare class-averaging about one every two years, but we do everything in our power to make it including driving all night, five hour cab rides and red-eye flights. A common week for me is flying out on Sunday night to speak Monday in one city, then flying Monday night to another city for Tuesday, and then repeating every day. As the owner of the company, it is particularly important that I try to speak in every possible city in a season, and that often means 35-40 different locations in November and December. Add in the logistics of trying to repeat this for ½ dozen other speakers and you can see our dilemma.

Earlier this spring when it became clear that available flights from one city to another were becoming scarce, cancellations were becoming a lot more than a nuisance and ticket prices rose from prior averages of $500-$600 to new averages of $1,200-$1,400. I knew some other travel options had to be considered. I started with trying to have at least one speaker in a city for both days. That helped, but it was not the solution that would work when we still had speakers flying everywhere and flight cancellations were (and continue to be) a national issue.

Because I do not mind driving and have always driven instead of flown to the next city when it is a 4 to 5 hour drive or less, I looked at everything. Of course, being an accountant, I ran the numbers, the risks, and the hotel vs. fuel costs and realized that it would be cheaper for our sponsors and avoid air travel risks if I bought a motor home and drove from one city to another.

In early May Taxspeaker (the corporation) bought a slightly used 2020 Renegade diesel RV, getting a three-year loan after putting 20% down, just like any other equipment purchase-our first loan in ten years. We determined, calculated and planned that it would be cheaper to drive from one city to another because of hotel and airfare savings, and we could be assured of always having at least one speaker (me) in many locations. In May Jean and I flew to upstate New York, bought the RV and drove it back to Indiana. Our plan was to get it serviced (we did), fill it up (we did) and start driving it to the fall seminars in August.

Something happened between our purchase and fall seminars though-the price of diesel fuel more than doubled, and all of a sudden the numbers did not work anymore. In fact, the RV is parked across the street from the Taxspeaker office building where we parked it after filling it up with fuel, having been driven less than fifty miles from purchase for service and fuel. The numbers no longer work, and we will be driving my truck between seminars during the entire month of November unless diesel prices come down by 50%.

Which leaves the purpose of this newsletter. What is the income tax return effect? Clearly, it was put in service the day it came back from service and fill-up, and our plan was to drive it beginning in August. We made a few minor safety and performance improvements and have now made four payments, with three more to be made by the end of the year. It has not been driven for even so much as one personal or business mile since parking it that day, and we will be selling it once I am back in the office after seminar season.

My questions for you and to myself: 

1.    Is it truly a business asset?

2.    Assuming it is a business asset, was it placed in service this year even though not driven?

3.    Is the interest on the loan, and the service and upgrades deductible this year?

4.    What about the RV-is it depreciable and what is the life?

5.    What about the mixed used property rules?

6.    What about the fact that it also qualifies as a home because of the eating, sleeping, kitchen and restroom facilities?

7.    Is it a listed or luxury or personal property requiring special logbooks, allocations or depreciation limits?

There are several Internal Revenue Code sections here, primarily 280A, and one recent court case, Jackson v. Commissioner TC Memo 2014-160 whose results were affirmed on appeal in 2017.

Frankly, the last question should be answered first, because everything else relies on that determination. In the Jackson Tax Court case, and at appeal, the courts referred to a Section of the IRC at 280A which states ““no deduction ․ shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.” A “dwelling unit” is defined as “a house, apartment, condominium, mobile home, boat, or similar property.” Id. § 280A(f)(1)(A). Petitioners' RV is “similar property” within the statute's residual category. See, e.g., Haberkorn v. Comm'r, 75 T.C. 259, 260 (1980) (holding that a “mini-motorhome” is a dwelling unit under § 280A(f)(1)(A)). 

Well, that stinks, but if it is clearly being used on a 100% business trip, and not used throughout the year at any point (or at a minimum for >14 days) for personal purposes, could it still qualify for a deduction? Read on for the law:

“[A] taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds ․ 14 days.” 26 U.S.C. § 280A(d)(1)(A).

The statute counts “us[ing] a dwelling unit for personal purposes for a day” as when, “for any part of such day, the unit is used for personal purposes by the taxpayer.” Id. § 280A(d)(2)(A).

In the Jackson case, the Jackson’s were already heavily involved in the social aspects of RV’ing, had previously owned other RV’s and took a few personal trips, all of which the court held against them. Neither Taxspeaker nor myself has previously owned an RV or travel trailer and we have never been involved in camping or any social aspects of RV’ing, and we have never driven it on a personal trip. Chalk one up for the fat guy!

Next, the law (IRC Sec. 274(d)) requires that any business use be substantiated if used for transportation, entertainment, recreation, or amusement, which clearly applies to an RV. We have both contemporaneous calendars and a logbook in the RV, so chalk another one up for the home team.

The court preliminarily allowed the Jackson’s a depreciation deduction, as well as interest (and presumably operating expenses) based on business use. Based on all of these arguments, it’s looking to me like we can take 100% of everything related to the RV, including bonus depreciating the contents of the waste tanks out of that sucker. But, daggone it, the courts had more to say.

Section 280A(a) and (b) provides the general rule that individual and S corporation taxpayers cannot deduct expenses "with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence" unless such a deduction would be allowable "without regard to its connection with [the taxpayer's] trade or business [or] income-producing activity".  And, an RV is very clearly a dwelling unit. But we did not use it as a dwelling unit because we never drove it anywhere!

So, the only question that matters is the question of personal use. To quote the court “Any personal use, including watching TV in the RV, makes the entire day a personal day. Petitioners therefore used the RV as a dwelling unit for personal purposes for more than 14 days, and section 280A prohibits them from taking any deductions with respect to the RV.”

In this key case, the Jackson’s clearly must have watched TV and used the RV for more than 14 days for personal use, thus disqualifying ALL business deductions for the RV, whether depreciation, interest, or operating expense.

Hold on though, that is not the end of this argument. Re-read that previous paragraph, which says any personal use disqualifies the entire day. Since we never had any personal use, and it does not look like the RV will be driven anywhere until sold, we can throw out that paragraph-there is no personal use or mixed use and it still has 100% business use. It is a 5-year depreciable asset with no GVW weight limits applying to depreciation, thus qualifying for bonus depreciation, and all other costs, including interest are deductible this year.

Was it placed in service and a business asset? Yes and yes-the intent was to use it as a business asset and it was full of fuel and ready to be driven. But then the facts changed beyond our control. Much like a machine shop owner that buys a new piece of equipment that is placed in service and ready to run and make sales, but then obsoleted by a newer model, this was a business asset at purchase and placed in service by intent. Strangely, if we had driven it, it would have been disqualified as a business asset!

This year we will write off the interest and operating expenses. Because it will be sold at a loss we are not going to bonus it or 179 it because we would just pay it back next year, so we will elect out of bonus on 5 year assets and take MACRS, unless we can sell it before that! And, because it was never driven for business (and won’t be now that I have written all of this out and come to my conclusion), the loss on sale will be just like any other business asset loss.