No Deduction Allowed for Substantial Use of RV

Jackson, Tax Court Memo. 2014-160

The taxpayer was an insurance agent who specialized in selling insurance policies specific to recreational vehicles (RVs).  To gain access to RV owners, the taxpayer was a member of several RV clubs.  The clubs held RV rallies which were primarily social events.  Only RV owners could attend these rallies.  Ownership was also required by certain RV parks, which often prohibited RV’s older than a certain age.

The taxpayer gathered sales leads at every rally.  He attached to his RV advertisement promoting his insurance business.  He invited potential customers to come to his RV and discuss the prospective client’s insurance needs.  It would often take months, if not years, for a relationship with a potential customer to develop into an actual sale.

The court stated there was no question the taxpayer used his RV for some personal purposes.  The taxpayer claimed, however, that he was entitled to deductions related to the business use of his RV.

The court acknowledged that the taxpayer actively sold insurance polocies during his time at the rallies, and that business activities conducted in using his RV generated a significant amount of revenue.  After reviewing the evidence in the record and considering the taxpayer’s testimony, the court concluded that the taxpayer spent two-thirds of his time during these rallies on business and one-third of his time for personal pleasure.  Thus, the primary use of the RV was for business, not pleasure.  However, none of the deductions for the business use was allowed because of IRC section 280A.

The Tax Court has previously ruled that an RV qualifies as a dwelling unit for purposes of the office-in-home rules under IRC section 280A.  Under the general rule, any personal use, including watching TV in the RV, makes the entire day a personal day.  IRC section 280A(c) has an exception to this general rule which allows a taxpayer to allocate costs to business use if a portion of the dwelling unit is “exclusively used” on a regular basis “as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business.”  The court said exclusivity is the key to this case.  The taxpayer did not use any portion of his RV exclusively for business.  Therefore, no deduction for the expenses allocated to the business use is allowed.

 

Advertisements

No Office-in-Home for Motor Home

Dunford, Tax Court Memo, 2013-189

A married couple lived in Illinois.  For 2005 and 2006, the tax years at issue, they filed a joint tax return with a Schedule C consulting business.  Most of the work was performed away from the taxpayer’s home in Illinois, sometimes working at or near client’s business locations.

For 2005, the taxpayers were away from home for half the year (the colder months), and for 2006, they were away the entire year.  During these periods, they traveled and stayed in their motor home.  The motor home had a sleeping area, a bathroom, and a kitchenette with a countertop.  Across the vehicle from the kitchen counter was a second countertop that was used as a desk, and on which the taxpayer had a computer and office supplies.

Throughout 2005 and 2006, the taxpayers traveled all across the U.S., but most of their travel time they were in Florida, California, and Nevada. The taxpayer’s three children also lived in Florida, Nevada and Quincy, Illinois, locations where the taxpayers spent significant time.  They kept no contemporaneous log that showed the business character of their travel. A reconstructed log of their travel that was entered into evidence in court often contradicted the documentary evidence of their whereabouts.  They had blended purposes, personal and business, for their travel, but their dominant motive for their travel plans was personal (the pleasure of being in the locations they chose and of being near their children).  Their clients reimbursed most of their travel expenses for airline, auto rental, standard mileage rate, per diem, meals, and office-related expenses.

The reimbursements included nearly all of the mileage they recorded in their activity log.  All of these reimbursements were deducted as travel expenses or meal expenses on Schedule C.  During the audit, the IRS did not dispute the deductibility of reimbursed expenses that the taxpayer’s had billed to their clients.  The disallowed deductions were for non-billed expenses.

Included in the expenses disallowed by the IRS were vehicle expenses including repairs and maintenance, depreciation, insurance, tax and licenses, and utilities.  These travel-related expenses were disallowed for at least one of the following reasons:

  •  The taxpayers used the motor home as a residence during 2005 and 2006, so IRC section 280A disallows the deductions.
  • The taxpayers had already claimed and been allowed deductions for their business use of their motor home and other vehicles based on the standard mileage rate, so that deductions for actual costs would be duplicative, and
  • The taxpayers failed to adequately substantiate their entitlement to many of their vehicle-related deductions.

IRC section 280A states that no deduction is allowed with respect to the use of a dwelling unit which is used by the taxpayer during the tax year as a residence, unless the business use of home exception is met.  IRC section 280A(c)(1) allows a deduction “to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis” for business.  The taxpayers did not prove that there was an identifiable portion of their motor home that was used exclusively for business purposes. The area they seemed to put forward as the home office was the countertop that was used as a desk.  But they did not make any showing of the percentage of the vehicle that constituted this area (it would be a very small percentage), and it is implausbile to suggest that, in the cramped quarters of a motor home, an unclosed area like the countertop would somehow be exclusively reserved to business activity.  Accordingly, the court ruled all deductions (other than deductions for interest expenses on Schedule A) claimed with respect to the use of their motor home were disallowed.

Actual expenses for the use of their motor home were also disallowed on the grounds that many would be duplicative to the standard mileage rate deduction that the IRS had already allowed based on the taxpayers billing their clients for reimbursement of travel expenses.  Actual expenses for the use of their motor home were also disallowed on the grounds that they failed to provide adequate substantiation for these travel costs.  A motor home is considered listed property, and deductions for business use of listed property require a higher level of substantiation than the taxpayrs provided.

 

 

IRS Announces 2016 Standard Mileage Rates

By Gary A. Hensley, MBA, EA

IRS, in Notice 2016-1, announced the optional 2016 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes.

Highlights:

Business mileage:  The standard mileage rate for transportation or travel expenses for 2016 is 54 cents per mile (compared to 57.5 cents in 2015) for all miles of business use (business standard mileage rate).

Charitable mileage:  The standard rate for 2016 is 14 cents per mile (same as 2015) for use of an automobile in rendering gratuitous services to a charitable organization.

Medical care and moving:  The standard mileage for 2016 is 19 cents per mile (compared to 23 cents in 2015) for use of an automobile for medical care or as part of a move (for which the expenses are deductible under IRC 217).

Basis Reduction Amount

For automobiles a taxpayer use for business purposes, the portion of the business standard mileage rate treated as depreciation (when sold or traded in) is 23 cents per mile for 2012, 23 cents per mile for 2013, 22 cents per mile for 2014, 24 cents per mile for 2015, and 24 cents per mile for 2016.

Remember:  A taxpayer is not required to use the standard business mileage but instead may substantiate using actual allowable expense amounts if the taxpayer maintains adequate records or other sufficient evidence.

 

Substantiating Your Business Expenses Is Critical to Keeping Them

By Gary A. Hensley, MBA, EA

By and large, the rules are straightforward:  the burden of substantiating the “income” of a taxpayer falls on the Internal Revenue Service (IRS) and the burden of substantiating expenses (or deductions) falls totally on the taxpayer.

The position of the IRS and their field revenue agents has been and will be inadequate or no expense documentation/substantiation equals no deduction.  The next recourse for the taxpayer is to go to IRS Appeals and argue that the revenue generated couldn’t have taken place without incurring “some” associated expenses (the Cohan Rule).  The results at the Appeals level varies widely in each case and, generally, the best case scenario is an allowance of “some” of the deductions claimed.  The expense of going to Appeals can more than offset whatever expenses are allowed by the appeals officer (especially if you retain professional representation).

Recent Court Decisions

Under Internal Revenue Code (IRC) section 274(d), for certain expenses, taxpayers are required to be able to provide specific detailed information to substantiate the expenses.

As demonstrated In the recent case of Garza, T.C. Memo. 2014-121, the result boiled down to an all-or-nothing proposition.  Without proper substantiation, no deduction is allowed for a Sec. 274(d) expense, even if the court believes that a legitimate expenditure was made.

Sec. 274(d) identifies four classes of expenses for which specific substantiation is required:

  • Sec. 274(d)(1) for travel expenses (including meals and lodging while away from home);
  • Sec. 274(d)(2) for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity;
  • Sec. 274(d)(3) for business gifts (which are limited to $25); and
  • Sec. 274(d)(4) for expenses with respect to any listed property (as defined in Sec. 280F(d)(4)).

In Garza, the court said that “while we believe that petitioner had business travel expenses in relation to his employment, the Court must heed the strict substantiation requirements of section 274(d).”  To support its ruling, the court cited DeLima, T.C. Memo. 2012-291, in which the Tax Court indicated that it had no doubt that the taxpayer used a vehicle for business purposes, but it was bound to deny the vehicle expense deduction because she failed to follow the requirements of Sec. 274(d) and the regulations.

Substantiation Required

Sec. 274(d)(4) requires the taxpayer to substantiate “by adequate records or by sufficient evidence corroborating the taxpayer’s own statement”:

  • The amount of the expense or other item;
  • The time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift;
  • The business purpose of the expense or other item; and
  • The business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.

In light of the above requirements, the message from the above paragraph is that “a taxpayer’s own statement” by itself is not sufficient in the IRS’s consideration of whether to allow a deduction.  As Garza and other cases show, the IRS and the courts look for contemporaneous records with the details listed above and, without it, they may disallow the deduction.

Taxpayers and their tax advisers need to understand what type of substantiation is required to take a deduction (with a solid foundation) on a tax return.

 

 

 

2015 Optional Standard Mileage Rates

The Internal Revenue Service issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 57.5 cents per mile for business miles driven  (up from 56 cents in 2014)
  • 23 cents per mile driven for medical or moving purposes (down a half cent from 2014)
  • 14 cents per mile driven in service of charitable organizations (no change from 2014)

The IRS Meal Allowance; Part of your Tax-Reducing Arsenal

Onion bloom as served in a Dallas restaurantOne of the most valuable tax-busting deductions seems to be hiding under the mushroom of business inexperience.  When I review this deduction at a writers’ workshop, ranging from novice to established writers, authors and illustrators, I find that only 2 or 3 have some awareness of this tax break.

I am talking about maximizing the IRS Meal Allowance.   The meal allowance becomes available when you incur meal costs while away from home (essentially, travel requiring overnight lodging) on business trips. If you eat sparingly, or only one basic meal a day, or are a perpetual “snacker” during the day, you will like the idea of not having to keep records of meal costs coupled with the higher, no-questions-asked, meal allowance.

In the IRS tables, the allowance is referred to as the “M&IE” rate (meals and incidental expenses).  In addition to meals and tips for food servers, the allowance (M&IE rate) includes a limited number of “incidental” expenses such as fees and tips for porters, baggage carriers, hotel maids, or room stewards.  Self-employed individuals may claim the M&IE allowance. 

Meal Allowance on 2015 tax returns

For travel within the continental U.S., the standard meal allowance (M&IE) for 2015 is generally $46 per day; however, [flashing lights] higher rates apply in major cities and other high-cost locations (such as resort areas) designated by the government.  For example, in 2015, the M&IE rate for both Dallas, TX and San Francisco, CA is $71 per day (rate research guidance will be provided below).   The basic and high-cost-area meal rates are determined by the federal government’s General Services Administration (GSA) and the IRS allows taxpayers to use the applicable rates in figuring their meal allowance deduction.

You must keep a record (required anyway for all away-from-home business travel) of the time, place, and business purpose of the trips.  As long as you have this proof, [flashing lights] you may claim the allowance even if your actual costs are less than the allowance!  EXAMPLE:  Suppose you were in Dallas on business for five full business days (excluding the arrival and departure days, discussed below) and you averaged spending only $35 per day for food, beverages and tips (totaling $175).  Your allowed deduction for those five full business days in Dallas would be $355 (5 X $71)!   In this example, you double your tax deduction by simply doing your meal allowance research and documenting the amounts in your travel journal.  If you frequently travel overnight on business, this approach, consistently applied throughout the year, will lower your tax due or increase your refund.

One quick note:  the meal allowance is prorated for the first and last day of a trip.  You may claim only 75% of the allowance for the days you depart and return.

Researching your Destination Meal Allowance

To get the allowable meal allowance for your business destination, you will use the General Services Administration (GSA) website and click on “per diem” rates on the home page.  [See below for Apple iPhone app.] You can search your destination meal allowance by using the name of the city and state or inserting its zip code.  You can also click on a particular state, using the map, and get a list of cities within that state.  You will be using this resource to see if your destination location has a higher meal allowance than the standard amount of $46 per day.   The M&IE amount is shown in the last column of the GSA chart.

The GSA chart is set based on the federal government fiscal year–October through September each year.  Right now, if you look at the per diem page, you will see, right above the map, that the rates currently reflect “fiscal year 2015” (October 2014 through September 2015).  You will need to use the drop down menu and select “fiscal year 2014” to get the rates for 2014 by destination.  As a calendar year taxpayer, you will be recognizing your expenses from January through December each year, so you are given an option:  you can apply the rates that were in effect for the first nine months of the year to business trips in the last three months or you may use the first set of rates for the first nine months and the updated rates (FY 2015) for the last three months (Oct.-Dec.).  For trips within the last three months, you must consistently use either the rates in effect for the first nine months or the revised rates that took effect on October 1; you cannot switch between the sets of rates on a trip-by-trip basis.  If you travel to more than one city on the same day, use the meal allowance for the area where you stay overnight.

Claiming the Deduction

As a self-employed person, you will report your allowable meal expense for the year times 50% on Schedule C, line 24b (based on the 2014 return).   That’s correct.  You take your total allowable meal expense, reduce it by 50%, and then report that net amount on Schedule C, line 24b.  Congress enacted the 50% reduction whether you use actual meal costs or the meal allowance (M&IE).   That’s why I feel this is so important to you.  Would you rather end up with 50% of your actual meal costs or 50% of your meal allowance?  My thoughts are that when you use 50% of the meal allowance, it is likely you are recovering almost 100% of your actual costs (review my Dallas example above)!  Without this strategy and documentation, you will only be allowed 50% of your actual costs as a deduction on Schedule C.

2015 Tax Strategy

Before completing and e-filing your 2015 federal tax return, go back through your out-of-town business trips that required staying overnight and research your meal allowance for each location and compare it to your actual meal expense for that location.  Use the higher amount in each case for purposes of claiming your meal and incidental expense on your tax return.  Some of you may have no meal receipts at all and this will be a godsend for you.

Finally, if you have your tax return prepared by someone, you must bring this information to them.  Paid preparers are busy!  Some may take the time to ask you how many days you were here and there when out-of-town and look up the meal allowance for you and then make the calculation but they will be charging you for this time.  You need to know, when you walk in or drop off your materials, your total business meal costs incurred or allowed.  Tell your preparer: “My gross out-of-town business food costs allowed or incurred for 2015 was $ ….. and my Schedule C deduction is $…… (50% of the gross amount).  Your preparer will not only be impressed but relieved. Be sure, when you review the completed return, that you check Schedule C, line 24b for agreement with your documentation (mistakes happen in a busy tax preparation office) before you approve the return for e-filing. It’s important that you retain the documentation to support the amount claimed for at least 3 years from the filing due date.

Mobile App Now Available

Go to the Apple iPhone app store and search using “GSA per diem” and download the application for easy use.  For other mobile platforms, go here.

DON’T FORGET TO SIGN UP FOR AUTOMATIC EMAIL ALERTS!  (See the very bottom right-hand side on my home page).

List of Business Trip Deductions $$$

While you are in the process of summarizing your 2012 business expenses, this will be a good time to review those items that are deductible, as a self-employed business professional, while on business trips away from home:

  • Plane, railroad, taxi and other transportation fares between your home and your business destination.
  • Hotel and other lodging facilities.  You need receipts or similar evidence for lodging expenses.
  • Meal costs.  You may claim your actual meal costs if you maintain records, or you may use the standard meal allowance.  Whichever method you use, only 50% of the unreimbursed meal costs are deductible.
  • Tips, telephone, and telegraph costs.
  • Laundry and cleaning expenses.
  • Baggage charges (including insurance).
  • Cab fares or other costs of transportation to and from the airport or station and your hotel.
  • Entertainment expenses incurred while traveling away from home are deductible subject to restrictions, including the 50% deduction limit. [Read “Deductible Business Entertainment Expenses“]