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.

 

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.

 

Appearance at 42nd Midwest Writers Workshop

Looking forward to my repeat visit to the 42nd Midwest Writers Workshop at Ball State University in Muncie, IN to talk about the “business side of writing.”  I will be giving classroom lectures on Friday, July 24th and Saturday, July 25th.  I will also be part of a round-table discussion on Saturday morning and have several one-on-one consultation appointments.

The conference is sold out this year.  Lecture topics include “Basic Taxation for Writers” and “Are You a Professional Writer?  Don’t Wait for an IRS Audit to Find Out!”

More about the Midwest Writers Workshop at Twitter @MidwestWriters. or on the web at http://www.midwestwriters.org.

The energy and creativity at this event is awesome!

Tax-Saving Strategy: Sole Proprietors Should Consider Hiring Their Children

By Gary A. Hensley, MBA, EA

If you are operating your business as a sole proprietor (filing Schedule C) then you have a great opportunity to reduce your federal income tax and self-employment tax.  In most states you will also reduce your state income tax.

As a sole proprietor you include Schedule C with your federal Form 1040.  The Schedule C reports the income and expenses of your business.  The net profits from the Schedule C are included in your gross income (on page 1 of your Form 1040) and in your self-employment income on Schedule SE which is also part of your Form 1040.  The income tax is assessed based on your marginal tax rate and your self-employment tax is assessed at a rate of 15.3% on the first $118,500 in 2015 and at 2.9% on the amount above $118,500.

The law allows sole proprietors to hire their children as employees

For those children who have not reached age 18, the law does not require the 7.65% withholding and the employer-matching 7.65% of Social Security and Medicare Tax.  As a result, this is a direct 15.3% family tax savings.  The child must provide a legitimate function necessary to operate the business.  In my opinion, it’s a good idea to write out a list of the child’s duties (responsibilities) and record the days and hours he or she works.  The child must be issued a W-2 form which will report his or her federal wages for the year.  Nowadays, these children are skilled in using computers and analyzing the use of software programs and time-saving skills through the use of data entry, filing, etc.

Tax-saving strategy

In 2015, each taxpayer (including your child) has a standard deduction amount of $6,300.  Don’t confuse their standard deduction with their dependent exemption which you will still get on your return for providing over 50% of their support.

If your child is under age 18 and you pay your child $6,300 for the year, your business income will drop by this amount.  If you, as the parent, are in the 25% federal income tax bracket, this will save you $1,575 (25% X $6,300) in federal income tax and further saves you $963.90 (15.3% X $6,300) in self-employment tax.  This is a total tax savings of $2,538.90 per child.  [Note:  When your child files his or own return (and does not claim a personal exemption since they are your dependent), their wages of $6,300 will be totally offset by their $6,300 standard deduction, leaving them with no federal tax liability on their wages.]

If your child is 18 or older, you will still be allowed to deduct his or her wages of $6,300 on your Schedule C plus your half of the Social Security and Medicare Tax employer match (7.65% = $481.95).  You will need to withhold the employee 7.65% portion from your child’s paychecks.

Contact your tax professional for specific advice related to your personal situation and IRS payroll filing requirement rules.

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Gary A. Hensley is a member of the National Association of Enrolled Agents (NAEA) and can be followed on Twitter @GaryAHensley.

Don’t Overlook the Child and Dependent Care Tax Credit

Day camps are common during the summer months.  Many parents pay for them for their children while they work or look for work.  If this applies to you, your costs may qualify for a federal tax credit than can lower your taxes.  Here are ten tips to know about the Child and Dependent Care Credit:

  1.  Care for Qualifying Persons. Your expenses must be for the care of one or more qualifying persons.  Your dependent child or children under age 13 usually qualify.  For more about this rule see Publication 503, Child and Dependent Care Expenses.
  2. Work-related Expenses.  Your expenses for care must be work-related.  This means that you must pay for the care so you can work or look for work.  This rule also applies to your spouse if you file a joint return.  Your spouse meets this rule during any month they are a full-time student.  They also meet it if they’re physically or mentally incapable of self-care.
  3. Earned Income Required. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment (Schedule C). Your spouse must also have earned income if you file jointly.  Your spouse is treated as having earned income for any month they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return.  Refer to Publication 503 for more details.
  4. Joint Return if  Married.  Generally, married couples must file a joint return.  You can still take the credit, however, if you are legally separated or living apart from your spouse.
  5. Type of Care. You may qualify for it whether you pay for care at home, at a daycare facility or at a day camp.
  6. Credit Amount.  The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income.
  7. Expense Limits. The total expense that you can use in a year is limited.  The limit is $3,000 for one qualifying person or $6,000 for two or more.
  8. Certain Care Does Not Qualify. You may not include the cost of certain types of care for the tax credit, including: (a) Overnight camps or summer school tutoring costs; (b) care provided by your spouse or your child who is under age 19 at the end of the year; and (c) care given by a person you can claim as your dependent.
  9. Keep Records and Receipts. Keep all receipts and records for when you file your tax return next year.  You will need the name, address and taxpayer identification number of the care provider.  You must report this information when you claim the credit on Form 2441, Child and Dependent Care Expenses.
  10. Dependent Care Benefits. Special rules apply if you get dependent care benefits from your employer.  See Publication 503 for more on this topic.

Remember that this credit is not just a summer tax benefit. You may be able to claim it for qualifying care that you pay for at any time during the year.