By: Martin M. Shenkman, CPA, MBA, JD
If you bought a new RV, trailer or TV in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase. Good news is that this could mean big bucks back from the IRS for you. But first you have to wade through a few rules. Be forewarned, the rules are ridiculously complicated, and make it pretty clear that the folks that wrote them don’t understand the difference between a trailer and motor home. We could have left out the technical stuff and details, but hoped that by giving you all of it, if you have an issue, or an audit, you’ll be able to figure out what was done and explain it.
This article will be the first of a regular column of articles on tax and business planning for RV’ers. Unfortunately, it seems that few tax rules have been written with any focus on the RV industry. The downside is complications and simply weird rules like those described below. The upside is that if you pick through the confusion, you might just find some great tax benefits. We’ll try to keep future articles easier.
Complications Abound Especially for Travel Trailers and Fifth Wheels
In case you want to understand the ugly details, or look up more specifics on line, we’ve given you this extra information in italics. If you just want the "big picture," skip the italics.
One of the reasons for some of the complexity and confusion, is the manner in which the law creating the deductions is written. There are actually two different provisions involved:
So what does this mean? If you bought an RV that is a motor home, as explained below, the RV is a motor vehicle and comes under the general rule permitting the deduction of sales taxes paid on the purchase. However, if your RV is a travel trailer or fifth wheel it is not a “motor vehicle” and you will only be able to deduct the sales tax paid if you choose ("elect") to use the Code Section 164(b)(5).
If You Don’t Itemize Deductions
If you don’t itemize your tax deductions (Schedule “A” on your Form 1040), you can deduct sales tax on a TV or motor home, but not a trailer or fifth wheel. This is because a special rules permits taxpayers who don't itemize deductions to take a motor vehicle sales tax deduction (based on the amount allowable under the Code Sec. 164(a)(6) itemized deduction) as a part of the standard deduction under Code Sec. 63(c)(1)(E). Since travel trailers and fifth wheels don’t have motors, they don’t qualify.
If you don’t itemize deductions you might find this rule pretty unfair. Why should your tax deduction be less because you have two vehicles, a truck or other RV and a separate travel trailer or fifth wheel? Why should someone who bought a motor coach get to deduct the sales tax when you can’t?
No double dipping. This is not Baskin Robbins. If you claim this special deduction for sales tax on a motor vehicle you cannot also itemize deductions and get a second tax bennie for the same sales taxes below. See Conference Report: “Additional deduction for State sales tax and excise tax on the purchase of certain motor vehicles.” American Recovery and Reinvestment Act of 2009, PL 111-5, 2/17/2009.
If You Itemize Your Tax Deductions (Schedule A on your Form 1040) Choose your Benefit
You may choose (called an “election” in tax jargon) to claim an itemized deduction for state and local general sales taxes instead of taking an itemized deduction for state and local income taxes. If you itemize your tax deductions on Form 1040 Schedule A you might qualify to deduct the sales tax you paid on a new travel trailer or fifth wheel, as well as a motor home or new TV.
To claim this benefit, you check box 5b on Schedule A of your Form 1040 personal income tax return. But you cannot have your cake and eat it too. You have to choose which tax benefit you want. And Just like Monty Hall on the show “Let’s Make A Deal,” you have three doors to choose from (only Monty was never as complicated as the IRS):
Door Number 1:
You can write off the actual total state and local general sales taxes you actually paid. To do this you have to save receipts showing the general sales taxes you actually paid. This should include any sales taxes paid on an RV, TV, fifth wheel, or trailer.
There is a special limitation for motor vehicles. In the case of motor vehicles, if the rate of tax exceeds the general rate, such excess shall be disregarded and the general rate shall be treated as the rate of tax. So, if your state charged a 4% general sales tax but 5% on a motor vehicle, then only a 4% rate could be deducted on your purchase of a motor home or RV. However, since a trailer is not a “motor vehicle” (see definition below) the actual sales tax on a trailer should be fully deductible.
Door Number 2:
You can deduct the amount you look up in tables provided by the IRS plus the state and local general sales taxes for a motor vehicle, boats, and other items specified by the IRS. Code Section 164(b)(5)(h)(i)(I). This includes a motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle. You can also include any state and local general sales taxes paid for a lease for any of these vehicles. Now, it sure seems that you should be able to add to this the sales tax you paid on a travel trailer or fifth wheel.
But, it is not really clear. Here’s why. The IRS (really the Treasury Department) was supposed to issue regulations elaborating on what other times can be added to the table. No new guidance has been issued. But prior law that permitted a deduction for sales tax, which was quite similar to this current rule, provided for the following: “In addition to the amount determined under the optional sales tax tables and amounts added for local general sales taxes, taxpayers may deduct allowable actual state and local general sales taxes paid on the purchase of the following items: motor vehicles (including automobiles, motorcycles, motor homes, recreational vehicles, sport utility vehicles, off-road vehicles, vans, and trucks), boats, aircraft, homes (including mobile and prefabricated homes), and materials to build a home.” Notice 2005-31, 2005-1 CB 830, 03/11/2005. It would seem pretty ridiculous for the IRS to argue that a travel trailer or fifth wheel wasn’t included in any of these. If you’re not a full-timer is a travel trailer really your home? Perhaps. With the lack of clear guidance, the conclusion is not fully clear, but it would seem unreasonable for the IRS to argue that somehow travel trailers and fifth wheels fall in between the cracks of all of the above items.
Tip: If you buy, for example, a mobile internet product and install it after you take delivery of your RV, the sales tax on that system probably won’t qualify for a deduction in addition to the table amounts. If instead, the dealer installed it and it is billed part of your purchase price for the RV, it would seem that you should be entitled to deduct the taxes on that system in addition to the table amount.
Here’s why (if you really wanted to know). This get’s technical, but here it is: “motor vehicles (including automobiles, motorcycles, motor homes, recreational vehicles, sport utility vehicles, off-road vehicles, vans, and trucks), boats, aircraft, homes (including mobile and prefabricated homes), and materials to build a home.” Notice 2005-31, 2005-1 CB 830, 03/11/2005. The IRS views materials to build a home, as well as the home itself, as qualifying. Parts or additions to an RV might not qualify since they aren’t listed.
If the sales tax rate on a motor vehicle is higher than the general sales tax rate, you can only deduct an amount calculated at the general sales tax rate. It is not clear that this limitation should apply to a travel trailer or fifth wheel.
The tables provide an amount of sales taxes paid based on your state of residence, total available income, and number of exemptions. The state of residence is the state where you physically reside. IR 2007-19, 1/29/2007. If you lived in more than one state during the year you have to allocate the amounts in the IRS tables for the portion of the year you lived in each state. Notice 2005-31, 2005-14 IRB 830.
Caution: For full timers, it might be an issue determining one state in which you “physically reside.” We’ll explore state income tax issues in future columns.
Door Number 3:
Instead of the special sales tax deduction, you can deduct the state and local income taxes you paid. If you claim an itemized deduction for state and local income taxes (because they were higher than the state and local sales taxes), you can add to it the sales tax paid on a qualified motor vehicle.
You know the IRS can’t leave it uncomplicated, they always need special rules to keep it really confusing. So, if you still haven’t grabbed the Excedrin yet, here’s a few more complications to keep your head spinning:
Caution: The special sales tax deduction isn’t available for sales taxes paid on items used in your trade or business.
Will A Trailer, Motor Home, TV All Qualify?
When the Beatles sang “The long and winding road…” were they describing the tax system? Bottom line is your trailer or fifth-wheel won’t qualify as a “motor vehicle”, but a motor coach will. Here’s the gruesome details:
If you bought a motor home or RV, you might qualify for a great additional tax write-off whether or not you itemize deductions for tax purposes. If you bought any type of RV, including a travel trailer or fifth wheel, and choose to deduct state and local sales taxes on your tax return as an itemized deduction, you should qualify to deduct the taxes on that too. Jump through the hoops and make sure to get the deduction you’re entitled to. Whether you use a tax preparation software (making the calculations and testing the various limitations by hand will be difficult or impossible), or a CPA, make sure to manually confirm that you, in fact, get the deduction you believe you’re entitled to. The rules are quite complicated, so be sure to get professional help if you need it.
If you want to Google the law, these rules are in Code Section Code Sec. 164(b)(5).
For more information, check out IRS Publication No. 600, State and Local General Sales Taxes available at www.irs.gov. The url for the publication is http://www.irs.gov/publications/p600/index.html.
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