I’ve traveled through 33 states during my four years as a self-employed entrepreneur while RV’ing full time. No doubt, the life of a traveling digital-nomad creates an income tax situation that is far more complex than it was during my sticks-and-bricks days. While we each have unique circumstances and challenges, I do encounter common themes when helping my fellow working RVers with their tax needs. Following are answers to the 5 most frequently asked RVer tax questions I’ve received:
Frequently asked RVer Tax Questions
1. Can I write of my RV expenses (including mileage)?
If your RV is your only residence, then (unfortunately) in most cases you are not allowed to deduct RV-related (including RV-travel) expenses. The IRS deems that you can never be on a business trip because you are always bringing your personal residence with you…therefore you are never away from home. There is a Home Office Deduction which can allow a partial write-off of some RV expenses (e.g. interest on RV loan, utilities, park rental fees, maintenance, etc). These expenses are allocated to the business based upon the ratio of your “home office” square footage to the RV’s total square footage. However, mileage is not a deductible expense under the Home Office Deduction. Be aware, it is very hard to justify when living and working in an RV that there exists an office area that is used “regularly and exclusively” for your business. In other words, the office space can’t be used for anything other than your business-related tasks. Most RV taxpayers forgo this deduction as it’s often relatively small and we don’t want to incur the audit risk—due to the abuse of this deduction over the years, it is a big red flag with the IRS.
If you have a primary residence other than your RV, and assuming you otherwise meet the qualifications for business travel, then travel-related expense in your RV can at least partially deductible (mileage, meals, incidental expenses, RV parking, etc). Note that you do not have to own your primary residence, it can be a rented apartment, or a friend or family member’s home that they allow you to live in upon return from your RV travels…you don’t even have to pay rent for it to be your primary residence. However, you must be able to make a legitimate case that your primary residence is someplace other than your RV, the home you return to at the conclusion of your RV trips. The IRS will consider not only objective measures to determine your primary residence but will also make subjective judgments as they assess the “facts and circumstances” of your situation to determine whether you are following the spirit of the law in addition to the letter of the law.
2. If I domicile in a tax-free state, can other states still hold me liable for income tax?
After selling their sticks and bricks home, most RVers are estatic when they learn they can domicile in an income-tax free state like Texas, Florida or South Dakota. The state income tax savings is a source of comfort in the face of uncertainty and other risks we face during the transition to full-time RVing. Unfortunately, the 42 states that have an income tax don’t care where you domicile when they consider your tax liability. They focus on how many days per year you are geographically present in their state earning income and how much income you earned. Every state has different rules and thresholds but there are some similarities. In general, my rule of thumb is if you are working in a state for more than 3 months or earning more than $5,000, you may have an income tax liability with that state and it bears further research. Note that the days do not need to be consecutive…a state determines your tax liability based upon the sum-total days and dollars earned during the year while present in their state.
Other factors can create a state tax liability for you even if you never set foot in the state yourself:
- If you own/store tangible personal property in a state
- If you own a business incorporated in a state or geographically located in a state
- If you own real (e.g. residential rental, land, etc) property in a state
- If your business has an employee in a state
3. What is the best business structure for my business?
My general rules of thumb:
- Start your business as a Sole Proprietor.
If you are not hiring any employees, there is no need to establish a federal tax id number or file a separate return for your business (you’ll file Schedule C that is included with your personal return under your social security number). Note: you will want to apply for a business license with your local (city or county) government that you can use to open a business checking account at a bank.
- If you are concerned about business risk beyond any liability insurance you may carry, forming a Limited Liability Company (LLC) is an effective next step to protect your personal assets from debts and obligations of the business.
Establishing an LLC is done at the state level and generally handled by the Secretary of State’s office. Most, if not all, states have online methods to create an LLC. The fee is usually $300 to $500 if you are establishing your LLC in the same state as your domicile (more on that later—see #4 below).
An LLC with one owner (technically, called “members”) is the easier to maintain (than a multi-member LLC) from a tax standpoint as you’ll continue to use the same Schedule C filing requirement as a Sole Proprietor. However, if you have more than one member (for example, a husband and wife team), the IRS requires you to file an information return, Form 1065, that is a completely separate filing process than your personal return. Hence, your overall tax filing cost will double or triple due to the complexities of the 1065.
LLC with an S-corporation election.
If your business generates a net income of $50,000 to $75,000 per year, then it’s time to consider the S-corp election. This is a tax saving measure that enables you to shield a portion of your income from the dreaded 15.3% self-employment tax. You’ll want to make sure the tax savings outweigh the additional costs you’ll incur to maintain the S-election (e.g. owner/members are required to be paid W2 employee wages, so you’ll have periodic payroll tax deposits and filings with federal and state tax authorities, payroll software costs, etc). Single-member and multi-member LLCs can make the S-election and requires a special information return to be filed annually (Form 1120-S) instead of Schedule C (sole prop) or Form 1065 (multi-member LLCs & partnerships).
The new (2018) tax law created a favorable flat 21% tax for C-corporations. For higher income businesses, a C-corp could be a better tax saving option than the S-election. However, while each of the above business structures enable you to escape double taxation, a C-corporation does not. A C-corp pays taxes on its income before paying dividends to its owners. Then, the owners pay income tax on the dividends received. (1)
4. In what state should I incorporate (form my business)?
I recommend you incorporate in the state of your domicile. If you incorporate in a state where you don’t have a physical presence, you’ll need to hire and pay a local “registered agent” because you must have an in-state address of record. These agents abound and are easy to find via online search, but it’s one more box to check and fee to pay every year. Also, you’ll likely have to register as a foreign entity to do business in your domicile state with additional fees and filing requirements—even in an income tax-free state.
However, there are reasons why an owner might choose to form an entity in a state other than a domicile state. Nevada and Delaware are popular states given their business-friendly laws, low taxes, streamlined court system for business cases, and business-owner privacy laws. Other states have unique advantages or disadvantages. For example, Wyoming is popular for software companies due to their intellectual property protections. Be sure the benefit of forming your entity outside of your domicile state outweighs the additional reporting burden and cost.
5. Is it better to have my business own my RV/toad or personal ownership?
Often the reason behind this question is the hope that if the business owns the vehicle it will be more easily allowed as a business write-off. From the IRS’ viewpoint, ownership doesn’t determine if a tax deduction is allowed. Regardless of whether a vehicle is owned by an individual or a business, it is the use of the vehicle that matters.
If the business owns a vehicle and it is available for personal use by employees/owners, such personal use is a taxable fringe benefit and must be calculated and reported as compensation for income tax purposes. Business ownership of your RV can cost you in other ways, for example, insurance rates may be greater for commercial vehicles. Also, large commercial RVs may be required to stop at roadside weigh stations when you cross state lines.
The easier method is to own all vehicles personally and when they are used for business purpose, submit a mileage reimbursement report to your business. In 2019, the standard mileage rate is 58 cents per mile, up from 54.5 cents in 2018. By using the standard rate, there is no need to track fuel expenses, repair and maintenance, depreciation, etc, on the vehicle. The mileage reimbursement is a write-off for the business but is not taxable income to the recipient. The mileage reimbursement is a great way to reduce your taxable business income and put tax free money in your pocket. Keep in mind, regardless of whether you own your vehicle personally or through your business, a mileage log is required by the IRS to track business versus personal use and support your tax deductions.
TAX TIP: In addition to submitting a monthly mileage reimbursement report to your business, include all business expenses that you paid with personal funds, including shared business/personal expenses such as cell phone and internet service. This is the IRS’ preferred method to document legitimate business expenses and ensure business owners and employees receive reimbursement without incurring a tax liability for such receipts. Email email@example.com and you’ll automatically receive the reimbursement report template (Excel spreadsheet and Word doc versions) that I use for my business. It’s a convenient way to stay organized and keep the IRS happy.
BONUS: The most overlooked write-off for self-employed tax payers
The self-employment health insurance deduction.
If you are self-employed, you should ask your tax preparer about this often-overlooked deduction. All self-employed taxpayers are eligible to deduct the cost of acquiring medical, dental and long-term care insurance for themselves, their spouse and all dependents. The deduction is available if you buy your insurance from a private carrier, through the Marketplace, as well as premiums paid for Medicare.
However, you can only take the deduction for months in which you or your spouse were not eligible for an employer-subsidized health insurance plan. Also, you can’t take the deduction if your business generated net loss. There are different rules on how to take the deduction if your business is a sole proprietorship, LLC, partnership or an LLC with the S-election. If you think you qualify, examine your 2017 tax return, Form 1040, page 1, line 29 to see if it was included. If not, be sure to ask your tax-preparer about this deduction before filing your 2018 return.
- For the sole proprietor, single- and multi-member LLCs, partnerships, and entities that have made the S-election, income from the business passes through to the owner/members and included on their individual tax returns. Thus, the business income is subject to income tax only once, on the individual return.
DISCLAIMER: The information and materials we share in this article are intended for reference only. As the information is designed solely to provide guidance to the readers, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Therefore, we strongly encourage you to seek the advice of a professional to help you with your specific needs.
Tim Ewing - Certified Public Accountant (CPA)
Tim began the RV life in 2014. For over 30 years, he has provided tax and CFO services for small businesses and non-profits and currently operates his CPA practice full-time while on the road. Tim specializes in helping self-employed RVers unload their bookkeeping burdens and avoid IRS headaches. You can reach Tim at firstname.lastname@example.org or by phone 757-771-2557.