Recently, a client came to me with a question. My clients’ primary residence is in Arizona, but they also own a beach house in California. The office of an important business connection is just blocks away from the beach house. The clients and their family visit the beach house often. While there, they meet with the business connection and host get-togethers and dinners for the business connection and employees.
The client has been deducting mortgage interest and real estate taxes as itemized deductions on Schedule A of Form 1040, but with the Pease limitation reducing their itemized deductions, they weren’t getting much benefit from the deduction. Could they claim all, or even a portion, of the vacation home as a business expense?
A recent Tax Court ruling offered some insight on the question. Dell and Judith Jackson owned Dell Jackson Insurance Services in Copperopolis, California. In 2004, the Jacksons started selling RV insurance. To market their RV insurance policies, the Jackson’s purchased an RV and began attending RV rallies on the weekends. They gathered sales leads at the rallies every day, outfitted the RV with a banner, and set up an information table outside of their RV promoting the RV insurance product. When the Jacksons returned to the office the next week, they would generate rate quotes for the leads they’d generated at the rally and contact the potential clients to close the deal.
The Jacksons claimed large depreciation deductions on their RV for 2006 and 2007 on Schedule C of Form 1040. They reported business use of 100% for 2006 and 99.95% for 2007.
There was no doubt that the RV had a business purpose. The Jacksons maintained a calendar for the fifteen business trips they took in the RV in 2007 and provided a log describing, in detail, their meetings with specific clients and potential clients. The court agreed that the Jacksons sold insurance policies at these rallies and spent at least two thirds of their time working on their business while attending the rallies. But it wasn’t enough to allow the deduction.
Section 280A(a) and (b) provide the general rule that individual and S Corporation taxpayers cannot deduct expenses for “the use of a dwelling which is used by the taxpayer during the taxable year as a residence.” In the Jackson’s case, their RV is a dwelling unit if used for personal purposes for more than fourteen days. Section 280A9d) defines personal purposes: “taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used . . . for personal purposes by the taxpayer.” Thus, any personal use, including watching TV or cooking breakfast in the RV, makes the entire day a personal day. The court ruled that the Jacksons used the RV as a dwelling unit for personal purposes for more than fourteen days.
In the Jackson’s case, the tax court judge wrote: “Section 280A casts a wide net . . . and sometimes catches taxpayers like [Mr. and Mrs. Jackson], who in addition to their personal use had genuine business purposes.” So although the Jackson’s RV was absolutely used in their business, they did not meet the requirements of Section 280A to claim depreciation on the RV as a business expense.
In my clients’ case, although their beach house may be used as a place of lodging while visiting their business connections in California and may be used to entertain business associates on a regular basis, there is no doubt that the beach home is used as their family vacation home first and foremost. I advised them to enjoy their family vacations at the beach, but forget about taking them as a business expense.
By Janet Berry-Johnson, CPA