Thursday, April 14, 2011

Commentary

I've been receiving several inquiries regarding depreciation of RVs, so here is my opinion. First, you must legitimately use your RV for business. Second, you must be able to support and document the business usage. Only when you have the percentage of business use, can you make an informed decision as to what type of depreciation may be appropriate in your case.

Many times in the rush of taking advantage of favorable tax treatment, people opt for accelerated depreciation. This is fine, however, my feeling is to take a larger view. So often, RVs are used a lot at first, then after the bloom has faded, the usage drops to well below 50%.

If you first opt for accelerated depreciation of any type, you must remember two things: (1) When the business usage falls to below 50% you will need to report depreciation recapture. (2) If you dispose of the property prior to its useful life, you will also need to report depreciation recapture.

So what exactly is depreciation recapture? Simply the excess of depreciation over what it would be had you taken SL (Straight Line). In plain english, let's say an asset has a recovery period of 5 years, and the cost is $10,000. In SL depreciation, you would depreciation 20%, or $2,000 of the asset each year. But if you chose 200% DB (Declining Balance) with a half year convention, then the first year the depreciation would still be 20%, or $2,000, the second year $ 3,200, the 3rd year $1,920 and so forth.

The problem comes, as an example, when the asset is disposed prior to the 5 year recovery period. Let's say the asset is totally useless after 3 years. With total depreciation taken in 3 years of $7,120 the excess of accelerated depreciation over SL is ($7,120 - $6,000) or $1,120 which must be claimed as depreciation recapture, or income.

The other consideration is the category. Notice RV's aren't listed in the IRS tables of Class Lives and Recovery Periods. So, here you must use your best judgment. What type of vehicle best fits the size and weight of the RV under consideration? For big rigs, such as ours, I use the table for heavy trucks, which is given a 6 year life. Perhaps for an entertainer driving a Prevost, a Class Life for buses of 9 years is most appropriate. And for a typical gas RV like our old Fleetwood, possibly just using the mileage method would be best.

Whatever your decision, it is imperative that you be able to justify your position if and when an IRS examination should be held. I hope this will help guide you to the best decision for your situation.

P.S. PS. Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

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