As a tax preparer for many digital nomads particularly full-time RVers, I get asked lots of questions from current and prospective clients. As we are closing out 2018 and about to welcome in 2019, I thought I’d answer the most frequently asked questions especially as it relates to any tax law changes beginning in 2018.
1. Can you offer a tax savings strategy for digital nomads and RV owners?
Don’t leave deductible business expenses on the table. This includes writing off cell phone and internet costs, mileage and possibly some travel expenses. Travel expenses can only be taken if they directly relate to your business and you have kept a good log. This can include attending conferences or travel to meet with clients.
Also, remember that as a self-employed individual you can possibly deduct health insurance costs, health savings account contributions and even retirement contributions. To max out savings for your personal situation, I highly recommend meeting with a tax professional to go over your exact numbers and situation.
2. Can you give examples of common tax deductions for RV owners?
For RV owners who also own a business, it’s important to track anything you buy which is used in the business. This can include a computer, software, internet, education, conferences and other items that are necessary for your business.
Unfortunately, there aren’t any special tax credits or deductions available to non-business RV owners. However, if you add solar to your RV, there is a residential energy credit available. For 2018, it is 30% of the total costs of installation including equipment and labor. If you qualify for itemized deductions and have a loan on your RV, the interest on the loan does qualify for the home interest deduction.
Additionally, RV owners with children may qualify for the child tax credit.
3. What’s the difference between hobby income and a business?
The IRS defines a business as being profitable three out of every five years. Consider if your business is profitable or losing money every year. It is normal to have losses in the first year or so in business but why continue to operate a business at a loss. Unfortunately, f you continue to show a loss after the first few years, you may be at risk of the IRS claiming your work a hobby. This means the IRS will disallow taking the loss as a deduction against other income.
4. Is the 2018 tax law reform a benefit to RV digital nomads?
The biggest change which almost every RV entrepreneur should benefit from is the qualified business income deduction. This is a 20% deduction for all income derived from a pass-through entity. Remember, sole proprietorships, partnerships, and S-Corps are all pass-through entities.
This means that if you earn $50,000 in net income in your business on the road, you’ll get a deduction of $10,000. That’s a pretty substantial savings for small business owners. This is the basics and there are exceptions.
The other benefit is the reduction in the tax rate of the 7 brackets. The following are the new brackets for 2018.
5. What’s the best structure for my business? How do I know if it should be an S-Corp or not?
It’s important to know the different types of business entities, so you can understand the best structure for your business. It’s also important to know that an LLC is not a business entity. Plus, an LLC alone offers no tax benefits whatsoever. Instead, an LLC is treated as a sole proprietor unless elected otherwise.
The entity which offers the most tax savings is the S-Corp and I usually see savings to the taxpayer starting at about $50,000 of net income. This can vary by each individual situation. If you think you could benefit, I highly recommend getting the opinion of a tax professional. Keep in mind having an S-corp comes with more requirements and paperwork. However, the extra work may be very much worth the amount you’ll save on self-employment taxes. Talk with your tax professional to see if it’s the right move for you.
6. At what point do I owe quarterly taxes?
Quarterly taxes are estimated tax payments paid 4 times (April 15, June 15, September 15 and January 15 of the following year) and they are payments that get applied towards your self-employment and income taxes.
The IRS says you must either pay 100% of your income tax liability from last year or 90% of this year’s liability to avoid a penalty. If your tax liability is under $1,000, the IRS does not assess a penalty. The penalty is based on underpayment of tax liability. It’s as simple as keeping up with your payments to avoid being assessed a penalty.
Should you need to make estimated payments, you can either mail in vouchers with a check or use the IRS website to pay online.
If you’re not sure if you need to be making estimate payments, I highly recommend talking with a tax professional.
7. Where should I register my LLC or business? Does it have to be my domicile state?
This is an important consideration and the answer I give most often is to register in the state in which you operate. This is typically your domicile state since that’s your legal address. I understand you may not always be in that state, but it is still the state from which you operate your business. I wrote a blog post on this very subject because there is lots of misinformation around this very subject.
Don’t be fooled into registering in a tax-free state to avoid income tax. You always pay taxes according to where you live. In fact, registering in a state other than your domicile state could cause more hassles. You should always register where you live and avoid the hassle of having to register in multiple states unless you are physically doing business in multiple states.
No matter where you form the business I suggest having a registered agent to receive documents on your behalf. The cost of this can vary but can be as inexpensive as $50 and be over $100 annually.
8. How do I keep track of my business expenses and income?
I always recommend opening up bank accounts once you have formed your business whether it’s an LLC or an S-Corp. This will help separate you from your business and you won’t be mixing funds. This means having a separate checking, savings, credit card, and any other financial accounts. Accounts in the name of the business help to establish business credit and also keep legal separation should that ever become an issue. (I’m not a lawyer, so talk with a business lawyer to confirm the legal separation.)
I also recommend keeping track of expenses with some sort of accounting software. There are lots of options available to fit every budget. Using software allows you to keep track of income and expenses, helps you understand the financial health of your company, and also allows for an easier tax time.
If you are just getting started, then a simple spreadsheet might do the trick.
9. How do I handle sales tax if I only sell digital products online?
This is a difficult topic and one where I highly recommend first understanding the tax rules of your home state. Each state handles sales tax in a unique way. Some states tax digital products while others do not. I did write a whole post about sales tax issues. Plus, the laws around this are changing quickly and it may be soon that digital products are taxed in every state and not simply where you operate.
Lastly, there are software services that will help you determine, collect and remit tax in whichever municipalities you sell. But, you guessed it. These software services come with a price and as a small business, these can dig into the bottom line. If you’re interested in learning more about these services here are some examples, TaxJar, TaxCloud, Taxify, Avalara and more. Costs for these services range from $9/month to $47/month and higher and depend on your monthly transactions.
The one good thing about these tax services is that many will integrate directly with your sales platform and accounting software including Amazon, eBay, Shopify, Stripe, WooCommerce, Xero, PayPal, Etsy, etc.
10. Can I take the home office deduction?
This is usually a big no. The IRS defines a home office as a completely separate space from your living area. It must be used 100% for business purposes. How many people can say that about their RV?
I have seen a few exceptions if you have a toy hauler with an office space in the garage or possibly a bunkhouse used as office space.
I urge you to think about this though. An RV is a small space and honestly, I’m not sure how much savings the home office deduction would even offer in such a tiny living space. Did you want to take a $100 and risk an audit? You decide if it’s worth it or not.
Hopefully, the answers to these 10 common questions as related to RV living and digital nomads help you as you navigate your tax situation.
What question do you still have? Ask me below!