You can’t deny the allure of boat ownership: fishing, water skiing, and social day trips with family and friends. There is a kernel of truth, however, to the old saying that boats are “holes in water that you throw money into.” But if you take advantage of the tax breaks available to boat owners, you can hang onto some of your money, making your boat even more enjoyable to own.
Generally, the IRS says you cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. A boat (like an airplane, fishing lodge, or vacation home) is considered by the IRS to be an “entertainment facility. The IRS says:
An entertainment facility is any property you own, rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.
The IRS does allow a business to deduct expenses for entertaining on your boats, such as food and beverages, catering, gas, and fishing bait (2018 Tax Reform Changes -There is 0% deduction for entertainment expense in 2018). But you can’t deduct the direct expenses of using the boat for entertainment. Here are five tax breaks to help you stay afloat this tax season.
1. Home on the Water
Deducting the interest you pay on your boat loan by declaring the boat your second home is the biggest tax deduction there is for recreational boating. All you need to have on your boat to qualify is a sleeping place, cooking facilities, and a toilet (portable ones count). If you rent your boat out to others, you need to stay on it for at least 14 nights out of the year, or 10 percent of the number of days the boat was rented. Of course, there can’t already be a second home in existence somewhere, as this would technically make a livable boat your third house, which is not covered by any IRS deduction.
You need to ask the lender with your boat loan for an IRS form 1098 to report the interest or, in most cases, you can simply get a letter from the lender. If you used an equity line of credit with your home or the boat as security, you’re entitled to deduct those interest charges. Don’t forget that you can deduct not just the interest, but also any points paid to get the loan as well as the penalty for an early payoff of the loan. Again, this is an option available to those with itemized deductions. State and local personal property taxes can be written off so long as they are annually imposed and sync up with the value of the vessel. If you work from the boat, you also have the home office deduction. Those boats that have extra rooms can be used for short-term rentals.
2. Place Your Boat into Charter
By placing your new yacht in a charter management program, you are converting it from a personal asset to a business asset, essentially an equipment rental business. The relationship between you and the charter management company is structured so that you own the yacht and they assist you in managing your yacht rental business. But you can also deduct all your business expenses as long as you’re trying to make a profit from the boat and are not using it as a hobby. You can deduct boat depreciation (over 10 years), maintenance fees, fuel, mooring costs, and any equipment you need to buy. Yachts in a charter fleet are typically washed weekly and cleaned inside and out after each charter. Routine maintenance is performed on a regularly scheduled basis and damage promptly repaired. For you, as the yacht owner, it means that you can spend your time sailing your yacht and not doing cleaning, maintenance and repairs. Yacht owners can reduce the costs of purchasing and owning their yacht by over 50% in many cases through a combination of tax deductions, new Section 179 & Bonus Depreciation, and charter income. Actual savings vary depending on the size of the yacht and the location in which it is placed in charter.
So, if you want to find ways to potentially reduce your income taxes on wages, have limited time to use your yacht and are willing to allow qualified people to charter your yacht when you’re not using it, then charter ownership might be right for you.
3. Business Transportation
Tax law classifies yachts and other pleasure boats as “listed property.” Therefore, you need to use the yacht more than 50% for business transportation. Once you beat the 50% test, your potential tax deductions include fuel costs, insurance, repairs, dock or slip fees, caretakers’ salaries, hurricane storage, and depreciation (including Section 179)—all of which is limited by tax rules on luxury water transportation. Even if you use your yacht 100% for business, one business entertainment use could sink your deductions. Tax law denies any deduction “with respect to a facility” used in connection with entertainment. And tax law classifies yachts and other pleasure boats as entertainment facilities. Obviously, if the yacht is used solely for business travel, you don’t have any entertainment that triggers the entertainment facility rules. For example, you could have a business office on Catalina island and a business office on the mainland area that would require water transportation for you to get to or from the island. You could do this in a yacht. If, at the end of a typical year you had 80% business use and 20% personal use of the yacht, you may deduct all of the yacht costs for the 80% business use, subject to the luxury water transportation limits.
Now that you have gone to the trouble to qualify your yacht for deduction, you face one final hurdle. Tax law places a daily limit on deductions for business transportation by water. The luxury water limit is double the highest per diem for federal employees traveling in the United States. For FY2017, the per diem rate for high-cost areas is $282 (IRS Pub 1542). If you use your yacht for business transportation for 45 days at double the highest per diem limit you would qualify for a tax deduction of up to $25,380. Not a bad payoff for a little tax knowledge.
4. Short-Term Rental
There are many short-term rental companies that can post your boat as a short-term rental. Much like how many people rent out their vacation homes in the mountains. The Tax Cuts and Jobs Act of 2017 also expands the definition of Section 179 property (allows a massive 1st year tax deduction) to include: Certain depreciate tangible personal property used primarily to furnish lodging (or in connection with furnishing lodging). This includes all furniture, kitchen appliances, and other equipment used in the living quarters.
5. Donating Your Boat
If you are in the market for a new boat, or if you’re done being a boat owner, consider donating your boat to charity. The IRS allows you to deduct the market value of your boat on the day you donate it (not what you originally paid for it). You can find out the fair market value of your boat by using an appraisal guide, such as BUCValu. Stipulations exist that determine how much you can deduct, however; these stipulations are based on what the charity does with the boat after donation, so be sure to read the fine print. In most cases, you can pick your favorite charity if it is qualified as a non-profit organization. Some groups, such as the Sea Scouts, are equipped to take care of all the paperwork and details involved in a donation.
Boats provide an assortment of pleasure and business opportunities for those able to own them. Tax deductions exist for both, but don’t expect anything other than a tightrope process from the IRS if you plan on writing off boat-related business expenses. The ultimate takeaway when it comes to any kind of tax deduction is that the truth shall set you free. Don’t exaggerate, misconstrue, or otherwise misrepresent the facts. If legitimate write-offs exist, take them, and never fear. Tax breaks are there for a good reason, even for boats.