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Ahoy, mateys! Have you foregone the life of owning a second home in favor of the biggest boat you can find? Are you part of the elite group of yacht owners wondering if you can score a tax deduction for your vessel? Well, shiver me timbers, the answer is "aye, it's possible!" But don't hoist the Jolly Roger just yet, there be a few rules and regulations to navigate if you don't want the IRS coming by to commandeer your vessel.
Quick note: none of this is tax advice. The world of boat ownership and seacraft taxation is immense, and requires a specific skill set to accurately navigate (especially with recent changes to the tax code and tax cuts). If you're interested in a yacht purchase and you don't know where to start with taxes, contact a licensed tax advisor. You can also contact an equipment finance specialist who knows this stuff inside and out. With that, let's get into the world of boat tax!
Business Use Tax Code
First off, let's set the scene. You're lounging on the deck of your yacht, sipping a Mai Tai, and wondering if you can write off the cost of your fancy floating palace. The answer, like most things in the world of tax law, is "it depends." If you use your yacht for business purposes, such as hosting client meetings or an entertainment facility for colleagues, you may be able to claim certain expenses as tax deductions since it's a legitimate business asset.
But before you start inviting your entire office out for a day of sun and sea, you need to make sure you're following the IRS guidelines. For starters, you'll need to be able to prove that your yacht is a legitimate business expense used for a legitimate business purpose, and not just a luxurious toy meant for personal use. This means keeping meticulous records of your yacht-related expenses and demonstrating that the boat is used primarily for business purposes.
So, what exactly can you deduct? Well, any expenses directly related to the operation and maintenance of the yacht are fair game. This includes things like fuel, insurance, repairs, and even the cost of hiring a captain or crew. But don't even think about trying to write off that gold-plated anchor or the crystal chandelier in the master suite. The IRS is onto your sneaky ways and won't let you claim frivolous expenses as deductions.
Finally, let's chat boat slips. You need somewhere to park your yacht, and that incurs slip fees, as well as property taxes and mooring fees. Generally, all of these fees are rolled into one lump-sum, which should be part of your deduction against the boat if you're truly using the yacht for business purposes.
Deprecation Rules
When you think about a toy for business use, you usually come across the "Section 179 Deduction" in the IRS tax code. This is generally the holy grail of the "maximum deduction life" that small business YouTubers are always talking about. That's why Biaheza owns a G-Wagon and a Tesla! But there are other things to consider when you take your deduction to the salty seas.
Essentially, the 179 deduction is a sought-after part of the internal revenue code for small business owners with business transportation needs. If you have a vehicle where you can claim business expenses for over 50% of the vehicles use, you now open yourself up to significant tax benefits and tax breaks. This essentially invites things like deprecation tax advantages and the ability to claim tax benefits on the adjusted cost basis of your yacht (since it's technically the purchase of business equipment and should not be a personal asset). However, under section 179(b)(1), this deduction is capped at $1,160,000 per year (as of 2023). There's also a significant ramp down period when considering bonus depreciation deduction, with the ramp down decreasing in set percentages through your depreciation period. Again, this is why accountants and equipment financiers get paid so much money: they know this stuff. Reach out to a certified financial advisor before you start playing around with your own potential tax deductions.
The other side of this coin is the hobby loss rule, also known as Section 183. The hobby loss rule means that losses you incur from not-for-profit activities (like fuel costs from boating with your grandchildren or hiding your mistress) can be used to offset for-profit revenue generated from the boat (think starting your own charter business, employee entertainment facilities, or business travel rental revenue). However, you cannot run at a loss for more than 2 out of 5 years on a rolling period. You actually have to make money with your boat, rather than burning a bunch of fuel and then faking your own death.
What About A Boat As a Second Home?
If you want to straddle the line between rockstar and sensible, you could use your yacht as vacation homes. This would also allow you to claim second home tax qualification, assuming your boat meets the minimum qualification of having at least one bedroom, a galley and a toilet.
Some enterprising business owners will also rent out their boats for extra income, whether that's for vacation goers or for a charter management program. If you decide to do this, you must yourself live in the boat for a minimum of 15 days per year, or 10% of the number of days that you rent your boat out, whichever is greater. This allows you to keep your second home deduction, while generating a bit of cash flow because you're an experienced pirate with luxury taste.
Non-Business Use
Now, let's be real here. Unless you're the CEO of a major corporation, or a part of a select group of business owners, it's unlikely that you'll be able to claim your yacht as a legitimate business expense. So, for the rest of us landlubbers, owning a yacht is just an expensive hobby. But fear not, there are still some ways to make your love of the sea work in your favor come tax time.
For starters, you can always donate your yacht to charity. That's right, instead of selling it for a fraction of what you paid, you can donate it to a qualified charitable organization and claim a tax deduction for the fair market value of the boat. Not only will you be doing a good deed, but you'll also get a nice tax break to boot.
You also might be someone that owns a boat to actually get to work. That's right: some people have it so good that they use their boat as a car. Well good news for you, you seafaring nine-to-fiver. You can deduct your mileage as a business commuter expense, the same way that the rest of us do with a car. You just get to enjoy the fresh air more than we do while we're spilling our morning Starbucks on ourselves while we take a Zoom call from the driver's seat.
But let's be honest, most of us aren't going to be renting out our yachts anytime soon. So, what's the bottom line? Unless you're a billionaire, owning a yacht is probably not going to help you save on your taxes. But that doesn't mean you can't enjoy the perks of yacht ownership without breaking the bank.
For example, instead of buying your own yacht, you could always join a yacht club. Sure, you won't be able to customize the boat to your every whim, but you'll still get to enjoy all the benefits of yacht ownership without the hefty price tag. And who knows, you might even meet some fellow yacht enthusiasts who can help you navigate the treacherous waters of tax deductions.
Conclusion
In conclusion, owning a yacht may not be the most financially savvy move, but it sure is a heck of a lot of fun.
And hey, if you can find a way to make your yacht work for you come tax time, all the better. Just remember to keep those receipts, document your business-related expenses, and consult with a tax professional to make sure you're following all the rules and regulations.
At the end of the day, whether you're cruising the open seas or just dreaming of the yacht life, there's one thing we can all agree on: taxes are no fun. But if you can find a way to turn your yacht into a legitimate business expense, you might just be able to soften the blow come tax season.
So, grab your captain's hat and your SPF 50 sunscreen, and set sail for the horizon. Who knows, you might just find your fortune on the high seas...or at least a few extra deductions on your tax return.
