As the April 15th (actually April 18th this year) tax filing deadline looms near, we thought you might want to be aware of these “tax tips” for luxury motor yacht owners.
A motor yacht is a big investment. Operations, management and maintenance can run up annual expenses in the tens of thousands of dollars. Yacht owners often wonder if there is a way to “write off” or deduct some of those expenses come tax time.
There is. However, understand that we are not CPAs or financial advisors here at 26 North Yachts, and you should seek the advice of your income tax professional when it comes to your individual circumstances. What we present here is general information based on our knowledge and experience as yacht brokers and yacht managers.
Your Yacht as a Second Home
A common and often overlooked tax break for boat owners is the “second home deduction.” If you have financed your motor yacht, or any boat for that matter, you may be able to write off the interest paid on your loan as if it were a second mortgage on a home.
You do not have to live on your yacht to claim the deduction. It just needs to be able to be lived upon. In fact the IRS has a pretty broad definition of what qualifies as a home.
As long as your yacht has cooking, sleeping and toilet facilities, it meets the IRS criteria for a home as per IRS Publication 936. It is no different from your accountant claiming a similar deduction for a beach house, or other vacation home, but, he or she may not realize you can claim the same deduction for your yacht. But, here is the rub, you can only claim one deduction on one second home, even if you own several. To use the second home deduction you must claim one property as your primary residence, and any one property as your second home. So, if you had been claiming a vacation residence you must substitute your yacht.
Other Possible Tax Deductions for Yacht Ownership
What about “business expenses?” There are a couple of ways that you can use your yacht for business and therefore garner some tax breaks, but you need to be careful about it.
If you entertain on your yacht for “business purposes” you may be able to write off some of the costs of entertaining clients on board. There are several caveats to this however.
According to the IRS, you need to have “reasonable expectation” of earning income or other significant benefit to the future of your business from having a business meeting, or social gathering on your yacht.
You must either transact business on board, such as the signing of a contract, or at the very least engage in conversation with the main purpose being a desire to transact business.
The IRS looks at “entertainment expenses” of high net worth individuals with extreme scrutiny. You must make sure that all of your yacht related expenses are well-documented. You will need to itemize each expense, the date incurred, who was onboard, what they were invited to discusses, and if they are not existing clients what are their businesses or occupations.
Chartering Your Yacht
One way to ensure that your yacht is considered a business, and therefor entitles you to write off some of your operating expenses is to place your yacht in a charter fleet.
Unless you specifically have purchased your boat to start a full-time charter business, you probably will only want to charter her “part time.”
Once you put your boat in charter, you will be able to deduct your expenses for things such as depreciation, maintenance, equipment, fuel and mooring costs, but only for the percentage of time your motor yacht is actually used as a charter business.
In other words, if the usage of your boat is as a charter for 20% of the time of operation, you should be able to deduct 20 percent of the expenses.
If there is any equipment on board that is strictly used only for chartering, the expenses associated with that equipment may be fully deductible.
However, when it comes to taxes, chartering your yacht can be a bit of a double edged sword, as you will have to claim any charter income your earn. Still there can be many advantages to chartering your yacht other than tax breaks.
Understanding the complexities of motor yacht ownership can be hard. If you would like to benefit from our expertise in these areas, or if you have any questions or comments about this blog post, do not hesitate to contact our Sales Specialists, or call us at (855) 318-6328.