Offsetting Expenses and Tax Tips for Yachts Owners
“Tax season” is well underway, and as you are gathering up all of your paperwork for that looming April 15th filing deadline (which is actually April 18th this year), 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 on their income taxes.
There is. However, understand that we are not CPAs or financial advisors, and you should always 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 the purchase of 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 catch, 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 Owners
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.
Charter Income and Offsetting Expenses
One way to be sure you are maximizing possible “business deductions” for your yacht is to put her into a charter income program.
What do you think of when you hear the word “income?” If you are like most people, you think “making money.” However, when it comes to “charter income,” if you want to truly understand a charter income strategy, and get the most out of putting your motor yacht into a charter fleet, you have to think of “income,” as less about “earning money,” as it is about offsetting expenses.
That is because with a few rare exceptions where people will purchase a yacht strictly for the idea of starting a charter business, most charter income programs are designed not to make you additional “income,” but to help defray many of the operational costs of owning a luxury motor yacht!
The key to charter income programs is that they provide options and a level of flexibility that can make yacht ownership a lot more fun, and hassle free. This is particularly true when you can combine a charter income program with a state-of-the-art yacht management, solution such as On Demand Yachting.
What Expenses Can Be Offset By a Yacht Charter Program?
Generally speaking, once you put your motor yacht into a charter fleet, you can expect that the charter management company will take care of most, if not all of your yacht’s “everyday” operating expenses, including: insurance, dockage, and maintenance. In addition, programs may offer “offsetting credits” for maintenance and repair work done to your yacht. Either way, once you have agreed to enter into a charter income program, you should expect to pay little or nothing towards the routine operating costs of the vessel for the duration of your contract. That alone can save you as much as 70% of your annual operating costs!
Other Advantages of a Yacht Charter Income Program
In addition to tax advantages and offsetting your operating and maintenance costs, there are other advantages of placing your motor yacht into a charter fleet.
- You will know your yacht will be safe, secure, and well maintained.
- Your engines and other critical systems will be used more often, which can actually extend their life.
- When you want to sell your boat, charter gives you great exposure, and potential buyers “try it before you buy it” opportunities.
If you enter into a yacht charter management program with the mindset that it is not a “business venture” but a way to reduce the expenses of owning a motor yacht, as well as broadening your own usage possibilities, you will come to realize what a great opportunity it really is!
At 26 North Yachts, we are not accountants or financial advisors. This article should be taken as general information. The complexities of donating a motor yacht to charity should not be undertaken without the advice of your financial professionals. However, if you would like to benefit from our experience in this area, or if you have any questions or comments about this blog post, do not hesitate to contact our Sales Specialists, or call us at 954-900-9988.