Can a Boat be a Tax Deduction?

If you have been to a boat show recently, you have, without a doubt, heard dealers and brokers talking about the “tax advantages available for boat ownership.” You probably have heard terms such as IRS Section 179 or IRS Section 162 thrown around as ways that the Internal Revenue Service (IRS) allows for significant tax advantages for boat owners.

Not so fast. Let’s check the facts…

A recent article published by Severiano Ortiz, Senior Manager with RSM US LLP, a tax advisory firm,  sheds some much-needed light on the topic of tax savings with boat ownership as well as “business yacht ownership.”

Tax Implications of Private Yacht Ownership

According to Ortiz, if a person is purchasing a boat or yacht as a primary home or as a private use (not rental) vacation home, that person is generally entitled to the same or similar tax benefits as owning a land-based home.

This makes sense as the yacht is now being used as a residence for the owner.

However, at boat shows, the issue you hear most often discussed is placing your yacht into a business to gain tax benefits. How does this work? Does this work?

Ortiz explains: “If a person buys a boat with the intention to both use it personally (greater than 14 days per calendar year) and rent it (greater than 14 days per calendar year), they may be said to have purchased a ‘vacation rental’ and the tax treatment and benefits will change.”

Typically, this ‘vacation rental’ type of ownership is what most yacht owners, who place a boat into fractional ownership or yacht charter, would fall under. Unfortunately, we think that this tends to be the spot where potential yacht owners become confused, thinking that they can benefit as a business would from owning an asset while still maintaining full (or almost full) rights to use the yacht.

Tax Implications of Business Yacht Ownership

There is a way that yacht ownership can take place as an actual business, provide business tax advantages. In this scenario, a person buys a yacht with the full intention of using the yacht in charter operations. This means a person is actively participating in the business of the yacht being chartered.

Under an operation such as this, a yacht owner would fall under the tax rules that apply to businesses and would reap the benefits of those tax codes. That being said, the rules for running a yacht as a business are complex and very likely, difficult to utilize with most yacht ownership plans.

For a yacht to meet the rules that govern business taxes, there are two key points which become sticky for yacht owners:

  1. The yacht owner must be able to demonstrate that the yacht is engaged in trade or business.
  2. The yacht owner must be actively participating in that business.

Point number one seems not to cause many issues. After all, the yacht is being placed in a situation where it is being used in a business. Point number two is where essentially all existing (apart from individuals who own and run their yacht entirely themselves, including booking the charters) outlets for business yacht ownership seem to fall short.

This is because most yacht owners are not actively participating in the business, that is their yacht. They are placing their yacht into a fractional ownership program or a charter operation and allowing these businesses to manage the bookings, maintenance, and other aspects of running the ‘yachts business.’

So, it seems, while likely well-intentioned, that ‘Business Yacht Ownership’ has a narrow application and many factors need to be in place to correctly reap the tax benefits.

At this point, you are likely wondering “why would PowerTime, a fractional ownership/membership company publish an article that seemingly closes the door on placing my yacht into a business and reaping tax benefits?”

At PowerTime, we believe in transparency. To that point, we believe that PowerTime falls under the category of ‘vacation rental’ tax incentives, not as a business yacht ownership scheme. The reason we are pointing out this fact is that we want our owners to be able to enjoy their time on the water, without having to wonder if the way they have their boat ownership plan set up is going to get them into trouble with the IRS.

The beauty of PowerTime is that, as an owner member, you do not have to worry about managing the boat bookings, its maintenance or other typical owner tasks. You simply enjoy the use of your boat while receiving a return on your investment. All this, while still being able to take advantage of tax incentives.*

We invite you to read the entire article by Severiano Ortiz HERE.

*PowerTime does not give out tax or legal advice. Please consult with your accountant, financial planner and/or legal advisor to discuss your particular circumstance and what ownership scenario best fits your needs.

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