How to lower the cost of boat ownership
Ahh, to be a boater in Florida. In other areas of the country, water lovers must stow their skiffs and catamarans at the sign of the first frost. But here, folks go fishing, water skiing, and cruising along both coasts all winter long. With about 2,000 miles of coastline, more than 11,000 miles of rivers and streams, and 7,700 named lakes, there is no shortage of places to go.
However, purchasing and owning a boat can be quite expensive. The good news is you can actually lower the cost of ownership quite significantly if you play your cards right. This is because boating and tax deductions are two sweet concepts that can go together under certain circumstances. There are several ways you can legally write off some of the costs of boating, thereby reducing your tax burden.
Boat as a Second Home Tax Deduction
You can take the home mortgage interest deduction for one second home in addition to your primary home, but you must itemize deductions. A boat is considered a second home for federal tax purposes if it has a head (bathroom), a bed (sleeping berth), and a galley (kitchen). You’ll need IRS Form 1098 to deduct the interest and also any points paid to secure a loan.
Boat as a Business
If you work from your boat, you can take a home office deduction, although that may raise a flag quickly. Additionally, if you use your boat to entertain clients, you may qualify for a deduction as an entertainment expense. You must have a reasonable expectation of gaining future revenue as a result of this entertainment, during which you must conduct at least some business discussions. Thorough documentation of entertaining clients is necessary for each expense, including date of use, location, the reason for the use, and the occupations of the persons aboard. The limit of the deduction is 50 percent of the costs associated with this outing (as with any other travel or entertainment expenses). You can include costs specifically related to that outing: fuel, food, drinks, transient mooring, or entry fees (such as for a fishing tournament).
Charter Boat Tax Deductions
You can charter your boat (acting as the captain), but you need to show genuine effort at making a profit. You’ll need a US Coast Guard license to take out six paying passengers, and you may need to increase your boat insurance if you use it for commercial purposes. You can write off depreciation (for example, a straight-line seven years), maintenance, boat equipment purchases, fuel, and mooring costs. Detailed records of every expense, as well as the amount of income, will be necessary. To avoid extra attention from the IRS, you’ll need to make a profit at least three out of every five years. You can only deduct the percentage of overall expenses that you use the boat for business. You cannot write off expenses when you’re pleasure-boating. You’ll be paying income taxes on the revenue you earn, so do the numbers before deciding on this course of action.
Boat for Transportation
If you use your boat to commute (at least 50% of the time for business transportation), you can deduct fuel costs, insurance, repairs, dock or slip fees, crew salaries, hurricane storage, and depreciation. You cannot use the boat to entertain clients, or that will nullify the boat transport deduction.
Donating Boats for Tax Deduction
Last but not least: Donating your boat to charity can prove more lucrative than selling it. You can only deduct its “fair market value”, and for that, you’ll need an appraisal in the form of a survey. The charity to which you donate must be a non-profit organization. The benefit of donation is that most of these charities can manage the paperwork for you, and the boat is disposed of quickly without needing to find a buyer. If the charity sells your vessel, you can claim a tax deduction for the amount the boat sold for (not the appraised value if it’s higher) or at least $500. If the charity uses the boat for its mission, you can deduct the full fair market value instead. The charity should give you a Form 1098-C for your accountant.
As the saying goes, “there are two certainties in life: death and taxes,” so discuss the nuances of the above situations with an accountant or maritime attorney. There are many exceptions as well as frequent tax law changes, so the issues are difficult to keep up with, and the penalties can be high. We at Allure Accounting are happy to advise you on your special situation before settling on any course of action.