Boat as a Business vs Conventional Ownership

[Wraith_Mac]

Originally Posted by FSMike

Sigh.
Back when I was doing tax accounting I was constantly having to explain to some of my clients that it was to their advantage to make a profit and pay taxes rather than to take a loss and have a write off.

Mike,
That is the most prudent way to avoid undue scrutiny isn't it?
Cheers,
Mac

[FSMike]

Originally Posted by Wraith_Mac

Mike,
That is the most prudent way to avoid undue scrutiny isn't it?
Cheers,
Mac

There is that, Mac. Not to mention having money in one's pocket lol.

[avb3]

Originally Posted by GreyBeardVA

....
I read a book in my twenties when books were still printed on paper that suggested that anyone who does not incorporate themselves is not taking advantage of the tax laws as written. I investigated, confirmed the hypothesis, and for nearly 15 years instead of being an employee for someone else's company I contract my services through a corporation which provides for amazing tax advantages. There is no suggestion to cheat the IRS simply to understand and comply with the rules; rules that are written to benefit corporations NOT the individual. Ever wonder why Apple, Google, Walmart, Microsoft, GE, etc. do not pay income tax on the billions in profits they make?

End of diatribe. Sorry, just saying that an individual can purchase a yacht as a business assuming that the business has income against which to deduct the expenses of the yacht.

That loophole has been closed and closed hard. My advice is to seek a competent tax lawyer or accountant, if you're still pursuing this and if you only have one major client.

[The Good Life]

This is/was a great thread! All of us younger working folk appreciate they insight as all of us are trying to formulate our plans to join join you !

Cheers,

Jason

[osirissail]

I would also agree that this is - so far - a very good thread relevant to the O.P's questions. I bought my sailboat originally as a business and saved probably close to half of the money it would has cost me to "re-build" it to my tastes and desires. But along the road were lots of hassles and inconveniences attached to operating as a "business" versus simple private ownership. If you are willing to do and keep up the "paper trail" of operating a business then you can save considerable money in ways already mentioned by others. But get lax and behind in all the details of business operation and you can expect some serious hassles from various levels of governmental tax/business authorities.

[denverd0n]

Originally Posted by osirissail

...get lax and behind in all the details of business operation and you can expect some serious hassles from various levels of governmental tax/business authorities.

This really summarizes the comments that I've heard repeatedly over the years from those who tried to make their boat (or any other hobby, for that matter) into a business. If you want to succeed, you have to approach it--first and foremost--as a business. You have to dot all the I's and cross all the T's.

Which means that you can't just enjoy it as a hobby anymore. You have to work at it. Yes, the work is probably more enjoyable than slogging away in a flourescent-lighted cubicle all day, but it is still work. People are not just going to throw money at you while you spend your days in idyllic luxury, sipping on rum-punches and living life on whatever schedule pleases you. You have to start living your life on the customer's schedule, and thinking about what pleases them, not you.

If you can do this then you have a fair chance of success. More power to you, and good luck. If you can't... Well, you would be much better advised to find a different way to pay for your dreams.

[rw58ph]

The most common write off for a boat is the interest and property tax just like a house. But it does have to meet the requirements, which most small boats do not.
However, if you do use the boat for business like, taking clients out, entertaining, you have to keep a log of hours for business vs pleasure. Before you can write off the boat just like you would a car. However, if you are going to do that its best to talk to a tax person to makes sure you meet the requirements and if its worth it.

The biggest plus which most pleasure boaters miss is getting a business license, which give you a state tax ID number, which can qualify you for deferred taxes, cheaper rates/fees and commercial discounts. Especially if you are going to buy a boat, and up date/re model like we did. If you register the boat as a charter, bare bone/6 pack, you may not have to pay the sales tax at time of purchase, and the fee/tax is usually cheaper than pleasure fees/tabs. However, you will be required to fill out a state tax forms, pay taxes and show some income.

The biggest plus for us besides the writing off the interest, property tax, not paying sales tax on the boat, cheaper tabs/fees, and commercial discount was commercial boats have preference over pleasure boats at bridges/locks, which saved us hundred of hours not having to wait. We moored on Lake Union which has bridges, and to get to the Puget Sound had to go thru the Ballard locks. On week ends and holidays it could be hours. Also Coast Guard, and police do not check/hazel you as much.

However, before you actually due any of the above you should talk to a tax federal and state accountants. So you have to way the pluses and minuses, and make sure you quailfy and the red tape required. Anyway, a very large majority of larger boats/mega yachts are for business and tax reasons. The benefits are there, if you can qualify?

[captainjay]

Originally Posted by WindYwager

I'm new to the forum but a long time lurker. I'm getting to the time in my life where I can see things slowing down. We are thinking about either purchasing a boat as a business and placing it in charter in the Anappolis MD. area and using it on long weekends and an occasioonal week. Possibly taking the boat to the Ft. Lauderdale area for and exteneded season. Another option might be a SailTime type of purchase. I still work full time and we live in the midwest (Kansas) flights are reasonable to the coast. We charter regularly in the BVI, but the idea of a boat vs. a second home is appealing. I'll take any and all
advice. We're just starting to explore the idea. looking at retiring in 7 yrs.

Thanks in advance

WindJeager

Welcome to the forum; let me state for the record that I work for a bareboat charter company in the Caribbean. I am part of the management team and run the dock staff and maintenance. If anyone wants to know which company send me a pm. I am not writing this as an advertisement.
It is interesting every time one of these threads starts. You have received a lot of advice and will likely receive more. Any time the words “boat as a business” are put together in a sentence it always gets a reaction from people. I think way to many people misinterpret this program. In my opinion turning your boat into a business is not a typical investment vehicle. Boats as a general rule of thumb cost money, they rarely make money. Most of the comments made so far have been weighing the traditional business models, like profit and wealth building and return on investment. Boat ownership is more of a reward for having made those better business decisions earlier in life.
Owning a boat is a personal lifestyle choice that has a lot to do with quality of life. The boat as a business model simply allows some people to offset a portion of ownership costs thru charter revenue and use the potential tax benefits to offset other personal income. Notice I said some ownership costs. It is highly unlikely that you will ever fully pay for a boat on charter revenue alone. As for the tax benefits if you structure your “business” properly, and have the income level that will allow you to take the tax savings from depreciation and interest it is likely that the paper loss on your boat can be used to reduce your overall tax burden, in turn those savings also can be used to help pay some of the cost of your boat. I am not a financial planner, talk to your CPA and possibly a tax attorney, but this is being done every day by a large number of people.
Another financial factor is your regular charters to the BVI’s. Assuming you use your boat instead of chartering, an average week on a boat down here is six to ten thousand dollars. Those savings also should be factored into your equation while deciding if you are going to go this route. I also would argue although I am a little biased that placing your boat in the Caribbean is a better idea than Annapolis. You already love sailing here. You live in Kansas so you are going to have to get on a plane either way to see your boat.
A “business plan” you can live with. Given what I have said already knowing what your goals and plans are for the future should be a key factor in your decision. Do you plan to use your boat as a live aboard platform when your charter business is over? Will it be a part time vacation home post charter? The happiest clients that we have are the ones with a well-defined plan including a time line that they stick to and use their boats. Owners that don’t use their boats and don’t have a working plan for the future of their boats tend to be less satisfied overall with the experience. Spending money on a boat without enjoying it is a complete waste of time, effort and capitol.
There are also lots of other hard questions you need to ask yourself before you buy a boat. How does this expense fit in your overall financial plan for the future? How quickly can you pay off the boat? Are you disciplined enough to take any tax savings and pay down the vessel or save that money for upgrades and un-foreseen expenses? Do you have the twenty or thirty percent down payment necessary to do a deal? Where is this money coming from? I don’t think it is ever prudent to borrow this money or remove it from long term retirement money. It should come from liquid assets in my opinion. This is not a decision to be entered into lightly but if done correctly the memories and time spent on the water are simply priceless. That’s a return on investment that is very difficult to quantify.
Good luck, if you have any specific questions let me know.
Jay

[Dtm67]

I have spent a fair amount of time researching charter options, and i have to say CaptainJay's summary is a good one based on what i have learned so far. Whenever I run the numbers, it always seems like it boils down to being able use the tax advantages for it to make sense. Otherwise, its basically prepaying for 8-10 weeks of charter use per year upfront (with the downpayment) and absorbing the financial risk at the end of charter of what you can sell the boat for versus what is left on the bank loan. Seems pretty break even-ish if you can sell the boat for what the prospectus indicates, but who really knows, right? This may matter less in situations where you phase out the boat at the end of charter and don't sell it. In that case, you have had 5 or 6 years of owners time and now own (and are still paying off) a potentially banged up charter version of a boat that will need extensive refit to be cruising worthy. But a large portion of the loan has been paid off.

It really starts to make more sense if you can use the tax advantages to offset passive income. I have worked with a CPA to fully understand this, and those conversations have always led me to the conclusion that this is the most IRS tax audit proof way of using the tax advantage. Unfortunately, I don't have enough passive income for it to make sense for me (that is income from passive investments like real estate rentals and so on). Getting the tax advantage on active income (normal income per se) is a much higher bar, which generally requires you to be actively involved in the charter business. Some charter companies will work with you to facilitate this, but it i have never felt comfortable with the audit risk (or the effort involved to be quite honest).

At the end of the day, it seems like the charter programs make the most sense when you are able to fully utilize owners time and have enough passive income. In that case, it sure seems attractive. Some of these charter companies have bases worldwide. Who wouldn't want to charter in the Caribbean for one trip, then tahiti the next?

[RRMontgo]

Originally Posted by captainjay

As for the tax benefits if you structure your “business” properly, and have the income level that will allow you to take the tax savings from depreciation and interest it is likely that the paper loss on your boat can be used to reduce your overall tax burden, in turn those savings also can be used to help pay some of the cost of your boat.

Be very careful with this or you'll find yourself under an IRS audit. At the very least, unless you are conforming to specific requirements, then it's unethical. This is only allowed when YOU are an ACTIVE participant in the management of your "boat as a business". There are explicit IRS tests to meet in order to be considered ACTIVE in the management of a business. In general, a resident in the US is not truly able to meet those requirements vis-a-vis their Caribbean-based charter boat, no matter what a boat brokerage in Annapolis might tell you. Said brokerage likes to push this "boat as a business" model and tells you the savings in your income taxes can virtually pay for the boat. I know, I've sat through their seminars. IMHO its a sham and invites an IRS audit. No matter how much you work on your boat's marketing website, or email with with charterers, or visit your boat 3 or 4 times annually to change the engine oil and polish the brightwork, you are not ACTIVELY managing it as a business. The best solution seems to be treating it as "vacation home rental property", where you can deduct expenses, including depreciation, up to the level of the property's rental revenue.

Yes, a lot of people are doing this "boat as a business" and deducting it's losses against their "real" job's salary income, but they're living on borrowed IRS time.

[NorthernSeaWolf]

Originally Posted by RRMontgo

The best solution seems to be treating it as "vacation home rental property", where you can deduct expenses, including depreciation, up to the level of the property's rental revenue.

Yes!!! As a former accountant, I have to agree! The CPA Firm where I worked, I probably should have pinned up a photocopy of a bulls-eye to bang my head against. I've seen some pretty creative accounting write-off attempts on behalf of the client, and wow - it's not worth the risk! If you are not actively managing the charter on a reasonable level, steer clear! Take advantage of the rental income, assuming she has a head/galley, and call it a day. You have better things to do with your time than pay back taxes, fines or sit in jail ... like sail!

[BandB]

Even the charter companies present owning and chartering as a means to reduce your costs, not to make money.

I'd toss out one other thing. Do you want to mix business and pleasure? Fine to buy on a contract and let it be managed by someone else completely, if they're reputable. But I try not to mix business and pleasure. Actually considered the purchase of a marina once and just reminded ourselves, no business related to boating.

Now for the accounting side, what has been pointed out is very good information and advice. Now, due to depreciation rules it is possible to generate a positive cash flow and a tax loss. That's done in real estate and is possible in boats. But it treads into a very dangerous area. Must prove it's business and must separate the personal use. And it also fails to consider the true depreciation and loss of value and the need for rebuilds and refits. It's like raising show horses. Can be a legitimate business but most often is to have horses for daughters to ride.

Also keep one thing in mind, in the event of an audit. Most IRS agents do not own yachts. Much like private planes. So they start off very suspicious of them all, even sometimes resentful. You will have to prove your case so better have an excellent accountant with experience on boat chartering.

[pistarckle]

Put your down payment in a mutual fund and in seven years you will have enuff money to buy a seven year old ex-charter boat . I have had four boats in charter and after a year or two I hated the fact that damn boat told me where and when my vacation would be .
I once had a chance to coach the Swedish Ladies Nude Volleyball Team and instead I had to fly to Culeba and play boat !!