Legally, of course

[jemsea]

Tis that time of year once again.

Just going through the finances, getting the tax info in order and one thought keeps hammering at me.

Couldn't some of the money going into a cruising boat, after the purchase, be tax deductible?

If I conduct some of my business while using the boat I believe I may be eligible for some write-offs

Would anyone who has experience in this area let me know what types of write-offs you have sucessfully (and of course legally) qualified for?

John Mallon
s/v Kloosh

This is what my tax guy says. I ran my business from the boat in 04 and 05. I wrote off 30% of slip fees just like you would any other home based business. When I purchased Kittiwake, I designated that boat a an asset of that business, and my primary office space allowing me to write off 100% of the cost of that boat including slip fees. If you are a full time live aboard, you can write off interest on the purchase loan just like any other primary residence. Unless your business requires that you operate the boat, operation costs and most maintenance costs would be a bit hard to justify.
Keep in mind, I am not a CPA, and this is just what my tax guy advised me to do. FWIW, the previous year I was conventionally employed and ran my business as a side business. I had H&R lock do my taxes and they said there was nothing I could write off relating to the boat. They even said that loan interest on the boat could not be written off. I have confirmed that this is incorrect since that time.

[Irish Eyes]

H and R block? Walked into 2 diffeent offices while trying to do my taxes while out of state. Walked out of both when I realized how little the both offices knew about the tax code. I think they are geared to people lfiling the short form.
Anyway ended up mailing all our paperwork back to our tax service(CPAs) back home. There really is a difference. They can be expensive but are usually creative enough to pay their own way.

[jemsea]

So, someone, that sells some product/service that requires a boat could write off the total cost?

Purchase price, new sails, insurance...anything related to the operation of a boat borne business?

That must be how well known cruising authors do it.

I can see that many have gone done this road ahead of me!

Thanks KAI NUI

[ssullivan]

I agree with everything Kai Nui said. Also, I have (in the past) deducted operating expenses since I took clients (and prospects) out several times a year for entertainment purposes. These operating expenses, however, we paid by my corportation.

You might also want to check into at least writing off the mortgage interest of the boat as a 2nd home. Just about everybody does that.

[sbuff]

Deducting the interest for loan as a second home should be something that even H&R Block would figure out. The boat only has to meet minimal requirements - head, cooking facilities, etc.

Although I don't have a boat yet (that's the next toy) our 5th wheel RV qualified as a second home and all interest was deducted while it was being paid for. Repairs should also qualify.

[roverhi]

Boat write offs are a red flag to the IRS. Count on being audited if your deduction seriously effect your taxable income. You can write off legitimate expenses if it's used in a business. Just be damned sure you have the written documentation to prove it.

Those write offs must be apportioned to the actual business use of the boat, however. If you take out charters and that's your sole use of the boat, it's 100% deductible. Same goes if you are a manufacturer of marine gear and use it on your boat and the boat is used exclusively in your business. If you use the boat for business only some lesser percentage of time, you'll have to deduct only that percentage of your costs for that use. If you should be lucky enough to make a profit on the sale of the boat, any depreciation will be recaptured at a much higher rate than Capitol Gains taxes

Using the boat for entertaining and good will in a business is the thing that will really get the IRS's attention. Better have your ducks marching with honor guard precision before you try it.

The real thing the IRS is looking at is whether the business makes money. If your boat brings an income that exceeds the write-offs, you are in much better shape than if it's the traditional hole in the water. The IRS doesn't expect a business to make money out of the chocks. It does expect that the business will be making a profit after 3 years. After that, it seriously becomes your responsibility to prove to the IRS you have a business that will make money, soon not just a hobby.

You may be able to deduct the interest on a loan used to buy the boat if you claim the boat as a second home, don't have any experience with that. I know that you can deduct the interest and probably get a lower interest rate if you use a Home Equity Loan to buy the boat.

You can deduct anything on anything. The problem is standing up to an IRS audit if you are so lucky to be picked for closer scrutiny. They will expect any expense to be written down and backed with reciepts. Remember, they are auditing you because they already have convicted you of trying to steal tax money from them. They are not paid to be nice and understanding.

Aloha
Peter O.

[jemsea]

Peter O,


Dang! Seems like the IRS puts a red flag on all the good ones.

And the CPA doing our taxes just remarked last week that the "Kinder, Friendlier IRS is now just a distant memory....and a short one at that!


Thanks

As a portion of my business was distributing boat parts, I was able to write off many upgrades on the boat as necessary to make the boat presentable to customers, but I never tried to write off using it for entertaining clients, as the additional cost of insurance to back this up outweighed the deduction. THat is just the route I took, but for others, this might be a worthwhile deduction. Since I was asked specifically by my insurance carrier if i would have clients on the boat, and if I would be sailing, a full audit would have disclosed that this was not the case.
As for H&R, even the short form does not seem to be their strong suit. Comparing two years of conventional employment with similar income, I paid as much with H&R as I got back with my CPA.

I have an office in my home that is only that, full time. I can legally take a pro-rated portion of all expenses as a deduction. My accountant said don't do it. It is a red flag that will bring in many audits which are a big hassle even if you are squeeky clean like I am. Just not worth the hassle. Boats would be the same way.
As for 2nd home mortgage interest. The banks usually don't see it as a mortgage and don't issue the needed paperwork. I forget what that form is but you will need it from the bank to qualify along with possibly proving it has a head, cooking facilities and sleeping quarters. But it is acceptable.

[ssullivan]

Peter O:

I definitely agree with everything you said. I should clarify that I lent my boat out to my corporation from time to time to entertain clients. The corporation made about 10x what the boat's value was in a calendar year. So... no red flags.

The corporation just paid for some maintenance and some slip fees.

What you say about a business set up solely for the purpose of deducting your boat expenses however.... now that's something everyone should pay some very close attention to. It's definintely a sure fire way to an audit.

You also really hit the nail on the head when mentioning deductions that seriously affect taxible income.

Additionally:

There is a little-known Revenue Ruling dealing with the sale of a personal residence where a business activity deduction has been claimed. (Rev. Rul. 82-26) In part, the ruling says the part of the gain on the sale of a personal residence that is allocated to the part of the residence used in a trade or business does not qualify …..

for Section 121 treatment…… However, the ruling goes on to say this rule only applies ………..”if the business use meets the requirements of Section 280A in the year of sale. No allocation is required if the business use of a part of the residence in the year of sale does not meet the requirements of Section 280A.”



In other words, if you are not using any part of your home for business in the year of the sale, or your business use does not meet the requirements for a business deduction, you are not required to divide the gain on the sale. Under these circumstances, all the gain (including the gain from the business use portion) may qualify for the Section 121 exclusion.

[coyote]

I'm a college edumacated accountant and have been at it for 25+ years, along with some other stuff. People are always asking me tax questions, and I tell all of them the same thing....
Never take advice from a general accountant, a message board, or your brother-in-law when it comes to income taxes. That includes CPAs who do not specialize in income tax. It's simply too convoluted these days, and what is legitimate in 2004 is not what is legitimate in 2005.
I don't even do my own anymore, and am more than willing to pay a guy who will sign off on his advice right on my 1040. Well, actually it's a woman, as I've found that for some reason women are much better at accounting than men in general. That may not be very PC, but I've found it to be true.

[ssullivan]

Coyote's words ring true... this thread is of course only to discuss things and get ideas.

[BC Mike]

Ditto what Coyote said. Most of the info posted was informative but when it comes time for action chat to the pro. I know the rules pertaining to farm property as well as anyone, yet I still paid for a professional opinion. I often find that the ladies can figure out insurance and financial stuff better than the men.
Michael

[jemsea]

Here's how it goes at the CPA's office:

"So Frank, See all this money that I'm spending on this boat?"

"Yes John, I do .... and you know what they say about boats;~)"

"How much of that is deductible if I operate a business from the boat?"

Frank, with a certain twinkle in his eye says, "I'll research that."

Cynic that I am, could it be possible that every time the 'chargeable hours' sign comes on in this man's mind a twinkle pulsates from his eye?

I thought I saw the same kinda twinkle the other day at the West Marine store when I asked about the new boat owner program.