5 Tax Tips For Cruisers
The end of the year is almost upon us and with it, that familiar wave of uncertainly. The question on many a cruisers' mind is — How to find a way to deduct the cost of their boat come April when the IRS comes calling for the annual donation. Surprisingly enough, there are several ways that you can write off some of the cost of your boat and reduce your tax burden.
According to Tanner Kidd, a tax specialist and boating enthusiast from
Seattle, "Most boat owners miss out on some valuable deductions because
they don't know about these particular loopholes. But anyone who
doesn't take full advantage of the tax laws is simply giving money
away. It is illegal, of course, to avoid taxes. It's perfectly
legitimate, however, to minimize your taxes".
Tax Tip #1: Your Home Afloat
For the interest deduction, here's what you have to do:
* Designate your boat as one of your two qualified residences.
* Make sure your boat includes basic and permanent living
accommodations, such as permanent sleeping area (berth), toilet (head)
and cooking facilities (galley).
*
If you charter your boat, make sure you use it for personal purposes
either 14 days a year or one-tenth as many days as you rent it out.
(See # 2).
Now, before you get your hopes too high, the boat must "reasonably" be livable — your 15-foot jet boat doesn't qualify. The IRS has generally determined, however, that any boat that has at least one berth, a permanent galley, and a head (even if it's just a Porta-Potty) qualifies for the second home deduction. The Internal Revenue Service requires no minimum number of days of personal use unless you have rented your boat sometime during the year.
There are some caveats here that you need to remember. Obviously, you
can't already have a second home you are deducting. If you do, you can
choose between the second home and the boat each year for your
deduction.
You
need to ask the lender with your boat loan for IRS form 1098 to report
the interest or, in most cases, you can simply get a letter from the
lender. If you used an equity line of credit with your home or the boat
as security, you're entitled to deduct those interest charges. Note
that while some financial institutions report your interest paid on
form 1098; however, the IRS doesn't require you to file one with your
return to qualify for interest deduction.
Don't forget that you can deduct not just the interest, but also any
points paid to get the loan as well as the penalty for an early payoff
of the loan.
One
caveat for taxpayers in the higher brackets: If you fall into the
"alternative minimum taxpayer" category, the rules are different, and
many deductions do not apply.
Tax Tip #2: Doing Business at Sea
Many boat owners use their boats to entertain clients and potential
customers, and this qualifies as a deduction under the entertainment
expense category for your business. But be careful here, because the
IRS looks very hard at entertainment expenses, so be prepared to
document every item thoroughly.
The
rules are straightforward for this deduction. You must have a
"reasonable expectation" of deriving income or other benefit in the
future as a result of your use of the boat. You must actually engage in
business discussions while onboard, with the main purpose of the boat
to transact business.
Because this is a highly abused deduction, the IRS requires you to keep
full documentation for each expense, the dates of use, the location,
the reason for the use and the nature of the expected benefit, and the
occupations of the persons entertained.
You'll be limited to deducting 50 percent of these costs, as with any
other travel or entertainment expenses, and you can't include regular
maintenance or depreciation for your boat. What you can include are the
costs specifically related to each particular use of the boat: fuel,
food and drinks are obvious, but you can also include specific expenses
such as a transient mooring fee or the entry fee to a fishing
tournament.
Tax Tip #3: Sweet Charity
When it comes time to look for a newer or bigger boat, you can sell or
trade in your present boat but in some cases, donating your boat to
charity can provide a sizable tax advantage. "You can only deduct the
fair market value of the boat," says Kidd, who has handled several boat
donations for clients. "You'll need to have an independent appraisal or
survey, and you should make sure that it clearly states the market
value and not the replacement value, which can be considerably higher
and which can trigger an alarm with the IRS."
In
most cases, you can pick your favorite charity as long as it is
qualified as a non-profit organization. Some groups, such as the Sea
Scouts, are equipped to take care of all the paperwork and details
involved in a donation.
Even better, you may end up getting more for your boat as a donation
than you would if you sold or traded it. A boat with a market value of
$10,000 might only be worth $5,000 as a trade-in at a dealership, and
it might take weeks or months to sell if you sell it yourself. With a
donation, the boat is gone immediately and you can gain at the bottom
line of your tax debt.
Tax Tip #4: Be Your Own Captain
It's appealing to think of using your boat as a weekend business. You
can take people on harbor tours or for a day offshore while you enjoy
all the benefits of boat ownership and deduct all the costs as a
business expense.
The
reality, however, can be somewhat different. According to Tom Cutter,
who operates a full-time charter boat operation, it can be a lot of
hard work.
"To
use your boat as a six-pack charter with yourself as the skipper, you
need to make sure that the IRS doesn't view yours as a hobby rather
than a business. You need to make a genuine effort to make a profit,
rather than just enough to cover your costs and get a free day out on
the water."
As
a starting point, you'll need to get your U.S. Coast Guard license
allowing you to skipper up to six guests aboard your boat.
Once in business, you'll be able to write off the depreciation,
maintenance, equipment, fuel and mooring costs. Kidd recommends using
the purchase price of your boat as a base for a seven-year (or longer)
straight line depreciation schedule. You'll also need to keep detailed
records of every expense as well as the amount of income. To keep clear
of IRS "hobby-loss" rules, he suggests that you aim to make a profit in
at least three out of every five years.
Since you probably won't want to devote full use of your boat to
chartering, you'll only be able to deduct the expenses for the
percentage of time actually used in business. For example, if you
charter 20 percent of the time that you operate your boat, you'll be
able to deduct 20 percent of the expenses. The exception to that is
equipment used purely for chartering, which is then fully deductible.
But, as the charter captain, you'll get a double hit in taxes. You'll
pay the income tax on the actual profits of the boat, but you'll also
pay self-employment taxes as a sole proprietor.
Some boaters prefer to take a less serious effort toward earning money
for their boat, preferring only to charter it occasionally. In that
situation, you can still deduct the related expenses, but not as a
loss. You'll only be able to reach the break-even point of costs versus
income, and you'll have to cover any losses out of your own pocket
because the IRS will label you as a hobby business.
Tax Tip #5: Write about it!
One
magazine contributor survived an IRS audit on his freelance writing
business, convincing the examiner that his 17-foot boat was a business
research vessel. The notebook and camera were always on board; boating
stories and photos generated income; and he had proof.
That's critical: Along with good legal and tax advice, make sure you have proof of everything suggested above.
Because the IRS is well aware that owners want to enjoy their boats at
a reduced cost, boating deductions often warrant an increased
examination of your tax return, which may not be worth the effort to
save a few dollars.
Because every tax situation is unique, Kidd advises that every boater
explore his options with a tax advisor familiar with boating deductions
before making decisions.
