The Covid-19 pandemic has stretched on for months, and many are ready to get out into the world and experience life again, but they want to do it safely. A boat or a yacht provides an opportunity to get out for the day but only interact with your own party.
If you own your own business, you may find yourself wondering, “Can my business write off a boat?” There is more than one way to take this kind of luxury deduction, but you must understand the restrictions and requirements of current tax laws for boat tax deductions in 2020. Keep reading to learn about the boat or yacht tax strategy that may work for you.
Can I Deduct a Boat or Yacht as an Entertainment Expense?
Your first inclination may be to try to deduct your new boat as an entertainment expense. However, entertainment costs are no longer deductible under the Tax Cuts and Jobs Act (TCJA) which was signed into law by President Donald Trump on Dec. 22, 2017. This includes facilities you own or rent for entertainment such as vacation homes, yachts and boats.
Although you may not be able to deduct operating expenses or deduct deprecation, you may still be able to deduct part of the costs of some meals you serve to business guests aboard your yacht. You can deduct up to 50% of the costs of business meal expenses, but only if
- The food and beverages are associated with operating your trade or business
- You can separate meal expenses from other entertainment expenses
- The expense is not lavish or extravagant under the circumstances
- The taxpayer or one or more of your employees are present when the food and beverages are served
- You actively discussed business while onboard the boat rather than just taking some friends out fishing
Can I deduct a Boat as my second home?
Just as you write off interest you pay for a second home on land, you can do the same if you can live aboard your boat. According to IRS Publication 936 (2019), Home Mortgage Interest Deduction, “A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”
Can I Deduct a Boat Central to My Business?
If you have a boat that is central to your business, such as renting out the boat or taking people for cruises, then you can enjoy some write-offs. To do this, you must keep careful and accurate records each time the boat is used listing
- How the boat is used
- When it is used
- Who is involved (such as who rented the boat or who you took out on a charter trip)
- Details of the business purpose
You must also demonstrate that you intend to make a profit from your boat. If the IRS decides that you really use the boat as a hobby rather than a business, then you can only take expenses up to the amount of your income for the year for the boat.
Purchase Price Expense Deduction: You can deduct the purchase expense of a yacht or boat outright that is bought for a legitimate business purpose such as hiring or chartering. However, the buyer cannot be an individual but must be an entity such as a corporation, partnership or LLC.
The IRS says on its website that under Section 179 of the tax code, “the TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million. The phase-out limit increased from $2 million to $2.5 million. These amounts are indexed for inflation for tax years beginning after 2018.”
Depreciation: You can depreciate a boat that qualifies as a business asset. However, a boat is considered “listed property” (more on that in a minute), and the IRS is picky about how you depreciate listed property. You can find out more at Publication 946 (2019), How To Depreciate Property.
Operation Expense Deductions: You can deduct operating expenses such as maintenance, gas and dock fees if the boat is used for your business. We are talking here about renting out the boat or giving charters for example, not using it for just entertaining clients. Once again, you need to keep documentation to prove you are using your boat as a business.
How Can I Deduct the Cost of a Boat as Listed Property?
Things become a bit more complicated if you use your boat for both business and personal pleasure, but you can still get some business write-offs. The IRS considers certain assets to be listed property. This is property that could be personal or business in nature and is any of the following:
- Passenger automobiles
- Any other property used for transportation (unless it falls under an exception). This includes boats.
- Property generally used for entertainment, recreation, or amusement. This could include items like computers, phones, cameras and just about anything that is moveable. Listed property is most property that is not land or buildings.
If you want to deduct expenses of listed property such as a boat, you must use it more than 50% of the time for business. That means if you have a boat that you charter, but you take it out yourself for pleasure every now and then, you must carefully document when you use it for business and when for pleasure.
Now here’s the catch. If you can demonstrate that your boat is a business asset that is used over 50% of the time for business, you must pay taxes on any personal use. Personal use of the boat, which is a business asset, is considered a benefit to you personally.
Is It Worth Taking Business Write-Offs for My Boat?
So, the short answer to the question “Can my business write off a boat?” is “Yes, it can.” However, be aware that the IRS is going to take a closer look at your tax returns if you take boat-related deductions. If you are really buying the boat primarily for your own pleasure, you may not want to undergo that kind of scrutiny.
You may also decide that deducting business expenses for your boat is just not worth the headache of documenting every use of your boat in order to take depreciation and expense deductions. It really depends on your individual situation. Because buying a boat or yacht is a major purchase, you will want to sit down with your tax advisor and discuss the ramifications of buying the boat yourself as an individual versus buying a boat through a company. To talk to a CPA now for more details schedule a call here