The Tax-Advantaged Boat | Boating Magazine

The Tax-Advantaged Boat

Learn how you can get a tax break on your boat.

| |How much galley or head qualifies you for a tax break on your boat?|

If your boat is big enough to have a working head, a working galley and a place to sleep (not a cockpit seat or padded sun deck), it’s possible it can be classified as a “second home”. This designation would allow you to take advantage of some of the same tax benefits you would have gotten from the house in the country that your wife preferred (Internal Revenue Code Regulation Section 163-10T). To get a better handle on the ins and outs of the system, we spoke to Alan Yates, senior tax partner with Nussbaum Yates Berg Klein & Wolpow (nybkw.com), a major Long Island, New York, accounting firm.

Capital Gains: If you bought your boat for a really good price and can sell it for a profit, you’re a genius. The feds will want to share in the profit you’ve earned in the form of capital gains tax. To help reduce your exposure to the gains tax, keep a record of all the capital improvements you’ve made (new canvas, new motor, etc.) and add them to the base cost of the boat. Of course, if you sell for a loss, your friends at the IRS no longer care to be your partner and are not going to share any of your losses.

Business Expense: Use your head (not the boat’s) and be cautious. Uncle Sam scrutinizes these activities with as much thoroughness as with your normal business lunch, theater ticket, gifts and other travel and entertainment charges. The IRS wants to prevent unwarranted or overinflated expenses from being written off. Keep accurate records of the dates, participants, expenses (fuel, food, etc.) and details of the business topics conducted and/or concluded (Internal Revenue Code Section 274).

Charter Income: If you derive any income from chartering your boat, it should be included as part of your gross earned income for the year. If you act as captain for your charter, know that you must have a Coast Guard license to substantiate your ability to charter, as well as for insurance purposes. If you charter only “bare boat,” this is no longer an issue. The income is treated the same as rental income derived from a vacation property. Deductions for relevant expenses can be claimed.

Charitable Donation: Can’t sell your boat? Don’t want to give it to Cousin Clyde? Find a legitimate charitable organization to give it to. First, determine the fair market value of the vessel in the BUCValu Book or NADA Guide. The charitable contribution deduction is limited to the fair market value of the boat, if used by the organization or given to a needy individual, and an annual limitation of 30 percent of adjusted gross income. If the donation does not meet these criteria, then the deduction is limited to $500. Any amount not used in the year of the gift can be carried forward and used at any time in the succeeding five years. Be sure to get a Form 109C from the charity and attach it to your tax return.

Please note that the above information is for your guidance only. We strongly recommend that you seek advice on current relevant tax provisions for the federal government and your home state from a qualified tax accountant to see which of these benefits apply to your unique tax situation. Second home deductions, especially relative to boats and airplanes, are a red flag to the revenuers. Better to be safe than called in for an audit.