As April 15 (April 17 if you live in Maine or Massachusetts) draws near, you may be wondering if there is any way that you can claim expenses related to your yacht. Given the fact that boats are big investments that can cost their owners thousands of dollars in operations and maintenance, many yacht owners explore ways that they can “write off,” or deduct, these amounts.
The answer is yes. According to the advice published on the IRS and professional CPA websites, there are tax breaks available, but they apply to specific circumstances and are subject to limitations, so it’s easy to make mistakes. Below is an overview of four tax errors committed by yacht owners regarding deductions and expenses.
1. Deducting expenses for using an entertainment facility
The IRS states that, in general, you can’t claim expenses like maintenance, utilities, and depreciation for use of an entertainment facility such as a yacht. Until 2017, however, you could claim the costs of entertaining clients on the boat, such as food, beverages, catering, and gas.
The 2018 tax reform changes reduced these deductions to zero, but some yacht owners may still unknowingly claim these expenses only to be surprised when they are disallowed.
2. Business transportation claim errors
Yachts and other pleasure boats are classified as “listed property” under current tax laws, so to claim business-related expenses, you need to use the vessel for business transportation over half the time. Examples of business use include charters or transportation between mainland and island business offices. Once the business use exceeds this threshold, you can claim costs like fuel, repairs, insurance, and depreciation.
One common mistake is to claim business expenses when the yacht is not used for business purposes at least 50% of the time. Even if you claim to use the boat only for business purposes (100%), a single entertainment event, such as a party for clients, may cause the IRS to challenge the deductions.
3. Exceeding daily deduction limits
Even when your yacht qualifies for business deductions, there are still some limitations. According to IRS Pub 1542, there is a daily limit of $287 on deductions for business transportation by boat. Any claim that exceeds this amount will be disallowed.
4. Mistakes in claiming the yacht as a second home
Many boat owners take advantage of what is known as the “second home deduction.” As long as the vessel has sleeping, cooking, and bathroom facilities, it meets the definition of a second home as per IRS Publication 936, and you can write off the interest on the financing. You don’t even have to live there – it just needs to be capable of serving as a secondary residence.
There is a catch that trips up some boat owners: you can only claim one second home deduction even if you own more than one. If you claimed a vacation residence last year, for example, you need to substitute the boat this year. You cannot deduct expenses for both.
Any yacht owners who plan to write off some or all of their yacht expenses should consult with their CPA or financial advisor to determine what deductions apply to their individual circumstances. If you have questions or require assistance with marine documentation records that could be used to support a future tax claim, please contact the Marine Documentation Division at Howard S. Reeder today.
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