YOUR YACHT AS A TAX DEDUCTION
What Savvy Yacht Owners Have Known For Years
Owning a new yacht is a great experience and the fun of owning it shouldn’t be diminished by the difficulty of paying for it. For years savvy yacht buyers have recognized that there is a completely legitimate way to significantly reduce the cost of owning a yacht by structuring ownership in a manner that allows you to write-off the purchase price of your yacht and deduct most ownership expenses (insurance, slip fee, maintenance) against your employment income. This can be done by placing the yacht in charter while still having it available for your use and following some basic tax law guidelines. In addition to providing a tax shelter, your yacht will also generate charter income to help offset ownership expenses.
Your Boat As A Business
First, let’s discuss the tax benefits of placing a yacht in charter and then we’ll discuss whether this will work for you. The key to understanding why yachts placed in charter can generate significant tax benefits is that these are the same tax benefits available to businesses for the purchase of business equipment. By placing your new yacht in a charter management program you are converting it from a personal asset to a business asset, essentially an equipment rental business. The relationship between you and the charter management company is structured so that you own the yacht and they assist you in managing your yacht rental business.
In recent years, Congress has significantly expanded the tax benefits available to businesses for equipment purchases in order to help stimulate the economy. These tax benefits are not available to people who own a yacht strictly for pleasure. While placing your yacht in charter changes the classification of it for tax purposes from a “personal” to a “business” asset, it does not prevent you from using your yacht.
At Marine Servicenter we have been helping customers to place new Jeanneau Monohulls and Lagoon Catamarans in charter for years and have seen these yacht owners reduce the costs of purchasing and owning their yacht by up to 75% in many cases through a combination of tax deductions and charter income. Actual savings vary depending on the size of the yacht and the location in which it is placed in charter. Charter fleets in Washington and throughout the country, of which there are many with hundreds of yacht in charter, wouldn’t be in business if this arrangement did not withstand IRS review. Many of these charter companies have been in business for 20 years and longer.
Tax Shelter and Cash Flow Advantages of Charter Ownership
Here is a summary of the tax and income benefits available to the owners of new yachts purchased and placed in charter:
- Under Section 179 of the Internal Revenue Code, you can take a one-time expense deduction in the year of purchase equal to the purchase price of your yacht up to a maximum deduction of $500,000.00
- Often you can also take a bonus depreciation deduction in the year of purchase.
- You can depreciate the adjusted cost basis of your yacht (the balance of the purchase price after deducting the Section 179 expense deduction and possible bonus depreciation deduction) over 10 years; plus
- You can deduct against your charter income and other employment income all ordinary and necessary charter related expenses including, for example, slip fees, insurance, repairs, loan interest, property tax, etc.; plus
- You will receive income from the charter of your yacht, the amount of which varies depending on the size of your yacht and the charter company you use.
As an example, on the purchase of a $265,000 yacht placed in charter, the total deduction available to you under paragraphs 1 – 3, above, is $265,000 resulting in a savings of $92,650 just in the year of purchase alone (assuming you are in the 35% tax bracket and can utilize the full deduction). To see how this deduction is calculated, see the Section 179 Tax Deduction Calculator.
This substantial tax deduction is an attractive tax planning opportunity if you are a highly compensated individual or receiving a large bonus or other large payment of ordinary income from active employment or the active conduct of a trade or business. It is not available to offset passive rental income, capital gains or IRA withdrawals.
AND THIS MAY BE THE BEST NEWS OF ALL..… the Section 179 and Bonus Depreciation deductions are exempt from the AMT calculation!
Professional Maintenance and Support
Placing your yacht in charter also is an excellent way to ensure that it will receive professional maintenance, service and care. Yachts in a charter fleet typically are washed weekly and cleaned inside and out after each charter. Routine maintenance is performed on a regularly scheduled basis and damage promptly repaired. For you, as the yacht owner, it means that you can spend your time sailing your yacht and not doing cleaning, maintenance and repairs.
Your charter management company will require that every charter customer demonstrate that they are qualified to operate the yacht being chartered in order to minimize the potential for any damage. Damage caused by a charter customer, up to the amount of the insurance deductible, is paid for by the damage deposit (cash or credit card) they make up front when chartering the yacht.