It is better to own the yacht in a corporation because it reduces personal liability. It is a smart thing to do when running the yacht as a business where it will be for charter. If you place the vessel in an LLC the tax benefits flow through to you personally.
If you are actively involved in the business and meet the IRS tests for active participation then it is a business and you can legitimately take the deductions and benefit from it. You need to show active participation as well as the ability and the intent to make a profit.
The most common test is that the owner does a minimum of 100 hours and more than any other one person. If you do a website, attend trade shows, do familiarization trips and technical inspection of asset directly related to your business, you will log far more than 100 hours.
In the course of running the business:
There is always the chance of an audit when a large deduction is generated, if proper records are kept and the owner does actively participate with the intent to make a profit then the standard is met and should satisfy scrutiny. Your CPA is the best person to answer this question because personal circumstances differ from person to person.
The deposit required by most lenders is 20 % so the cash out would be 20% of the full purchase price plus two months of mortgage payments in the Guaranteed program and two months of mortgage payments plus the insurance premium (1.5% of hull value) in the performance program.
The boat has comprehensive insurance in the name of the owner or the LLC from the time the keels touch the water. If there is a loan the lender is recorded as the first loss payee and DYC is noted on the policy for charter operations. The deductible is covered by an additional insurance policy that the charterer pays, so the owner has no exposure to a deductible unless they cause the damage themselves.
Your CPA will be able to answer this but generally the LLC would generate a K1 which would be incorporated into the tax return
Yes they do.
Yes, there is if you sell the yacht outright at the end of the program and the rate is at ordinary income. If you keep the vessel for personal use after the program than this should not be an issue but check with your CPA for your personal situation. The third alternative is to trade the yacht is and do a "like kind" exchange in which case there is no recapture.
Wrong, if you put the vessel into a Corporation and run it as a business and ensure you meet the relevant standards and tests then it is a small business and is taxed accordingly. Note, that if you go into a guaranteed income program where you sign a long term management agreement and receive a monthly guaranteed income, then this is passive activity and you will not be allowed to generate tax advantages save and except if you have passive losses that you can be offset against passive income.
No, the test most commonly used is " a minimum of 100 hours and more than any other one person". You will find that the US staff and base staff, who all have different tasks, will never spend more time on your boat individually than you will in a given year. Remember that the trade shows, familiarization trip, asset inspection trip, marketing, contract negotiation (we renegotiate the contract each year) would result in close to two hundred hours of active participation not to mention that all costs are also deductible.
Unlikely that an audit is automatic, this is not the experience we have over the last eight years. The issue is to meet the tests and standards and ensure that you are in compliance with the rules. This is not for everyone but if scrutinized and everything is in order then it is unlikely that it would proceed to an audit.
The rules state that if you make a profit three out of five years then hobby loss cannot be applied. To be clear, you DO NOT HAVE to make a profit three out of five. Many CPAs make this statement, which is not entirely accurate as it is interpreted the wrong way. The actual rule is that you have to have "the Ability and the Intent" to make a profit which is clearly the case here.
The yacht is equipment that is being purchased and placed into service in a small business that has the ability to make a profit if well run which is the intent. The same rules would apply to the owner of a dump truck who sub contracts to a general contractor, there is fundamentally no difference. The truck would qualify for section 179 and Bonus Depreciation if purchased new. The owner would be actively involved even if there is an employed driver because of contract negotiations, marketing admin etc. and the intent is also to make a profit.
You can use the yacht. It is generally agreed between most CPA's who are familiar with the program that 10% of private use by the owner over and above the familiarization and asset inspection trips, is acceptable.
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