How To Set Up Your Yacht Business To Comply With Tax Laws
This article is a basic overview of how to qualify for tax advantages. Before you make the decision to purchase a yacht, consult with us to figure out if this scenario will be suitable for your situation. We will advise you on what size yacht you qualify for and what charter company will work for you in which location. There are many things to consider. We can discuss all scenarios with you and tailor the program for you and your family.
Establish a Yacht Business Purpose
Set up a business partnership with a charter management company that understands the guidelines and will book the yacht for charter. Some business professionals simply operate their own boats and offer cruises or CE courses to meet the criteria. A number of choices are available to you, but it is critical for the business to be set up correctly from day one as any misstep may disqualify the yacht business. When this happens and the intent to make a profit cannot easily be proven, the less favorable hobby loss rule may apply.
Set Your Yacht Up as a Business in an LLC or Other Pass-Through Entity
The business tax advantages should directly offset the income from your boat business activity as well as the taxable income from any other active source including your regular job (W2 income). Our business plan highlights the tax advantages available to you through the yacht as a business plan. That way you can adjust your withholding and use the tax advantages to offset cash flow immediately! The tax advantages include writing off:
- expenses for inspection visits to the boat
- bonus depreciation
- MACRS or straight line depreciation
- boat show expenses to sell boats
- familiarization trips on the boat for the purpose of understanding the cruising ground in order to sell charters
Consider Your Ultimate Goals and Exit Strategy
- Retirement within 2,5,7 years: In this case you want to build equity with tax savings.
- Longer term strategy: Purchase an interim yacht, sell it at the end of the period and convert your second yacht to personal use (like-kind exchange in real estate).
- Offsetting cost of ownership: You prefer that a management company takes care of the day-to-day management of the yacht but still want to be actively involved in other areas of the business like marketing, accounting etc. to offset the costs of owning the yacht.
How to Make Sense of a Yacht as a Business
- When you set your yacht up as a business, you get income and tax advantages.
- The great thing about the programs we select compared to a standard charter company plan is that you only need a few weeks of charter income combined with tax advantages to cover 80-100% of costs. You don’t need to charter excessively and have your boat get the wear and tear it receives in a regular charter company program.
- You can have your yacht equipped the way you want it with washer/dryer, air conditioner, water maker, etc. and you can use it as much as you like depending on your business strategy.
- From a tax point of view, there are three aspects to consider:
- First year of service – qualify for the Section 179 expense allowance of up to $500,000 + take bonus depreciation
- Longer term benefits such as retirement strategy
- Offsetting costs of owning.
Note: Regular charter management programs do NOT qualify you for the tax benefits for the following reasons:
- In these cases you have to commit to an agreement that turns over control to the management company. This arrangement is considered to be PASSIVE, instead of the obligatory ACTIVE participation required to qualify for Section 179 benefits.
- Typically the agreement is negotiated for a term of 2 years minimum and usually 5 years, constituting a lease that is considered PASSIVE participation. The lease has to be negotiated every year to show ACTIVE participation.
You can purchase your yacht to your specifications including an owner version layout, set the yacht up as a business, operate it with the help of a charter company anywhere worldwide, and have your yacht at least partially or fully paid off at the end of the contract period by applying business revenues and tax advantages. Do not be fooled however, as dumping your yacht in a charter fleet for 5 years and collecting a guaranteed monthly income is deemed “passive income” and does not qualify you for the section 179 rule and tax advantages. Once your “Yacht As A Business” is set up correctly, you stand to benefit greatly from this concept, but it does require work on your part.
Limits and Qualifying Property
As always, there are limits to Section 179. The underlying limit is the total cost of the equipment you are deducting cannot exceed the total amount of the taxable income you are reporting. This means you cannot have huge equipment deductions while also showing no income. Also, you always need to check your local state tax laws in regards to expensing equipment purchases.
**This information is general in nature and purchasers are encouraged to seek experienced legal counsel in yacht acquisition planning and implementation. Catamaran Guru is not a licensed Tax Attorney or CPA and is not qualified to give legal advice but we can put you in touch with experts who are.