by Steve Curran
Over the years many people have operated their boats as part of a business, thereby creating some revenue to help with the expense and also allow the write-off of the boat expenses, even the depreciation of the boat. This has a dramatic effect on reducing the cost of boat ownership, especially to those that are in high income tax brackets. Not only is there cash flow created to cover the expenses, the boat is depreciated, sometimes on an accelerated basis, and this non-cash loss was used to offset other income. The net effect for many was to significantly reduce net cost of their boat.
Well-Known Business Uses
Many customers have used charter as their business vehicle, renting the boat to others. Some put the vessel in sailing clubs or charter organizations that assist in qualifying the boat charters, checking the boat in and out, and helping with the booking and maintenance. Others have used a fractional usage program that allowed a fixed number of others to pay a monthly fee for boat usage. The later minimizes the number of people using the boat and encourages repeat users, making training less difficult and minimizing the potential risks caused by inexperienced boaters having accidents.
Another business use is using a boat as an office. With the current cost of office rental on the Los Angeles West Side, there is sometimes a cost advantage to this. The ambiance of a nice boat is also appealing to many clients and provides a beautiful working environment. Sometimes the boating culture is supportive to business. For example, I know of a wealth management company that uses a sailboat as an office. Their wealthy clients find the yachting experience alluring, and fitting of the company motto of “Living Well.”
What are the pitfalls? There are some. The charter usage increases the wear and tear of the boat. Having the charter checked out well and well trained is tremendously important also. Over the years I have seen many non-qualified charterers causing accidents. A very particular boat owner is generally not well suited for the additional problems and wear that charter boats seem to experience.
Another potential problem with this is “recapture.” Recapture is when taxes are due to the IRS when and if the boat is sold for more than the depreciated book value. This is particularly problematic if the owner uses a very rapid depreciation or “Section 179.” Section 179 allows a large first year depreciation, at times the entire amount of the boat during the first year.
Legitimacy is another potential pitfall. The plan must be defendable and be able to withstand the scrutiny of an auditor. Creating a reasonable business plan at the inception to verify the logic and anticipated income is a good practice. Expectation of a reasonable amount of income is an important part of any business.
Getting some professional advice is an important part of preventing future questions or possible problems. Having a knowledgeable tax accountant review the individual’s individual situation is a highly recommended part of “Making a Boat a Business.” Our website has some additional information regarding this subject. Please review it. Also, I am available to chat personally at 310 822-9814, 310 877-5500.