Details regarding writing off your yacht or sailboat
Seven Steps to Writing Off Your Yacht
So, you want to write off your sailboat or motor yacht. Maybe you went to a boat show and a yacht broker told you it was possible, but you went home to your CPA and they said, “It’s not possible” or “You can’t do that”. Despite the reasons for your CPA’s response, maybe they are not familiar with the laws or as CPA’s tend to do, they err on the side of conservatism, it is possible. The broker at the yacht show said “You can write off your new yacht purchase” while simultaneously disclaiming “We are not tax professionals, consult your CPA or attorney.” So, who is correct?
Both the CPA and the Yacht Broker are technically correct…..
Historically, before the Tax Cut and Jobs Act (TCJA) of 2018, it was possible to have a boat or airplane as a business asset. But, the boat or plane is classified as an entertainment facility and the tax laws frown upon providing business entertainment. Either way, entertainment is no longer deductible, which is one reason why your CPA said: “It’s not possible”.
Don’t fret, it’s still possible to buy a boat or plane and write it off, all while reducing active taxable income from other activities. We are also going to generate positive cash flow with this new business. Get ready to start you new charter business.
In most cases, running your new yacht chartering business will actually reduce your other taxable income, down to nothing, depending on your tax situation, all while putting money in your pocket and offering an excellent get away for you and your family. A month in the Virgin Islands? Sign me up!
So, what’s the plan?
Step 1: BUY YOUR NEW YACHT
The first step is to find a sailing or motor yacht that you would enjoy spending some time on. After all, what’s the point if you can’t enjoy your new purchase. We can recommend our favorite yacht brokers if you would like or a visit to a boat show should help you narrow down the selection. It is also important to remember, we need to limit the personal use of the boat, especially in year one. This doesn’t mean you won’t have access to possibly one of the biggest purchases of your life, but there is a tactical way to putting that boat “into service”. After you find a boat to write off, let’s consider how to pay for it. Sure, you can probably get traditional financing offered through a broker at 4.99%, as of February of 2022. Or, you could pull some cash out of your investments and buy the boat outright. The third option, our favorite, equity backed financing involves interest only rates as low as 1.875% and doesn’t involve liquidating a large chunk of your retirement or investment accounts. Preliminary analysis on a million-dollar yacht purchase shows interest savings of over $400k and your money continues to grow, which conservatively should yield 6%, over $500k in returns during the life of the charter boat.
Step 2: CHOOSE A NAME
Now, we need a name for that new boat! We also need to begin registration of your new LLC, with your state and the IRS. We prefer Florida for the asset protection laws but there are other states that have similar advantages. And, oh by the way, Florida has no state income tax for individuals…. Asset protection should be one of your top concerns, especially if your boat is purchased with cash or equity backed financing. This means the boat will be essentially “free and clear”. Our attorney can structure the LLC and operating agreement to prevent a lawsuit from forcing you to hand over your asset.
Step 3: GET A PLAN
We need a plan. Yeah, yeah, we are three steps into this yacht charter business and we need a plan? Yes, we need a business plan. To maximize the tax effect, this needs to be a legitimate business, with a profit motive. The business plan should outline the who, what, when, where, and how of your new charter business. We are beginning the process of documenting your active involvement in the business. As with the first two steps, we can help write the business plan, and would prefer to be involved.
Step 4: MARKET YOUR BUSINESS
We need a website or social media page for your new business, at a minimum. We handle the website with your photos and your yacht charter broker probably offers an API (Application Programming Interface). Why do I need an API on my website? Well, it gives your charter guests the ability to directly book with you. Check with the yacht charter company, but this probably also means a better revenue share for this charter.
Step 5: TRACK YOUR INCOME & EXPENSES
We need to track the finances. Our recommended platform is QuickBooks Online (QBO) which also offers access to your new business checking account, offered through QuickBooks. Currently, QB is offering 1% yield on your balance plus instant deposits, no waiting for your money. Our firm specializes in QBO and we can vouch for how good the application has become. Access to your financial records anywhere, as long as there is internet, and your accountant always has access. No more sending a QB desktop portable or accountant’s file.
Step 6: DOCUMENT YOUR PARTICIPATION
We need to document your participation in this active business. This goes back to the business plan. Just because we wrote the plan, we need to implement and document the ongoing involvement. We can offer a template and/or outline for what information needs to be documented.
Step 7: FILE YOUR TAX RETURNS
This is the last step, we promise. We need to file your business tax returns. Because of the asset protection laws, your LLC will likely be a partnership or an S-Corporation. We specialize in small business and high net worth individuals, so we have your back.
So, seven steps to writing off your new boat. Not so bad, right? And the good news, we are educated in the transaction and have a group of close partners that can make the most of the purchase. But, the best news of all, you and your family have essentially tax free income and a great place to vacation and disconnect. Just imagine island hopping in crystal clear water on your new boat!