Depending on how you use your boat, you may readily qualify for IRS tax deductions and reduce your boat operating expenses. You can find a way to maximize your taxes every April when the IRS comes calling for taxes. Most boat owners don’t know the valuable deductions they miss out on when they fail to exploit certain legal loopholes. Here are five scenarios to consider:
Using the boat as a business
If you are earning income off of your boat, for fishing trip charters or sightseeing tours, you need to report that income to the IRS. But you can also deduct all of your business expenses as long as you’re trying to make a profit from the boat and are not using it as a hobby. You can deduct boat depreciation, maintenance fees, fuel, mooring costs, and any equipment you need to buy. If you entertain your clients in your boat, you may apply for tax deductions under the entertainment expense.
Likewise, if you use your boat as a part-time office, you may qualify for a home office deduction. In both scenarios, you must have future expectations of raising revenue as a result of these business-related activities. The purpose should be to transact business, and occupants of the boat must have business discussions onboard.
Using Your Boat for Business Commuting
If you use your boat to commute to-and-from your business location, you may qualify for tax deductions. The IRS requires that you use the vessel for at least 50% for business transportation before you can claim it. You can deduct insurance, fuel, repairs, crew salaries, depreciation, and hurricane storage. And for these businesses, you should not use the boat for entertainment purposes, or else it will invalidate the business transport deduction. It’s also a good idea to keep a record of every expense and activity of your business.
If you take clients and prospects on fishing trips, your fishing trips are a form of tax-deductible entertainment. You can deduct many of the expenses if you keep good records that prove the fishing trips are valid business entertainment deductions. If you own or rent equipment that you use on your fishing trip, such as a boat or fishing rods, the IRS “entertainment facility” rules deny deductions for that equipment.
You must be careful with this deduction, because it’s probably one of the most abused tax deductions there is: mixing business with pleasure. You must be able to prove to the IRS that you are doing business on your boat. Keep records of client names, the reason for the outings, their locations and dates, what your expenses were, and expected benefits of the meetings. You can deduct up to 50 percent of the costs of fuel, food, drinks, mooring fees, and tournament entry fees.
Donating your boat to a charity
If you are in the market for a new boat, or if you’re done being a boat owner, you might consider donating your boat to charity. The IRS allows you to deduct the market value of your boat on the day you donate it (not what you originally paid for it). You can find out the fair market value of your boat by using an appraisal guide.
Stipulations exist that determine how much you can deduct, however; these stipulations are based on what the charity does with the boat after donation, so be sure to read the fine print. You need to have an independent appraisal that clearly states this market value. Unlike this value, the replacement value is considerably higher. You can choose any charity as long as it’s an NGO, with groups like the Sea Scouts taking care of all the donation paperwork, including a Form 1098-C for record by your accountant.
Using the vessel as a second home
Deducting the interest you pay on your boat loan by declaring the boat your second home is the biggest tax deduction there is for recreational boating. All you need to have on your boat to qualify is a sleeping place, cooking facilities, and a toilet (portable ones count).
If you rent your boat out to others, you need to stay on it for at least 14 nights out of the year, or 10 percent of the number of days the boat was rented. It needs to have a berth, a permanent gallery, and a head (bathroom). For this deduction, you need an IRS form 1098 to write off any interest and secure a loan. If you do use this vessel as a second home, it will require deep boat cleaning from time to time and may insure you additional costs.
Charter Boat Deductions
For you to captain your boat as a six-pack charter, you need to ensure the IRS doesn’t view your activities as a hobby by making a genuine effort to make a profit. You may also need to upgrade your boat insurance for you to use it for commercial purposes. But first, you need to acquire your U.S. Coast Guard license so you can have at least six guests onboard your boat. Under this deduction, you can also write off costs like depreciation, fuel and mooring, maintenance, and other boat equipment purchases.
Boat Maintenance and Detailing
If your boat is being used as a legitimate cornerstone to operating your business, you should consider boat detailing and maintenance as a tax deduction as this is a critical component to keeping a boat.
Winter Boat Storage
Most boat owners in New England (especially on Cape Cod) want dry boat storage during the off-season, due to our harsh winters. Only very rarely will slip holders with a lift may store the boat in place on the lift through the winter. Winter Boat Storage with a professional usually comes with some additional perks such as shrink wrapping, or extra care and supervision while you are not attentive to your vessel.
Claiming your deduction
Your lender is not obliged to issue you with Form 1098 since your boat is not real property. This form documents all the interest on the boat loan for the year, which appears in box 1 of form 1098. Contact your lender to find out the total interest you paid during the year, then report this deductible interest on line 11, Schedule A.
Keeping up with the frequent federal tax law changes may seem impossible, especially if you have a tight business schedule. The penalties may also be too high to keep up with, especially if your business is not turning a decent profit. If you are not sure which of your boat operating expenses qualify for tax deductions, it’s best to consult your maritime attorney or accountant.