Boat Tax Deductions: What Vessels Are Eligible?

Owning a boat is a costly affair, with expenses such as storage, registration, insurance, fuel, and maintenance. However, there are some tax write-offs available for boats used for business or pleasure that can help offset these costs. The type of boat, the purpose it is used for, and the state in which it is purchased and operated all influence the tax deductions available. For example, a boat can be considered a second home if it has sleeping accommodations, a kitchen, and a bathroom, allowing for mortgage interest and home office deductions. If a boat is used for business, such as chartering or entertaining clients, additional deductions may be applicable, but careful documentation is required. Yacht owners may also be eligible for substantial tax deductions if the vessel is used for business purposes at least 50% of the time. Understanding the specific tax laws and consulting with a tax professional is essential to maximize deductions and ensure compliance with federal and state regulations.

Boat as a second home

A boat can be considered a second home for tax purposes, providing it has a few basic living amenities. These include a sleeping berth, a galley (kitchen), and a head (bathroom). If you work from your boat, you may also be able to claim a home office deduction.

Home Mortgage Interest Deduction

If your boat is financed, you can take the home mortgage interest deduction, just as you would with a second home. You must itemize deductions and will need IRS Form 1098 to deduct the interest and any points paid to secure a loan.

Home Office Deduction

If you work from your boat, you can take a home office deduction. However, this may raise a red flag with the IRS, so be sure to keep detailed records.

Entertainment Expense Deduction

If you use your boat to entertain clients, you may be able to claim a deduction as an entertainment expense. To qualify, you must have a reasonable expectation of gaining future revenue from the entertainment, and you must conduct at least some business discussions. You must keep thorough documentation of each expense, including the date of use, location, reason for use, and the occupations of the persons aboard. The deduction limit is 50% of the costs associated with the outing, and you can include specific costs such as fuel, food, drinks, and mooring fees.

Boat for Transportation Deduction

If you use your boat to commute to work, you may be able to deduct certain expenses, such as fuel costs, insurance, repairs, dock fees, crew salaries, and depreciation. However, you cannot use the boat to entertain clients, as this will nullify the transportation deduction.

Boat for transportation

If you use your boat for transportation, you may be able to deduct some of the costs from your taxable income. This is only possible if you use your boat for business transportation at least 50% of the time. If you use your boat to commute to work, you can deduct costs such as slip fees, fuel, insurance, maintenance, repairs, and crew costs. You can also deduct crew salaries, hurricane storage, and depreciation. However, if you use your boat to entertain clients, you cannot claim this deduction.

It is important to note that the rules and regulations regarding tax deductions for boat owners can be complex and subject to change. Therefore, it is always a good idea to consult with a tax professional or accountant to ensure you are complying with the latest laws and to understand the nuances of the different situations in which deductions may be claimed.

Boat donation deduction

Donating your boat to charity can be more financially beneficial than selling it. If you donate your boat, you can deduct its "fair market value" from your taxable income. To do this, you will need a professional appraisal and survey, which will cost money. The charity you donate to must be a non-profit organisation and they will provide you with a Form 1098-C for your accountant.

If the charity sells your boat, you can claim a tax deduction for the amount it sold for, or at least $500. If the charity uses the boat for its mission, you can deduct the full fair market value.

Donating your boat also means that the charity can manage the paperwork for you, and the boat is disposed of quickly without needing to find a buyer.

Important Considerations

• The boat donation deduction is likely to raise red flags with the IRS, so keep thorough records and consult a CPA or maritime attorney.
• Tax laws change frequently, so make sure you are complying with the latest federal and state laws.
• If you are donating a yacht, the IRS offers a deduction for the market value of the yacht on the day it is donated.

Boat used for business

If you use your boat for business purposes, there are several ways you can write off some of the costs, thereby reducing your tax burden.

Entertainment Expense

If you use your boat to entertain clients, you can qualify for a deduction as an entertainment expense. However, entertainment costs are no longer deductible under the Tax Cuts and Jobs Act (TCJA). To qualify for this deduction, you must meet the following requirements:

• You must have a reasonable expectation of gaining future revenue as a result of this entertainment.
• You must conduct at least some business discussions.
• You must keep thorough documentation of each expense, including the date of use, location, reason for use, and the occupations of the persons aboard.
• The limit of the deduction is 50% of the costs associated with this outing (as with any other travel or entertainment expenses). You can include costs specifically related to that outing, such as fuel, food, drinks, transient mooring, or entry fees (e.g. for a fishing tournament).

Central to Business

If your boat is central to your business, such as renting out the boat or taking people on cruises, you can write off some expenses. To do this, you must keep careful and accurate records each time the boat is used, listing:

• How the boat is used.
• Who is involved (e.g. who rented the boat or who you took out on a charter trip).
• Details of the business purpose.

You must also demonstrate that you intend to make a profit from your boat. If the IRS decides that you really use the boat as a hobby rather than a business, then you can only take expenses up to the amount of your income for the year for the boat.

Purchase Price Expense Deduction

You can deduct the purchase expense of a boat bought for a legitimate business purpose such as hiring or chartering. However, the buyer cannot be an individual but must be an entity such as a corporation, partnership, or LLC. Under Section 179 of the tax code, the TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million. The phase-out limit increased from $2 million to $2.5 million.

Depreciation

You can depreciate a boat that qualifies as a business asset. However, a boat is considered "listed property", and the IRS is particular about how you depreciate listed property.

Operation Expense Deductions

You can deduct operating expenses such as maintenance, gas, and dock fees if the boat is used for your business. This includes renting out the boat or giving charters, not just using it for entertaining clients. Once again, you need to keep documentation to prove you are using your boat as a business.

Commuting

If you use your boat to commute to and from work (at least 50% of the time for business transportation), you may qualify for tax deductions. The deductions for business commuting include storage, crew salaries, depreciation, repairs, fuel, and insurance.

Boat used for charter

If you're chartering your boat, there are several deductions you can make. Firstly, you can deduct the costs of equipment, purchases, upgrades, slip/mooring fees, fuel, maintenance and depreciation. However, there are some important requirements to note. Firstly, you must show a profit in at least three out of every five years. You can only deduct the percentage of the above costs that the boat is chartered, so if you're using the boat for your own recreation as well, you can't deduct all of these expenses.

Secondly, you must keep meticulous records of every expense and the amount of income you make. You will be taxed on your income at a state and federal level, and you may need to upgrade to commercial boat insurance. Therefore, it's important to do the math to make sure that chartering is worth it for you.

If you are acting as the captain of your boat, you will need a U.S. Coast Guard license to take out six paying passengers. You may also need to increase your boat insurance if you're using the boat for commercial purposes.

If you're using your boat for business, you can deduct operating expenses such as maintenance, gas and dock fees. However, this is only if you're using the boat for renting or chartering, not for entertaining clients. Once again, you need to keep documentation to prove you are using your boat for business.

Frequently asked questions