Boat Owners: Tax Declarations And Interest Expenses

Owning a boat comes with a set of tax implications that are important to understand. In the United States, a boat can be considered a primary or secondary residence for tax purposes, provided it has sleeping accommodations, a bathroom, and a kitchen. This classification allows boat owners to deduct mortgage interest on their tax returns, similarly to how they would for a traditional home. It's important to note that the specific requirements and tax forms may vary across different locations and jurisdictions, so consulting a tax professional or accountant is always recommended to ensure compliance with the applicable laws and regulations.

Boat as a second home

A boat can be considered a second home for tax purposes if it has a head (bathroom), a berth (bed), and a galley (kitchen). If your boat meets these requirements, you may be able to deduct the interest on your boat loan from your federal taxes. This is called the home mortgage interest deduction, and it applies to one second home in addition to your primary residence.

Requirements for a Boat to be Considered a Second Home

• The boat must have a bathroom, a bed, and a kitchen.
• You must itemize deductions and file IRS Form 1098 to deduct the interest and any points paid to secure a loan.
• The boat must be financed for you to take the mortgage interest deduction.

Other Tax Deductions for Boat Owners

• If you work from your boat, you may be able to take a home office deduction.
• If you use your boat to entertain clients, you may qualify for an entertainment expense deduction, provided that business was discussed during the outing.
• If you donate your boat to a non-profit charity, you can claim a tax deduction for the amount it sells for or its fair market value, whichever is lower.

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. Here are some scenarios and strategies to consider:

Entertainment Expense

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

• Business must be discussed during the outing, and you must have a reasonable expectation of gaining future revenue.
• Keep thorough documentation of each expense, including the date, location, reason for use, and occupations of the persons aboard.
• The limit of the deduction is 50% of the costs associated with the outing, including fuel, food, drinks, and mooring fees.

Business Central to Your Boat

If your boat is central to your business, such as renting it out or taking people on cruises, you can enjoy some write-offs. To do this, you must keep accurate records each time the boat is used, including how the boat is used, who is involved, and details of the business purpose. You must also demonstrate that you intend to make a profit from your boat. If the IRS determines that you use the boat as a hobby rather than a business, you can only take expenses up to the amount of your income for the year.

Purchase Price Expense Deduction

You may be able to deduct the purchase expense of a boat bought for a legitimate business purpose, such as chartering or renting it out. 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 maximum expense deduction is $1 million, with a phase-out limit of $2.5 million.

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 entertaining clients. Again, documentation is essential to prove that you are using your boat for business purposes.

Business Write-Offs for Personal and Business Use

If you use your boat for both personal pleasure and business, you can still get some business write-offs. However, you must use the boat for business more than 50% of the time. This means carefully documenting when you use it for business and when for pleasure. Additionally, if you demonstrate that your boat is a business asset, you must pay taxes on any personal use as it is considered a benefit to you personally.

Home Office Deduction

If you work from your boat, you can take a home office deduction, although this may raise some flags with the IRS. To qualify, your boat must have sleeping accommodations, a bathroom, and a kitchen. You will need to itemize deductions and file IRS Form 1098.

Transportation Deduction

If you use your boat to commute to and from work at least 50% of the time, you may be able to deduct expenses such as slip fees, fuel, insurance, maintenance, repairs, crew costs, storage, and depreciation. However, you cannot use the boat to entertain clients, as this will nullify the transportation deduction.

Boat used for transportation

If you use your boat for transportation, you may be able to deduct some of the costs from your taxes. To qualify for this deduction, you must use your boat for commuting to work or business at least 50% of the time. This means that if you use your boat for transportation less than half of the time for work or business purposes, you will not be able to claim this deduction.

When using a boat for transportation, you can deduct expenses such as slip fees, fuel, insurance, maintenance and repairs, and crew costs. It is important to note that this is an "or" deduction, meaning that if you use the boat for both transportation and entertaining clients, you cannot claim this deduction. Therefore, if you use your boat for commuting and also occasionally entertain clients on it, you will not be able to claim the transportation deduction.

To be considered a qualified residence for tax purposes, your boat must have certain features. These include a sleeping space, a toilet, and cooking facilities. If your boat meets these requirements and you are not already claiming two homes, you can claim mortgage interest on your boat loan, in addition to your primary residence. This can provide tax benefits, but it is important to consult with a tax professional to ensure you are complying with the relevant laws and regulations.

Additionally, it is worth noting that the rules and regulations regarding boat taxation can vary by state. For example, some states do not have sales tax, while others may assess a use tax if you use your boat in a state with sales tax, even if you purchased it in a state without sales tax. Therefore, it is always a good idea to consult with a tax professional or maritime attorney to ensure you are complying with the specific laws and regulations in your area.

Boat used for charter

If you are using your boat for charter, there are several deductions you can claim. Firstly, you must show a genuine effort to make a profit. To avoid extra attention from the IRS, you need to make a profit in at least three out of every five years. You can deduct the percentage of overall expenses that you use the boat for business. You cannot write off expenses when you are pleasure boating.

The costs you can claim include equipment and purchases, upgrades, slip/mooring fees, fuel, maintenance, and depreciation. You will need a U.S. Coast Guard license to take out six paying passengers, and you may need to increase your boat insurance if you use it for commercial purposes.

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 this type of property. If you use your boat for both business and personal pleasure, things become more complicated. If you want to deduct expenses for listed property, you must use the boat for business more than 50% of the time. You must carefully document when you use it for business and when for pleasure. If you demonstrate that your boat is a business asset used over 50% of the time for business, you must pay taxes on any personal use.

If you are buying a boat for a legitimate business purpose, such as chartering, you can deduct the purchase expense. 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, and the phase-out limit increased from $2 million to $2.5 million.

If you are thinking of using your boat for charter, it is recommended that you consult a tax expert or maritime attorney, as there are many exceptions and frequent tax law changes.

Boat donation

Donating your boat to charity can be more financially beneficial than selling it. When you donate a boat, you can deduct its “fair market value” from your taxes. This will require an appraisal in the form of a survey. The charity you donate to must be a non-profit organisation.

If the charity sells your boat, you can claim a tax deduction for the amount the boat sold for (not the appraised value if it’s higher) or at least $500. If the charity uses the boat for its mission, you can deduct the full fair market value instead.

The charity should provide you with a Form 1098-C for your accountant. You will also need to fill out an IRS Form 8283 Noncash Charitable Contributions and Instructions for Form 8283. You will also need to file a Deed of Gift (USCG Form 1340).

Donating a boat can save you the time and expense of selling it. You will save money on insurance, storage, maintenance, repairs, and depreciation. The charity will handle the paperwork for you, and the boat is disposed of quickly without needing to find a buyer.

Frequently asked questions