You claim your boat is a business.
But the IRS may see things differently.
Claiming a boat as a business?
Many boat and yacht owners increasingly attempt to subsidize the costs of the yachting lifestyle by claiming a broad range of business tax deductions from a “boat charter business” while hoping for some charter revenue when the owner doesn’t want to use the boat.
These days it’s often a necessary condition to the sale, to place the boat in a "charter business" where the hoped for income and business tax incentives can subsidize the purchase and operational costs of future operations. Section 179 business deductions seem to be popular with many.
Even though everyone pretty much acknowledges owners of charter boats will probably never earn a net profit, the boat owners expect to be able to enjoy their passion for the boating lifestyle at a reduced cost due to the hoped for charter income and the tax subsidies.
There is even a growing industry of “boat as a business” one stop shops that sell boats to be placed into charter that are all too quick to point out that one doesn’t really ever have to make a profit from yacht charter to take business deductions, just do enough to convince the IRS and a tax court of one’s intention to earn a profit.
Thus as many boat and yacht sales are presented, if you buy a boat from the promoter / boat broker, and participate in their business charter management program, you can take the business deductions because they have a carefully crafted program they believe should allow you to do just enough to convince the IRS of a profit motive.
On its face, doesn’t that seem a strange way to promote a legitimate business opportunity?
Do you know of any other legitimate profit seeking business opportunities that are promoted in a similar fashion?
Perhaps that may be a reason why the IRS is so skeptical of unprofitable yacht charter operations ever having a true profit motive. And especially so for many of those "business in a box" opportunities.
However, even the most successful boat charter business template is not a one size fits all strategy. All too often what may work for one boat owner, may not suffice for another.
REDUCE THE RISK OF THE YACHT CHARTER AUDIT TRAP
Fortunately, now there are superior alternatives than just relying on “charter” revenue and tax deductions that can make the boat and yacht ownership affordable AND with less risk.
Obviously earning a net profit from your yacht charter business solves many issues regarding boat ownership. The competitive advantages of a YES crafted strategic charter business plan may be the difference between a successful and “profitable” boat or yacht charter business and just an expensive “hobby”.
So honestly, what do you think the IRS would see if they looked at you and your charter operation?
Would they see a legitimate business?
Or maybe something else – like a target for an audit and an easy bullseye?
The IRS has already identified yacht owners as a group that try to subsidize
their lifestyle by claiming tax deductions they are not entitled
Unless your boating venture actually makes a net profit the question of just
what qualifies as a business eligible for tax deductions is anything but certain- and open for IRS interpretation.
For example, if a “boat charter business” does not make net after tax profit
in 3 out of 5 years, the IRS presumes it's not a business with a profit motive.
If it is not a business, then the business tax deductions are disallowed.
So if the burden shifts to you as the boat owner to prove to the IRS and tax court you are and have been - actually operating the boat as a business with the intention of earning a profit, how confident you would succeed?
YES realizes the many boat and yacht owners are concerned about these issues. Many more probably should be. And as such, is uniquely qualified and positioned to help boat owners by providing additional protection against many potential adverse events and negative consequences.
But making a profit is not the only way YES helps charter owners qualify for business deductions.
Has your charter “business” made a net after tax profit in each of the last two years?
If not, you need to make a profit this year – or at least make a change –
to as least suggest a profit motive.
You must do something new, something you have not done before, with new advisors to demonstrate your intention to make a profit.
Smart Charter Owners
YES is the answer
While there are general guidelines as to what may suggest a profit motive, there is no universally acceptable definition of what constitutes a profit motive. Thus any determination is subject to interpretation depending on the individual facts and circumstances of the situation and of each individual boat owner.
Activities that might demonstrate a profit motive for one boat owner, might not constitute a profit motive for another.
And even for the same boat owner, what might qualify as a business one year, may not qualify as a business in subsequent years, or even in prior years. It depends on the how the owner operated.
So what does this mean to boat owners claiming deductions from a boat charter business?
If you have a boat / yacht charter business that has not made a net after tax profit after two years – you need to make a net profit for the next three years in a row OR you will have the burden of proving you actually had a profit motive from day one with your boating endeavors.
If you are unsuccessful in convincing the IRS or a tax court of your profit motive from the start, it’s possible your deductions in years one and two could be disallowed and incur additional penalties and interest.